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Vocational Training Council Vocational Training Council
VTC Institutional Repository VTC Institutional Repository
Technological and Higher Education Institute of Hong Kong (THEi) Staff Publications Support & Other Units
1977
Do foreign companies pay higher wages than their local Do foreign companies pay higher wages than their local
counterparts in Malaysian manufacturing? counterparts in Malaysian manufacturing?
David Lim Monash University, dlim@vtc.edu.hk
Follow this and additional works at: https://repository.vtc.edu.hk/thei-adm-others-sp
Part of the International Business Commons, and the Labor Economics Commons
Recommended Citation Recommended Citation Lim, D. (1977). Do foreign companies pay higher wages than their local counterparts in Malaysian manufacturing?. Journal of Development Economics, 4 (1), 55-66. http://dx.doi.org/10.1016/0304-3878(77)90007-4
This Journal Article is brought to you for free and open access by the Support & Other Units at VTC Institutional Repository. It has been accepted for inclusion in Technological and Higher Education Institute of Hong Kong (THEi) Staff Publications by an authorized administrator of VTC Institutional Repository. For more information, please contact wchu@vtc.edu.hk.
DoforeigncompaniespayhigherwagesthantheirlocalcounterpartsinMalaysianmanufacturing?
DavidLlM*
MonashUniversity,Clayton,Victoria3168,Australia
ThispapershowsthatforeigncompaniespayhigherwagesthantheirlocalcounterpartsinMalaysianmanufacturing.Step-wiseregressionanalysisshowsthatthisisduetotwofactors.Thefirst,andperhapsthemoreimportant,isthegreatercapitalintensityoftheproductionprocessesusedbyforeigncompanies.Thesecondistheirtendencytopaywagesthattheyconsider,orthatareconsideredtobe,commensuratewiththewagesthattheypayintheirhomecountries.Thismaybecalledthedemonstrationeffectofwageremunerationinless.developedcountries.
1.Introduction
Ithassometimesbeenclaimedthatforeigncompaniesoperatingin.lessdevelopedcountriestendtopayhigherwagesthantheirlocalcounterparts.1Thisisbecausetheyarewillingorareexpectedtopaywagesthatarecommensuratewiththoseintheirhomecountriesandthatarecompatiblewiththeirinter-nationalstatus.2lstherereallyadifferenceinthewagerates,andifthereis.howmuchofthisisduetothestatuselementandhowmuchtootherfactorssuchasthepossiblegreaterskillsof‘workersemployedbyforeigncompanies?’ThispaperattemptstoanswerthesequestionsforMalaysia:firstly.bypresentingdataonthewageratesofforeignandlocalmanufacturingestablishments,secondly,byidentifyingthroughstepwiseregressionanalysisthedeterminants,andtheirrelativeimportance.ofwageratesinMalaysianmanufacturingandthirdly,byexaminingtherelativeimportanceofthedeterminingcharacteristicstothetwocategoriesofestablishments.
2.Wageratesbynationality
Dataonthebasicandthegrosshourlywageratesforproductionworkers(WbandWg)andothervariableswereobtainedfor350establishmentsoftheWestMalaysianmanufacturingsectorfor1972byinterview.The350establishmentsrepresentedabout10percentofthetotalnumberofWestMalaysianmanufacturingestablishments.Thecriterionusedfordecidingonthenumberofestablishmentstoallocatetoeachofthe59industrygroupsatthe4-digitleveloftheMalaysianIndustrialClassification(MIC)/UNInternationalStandardIndustrialClassification(ISIC)3wastheshareofeachindustrygroupinthetotalvalueaddedofthemanufacturingsector.4"Fineselectionofestablishmentswithineachindustrygroupwasthencarriedoutrandomly.
