Paper short abstract:

The debate over state intervention for GVCs rarely addresses whether policies should target locally-owned firms. A study on Malaysia’s upgrading performance, which finds capability gaps between locally-owned firms from E&E and palm oil sectors due to different sectoral policies, holds some answers.

Paper long abstract:

Government's role in promoting productivity growth and technological change in national sectors is a contentious subject. The debate mainly surrounds the raison d'être for state interventions variedly referred to as industrial, innovation or technology policies, as well as the efficacy and implications of favouring certain sectors over others. Subsumed under the debate is a relevant aspect that is not addressed explicitly: should sector-specific policies target locally-owned firms? To attempt the question, our study examines upgrading performance of Malaysia's electrical and electronics (E&E) and palm oil sectors at both sectoral and firm levels. Our fieldwork draws on primary data gathered from interviews with firms and government officials as well as secondary data from statistical sources and industry publications. We find that government policies had historically induced upgrading at the sectoral level for both sectors. Over time, significant capability gaps emerged between locally-owned firms from the two sectors, in tandem with their respective policy emphases and institutional arrangements. Locally-owned oil palm-based firms have evolved into lead firms or competitors to foreign firms within segments of palm oil GVCs in which they had little presence initially. In contrast, locally-owned E&E firms still occupy less sophisticated segments of their value chains such as assembly as well as test and engineering services. This, in turn, constrains the options for future sectoral upgrading in the E&E sector. The results highlight the need for policies and research to consider firm type more closely, in addition to other aspects of the ongoing debate.