Ofthe350establishments,191(54.4percent)wereentirelyMalaysianowned(M),117(33.4percent)entirelyforeignowned(F)and42(12.2percent)ofmixedownership(Md).Thedistributionofshareholdingsinthelastcategorywasverymuchinfavourofforeigninterests,thusthemixedestablishmentscouldbesaidtobeforeign-controlled.Atthe4-digitMIC/ISIClevelofaggregationtherewere30industrygroupswhichwerecommontotheMandtheFestablishments,19whichwerecommontotheMandtheMd
establishmentsand34whichwerecommontotheMandtheFandMdestablishmentscombined.
Thegrosshourlywagerate(Wg)isgreaterthanthebasichourlywagerate(Wb)bytheamountoffringebenefitsgiven.Thesebenefitsincludesubsidiesforfood,transport,cfothingandmedicaltreatment.Table1showsthevaluesofWbfortheM,F,Mdand(F+Md)establishmentsforthe59industrygroupsatthe4-digitMIC/ISIClevelinMalaysiandollars,aswellasthepercentagedifferencesinWbbetweentheMandF,theMandMd,andtheMand(F+Md)establishments.TheweightusedinthecalculationofWbisthenumberofproductionworkersemployedbyeachestablishments.Table2showthecorrespondingvaluesforWg.
Table1showsthatthebasichourlywageratespaidbyMalaysianestablishmentsarelowerthanthosepaidbytheirforeigncounterpartsin18ofthe30industrygroupsthatarecommontothem.
Insomeofthese(MIC/ISIC3121,3140,3523,3530and3819)thepercentagedifferencesareverysubstantial.Thereare11industrygroupsinwhichMalaysianfirmspaymorethanforeignfirms,butthepercentagedifferencesarenowhereaslargeasthe;previousonesandin4ofthesethedifferencesarelessthan7percent,thelowestpercentagedifferenceofthe18casesreportedwhereforeignfirmsrecordedhighervaluesforWbthanMalaysianfirms.TheaveragevalueofWb,forthe117foreignestablishmentswas87centsasagainstthe81.centsreportedforthe191Malaysianestablishments,adifferenceof7.5percent.
WhenthecomparisonisbetweenMalaysianandmixedestablishments,thelatterwasseentopayhigherbasicwageratesinonly8ofthe19industrygroupsthatarecommontothem.However,whentheaveragebasicwageratesarecompared,themixedestablishmentsappeartohavehighervalues,88centsasagainst81cents,adifference:of8.6percent.
TheimpressionthatforeignestablishmentspayhigherbasicwagesthantheirlocalcounterpartsisfurthersupportedbythevaluesofWbfortheMandthe(F+Md)groupings.Ofthe34industrygroupscommontothem,thelatterhashighervaluesforWbin22industrygroups.Whentheiraveragebasicwageratesarecompared,theMalaysianestablishmentsreportedavaluethatwas7.4percent.lowerthanthatrecordedbytheforeignownedandcontrolledestablishments.
Basicallythesamepictureemergeswhenthecomparisonismadebetweenthegrosshourlywagerates(WE)paidbythethreecategoriesofestablishments.Infact,table2showsthatthepercentagedifferencesareevenlargerwhentheaveragegrosshourlywageratesarecompared.ThedifferencesbetweenMalaysianandforeignestablishmentsis9.3percent,whilethosebetweenMalaysianandmixedestablishmentsandbetweenMalaysianandforeignandmixedestablishmentsare10.5and9.3percentrespectively.TheobservationthatforeignownedandcontrolledestablishmentspaymorefortheirlabourservicesthantheirMalaysiancounterpartsisfurtherborneoutbytheavailabledataonthewagepremiafornight,weekendandovertimeworkbynationality.Table3showstheaveragewagepremiafornight,weekendandovertimeworkexpressedaspercentageincreasesoverthenormaldaytimebasichourlywageratebynationality.TheyshowveryclearlythatMalaysianestablishmentspaidlessthantheirforeigncounterpartsforanonnormal,daytimeworkin1972.Thediscrepancyappearedlargestforweekendwork.
3.Determinantsofwagerates
Theconclusionthatcanbedrawnfromtheavailabledataisthatforeignowned.andcontrolledmanufacturingestablishmentsinWestMalaysiapayhigherbasicandgrosshourlywageratesandlargerwagepremiafornight,weekendandovertimeworkthantheirMalaysiancounterparts.Inordertoseewhetherornotthedifferenceisduetothefactthatforeigncompaniesareexpectedorarewillingtopaytheirworkersmorebecauseoftheirinternationalstatus,twoseparatebutrelatedstepsweretaken.
Thefirstwastodetermine,throughstep-wiseregressionanalysis,thedeterminants,andtheirrelativeimportance,ofWbandWgat:
(1)the3-digitMIC/ISIClevelwherethereare28observations,(2)the4-digitMIC/ISIClevelwherethereare59observations,(3)theestablishmentlevelwherethereare350observations.
Atthe3-digitandthe4-digitMIC/ISIClevel,avariable,FO,whichmeasuresthepercentageofsampledproductionworkersinanindustrygroupemployedinforeignandmixedfirms,
wasusedasanindependentvariable,amongothers,inthestep-wiseregressionanalysistotestwhatmaybecalledthedemonstrationhypothesisofwagedetermination.Supposethereare5establishmentsinanindustrygroup,ofwhich3areforeign,1mixedand1Malaysian,andthenumberofproductionworkerstheyemployare30,20,60,50and40respectively.FOwillbegivenby100(30+20+60+50)/(30-l-20+60+50+40),whichis80percents.5Attheestablishmentlevel,FOisgivenavalueoflforeachoftheforeignownedandcontrolledestablishmentsandavalueof0foreachoftheMalaysianestablishments.SupportforthedemonstrationhypothesiswouldbeshownbytheappearanceofapositiveandstatisticallysignificantrelationshipbetweenWborWg,andFO.ThesecondstepwastoidentifytherelativeimportanceofeachofthedeterminingcharacteristicsfortheforeignownedandcontrolledestablishmentsandtheMalaysianownedestablishments.
Boththelinearandthenonlinearformsofstep-wiseregressionanalysiswereattempted.TheformerproducedbyfarthebetterresultsandtheequationsobtainedforWbandWgareasfollows.
3-digitMIC/ISIClevel:
4-digitMIC/ISIClevel:
Intheaboveequations:K/Listhecapitalintensityoftheproductionprocess,MWthemethodofwagepayment,6UttheWinstontime-measureofcapitalutilization,7Xthepercentageofoutputexported,MthepercentageoftotaldomesticgrosssalesimportedandFOthevariablefortestingthedemonstrationhypothesis.8
Thedeterminantsarepresentedintheorderinwhichtheyappearedinthelinearstepwiseregressionanalysis.Thet-valuesoftheregressioncoefficientsaregiveninthefirstrowoftheparentheseswhilethesuccessivecoefficientsofdeterminationaregiveninthesecondrow.𝑅2isthefinalcoefficientofdeterminationadjustedforthedegreesoffreedom,FtheF-ratio,andNthenumberofobservations.
TheanalysisshowsthatthereisempiricalsupportforthedemonstrationhypothesisasfaraswageremunerationinMalaysianmanufacturingisconcerned.ThevariableFOappearsasa.determinantofthehourlywageratewithapositivesignforitsregressioncoefficientintwoofthesixequationsestimatedtoshowthatthehigherthedegreeofforeignownershipandcontrolthehigherthehourlywageratewillbe.
Inconsideringtherelevanceofthedemonstrationhypothesis,two»otherfindingsoftheanalysismustalsobetakenintoaccount.ThefirstisthatFOdoesnotappearasadeterminantofWb,thebasichourlywagerate.ThevariableswhichcameoutareK/L,X,Ut,andM.ThepresenceofK/Lwithapositivesignateachlevelofanalysissuggeststhepossibilitythatcapitalintensiveestablishmentsorindustriesrequiremorehighlyskilledworkerstooperatetheirmodernsophisticatedequipment,andwiththelevelofskillsbeinggenerallypositivelylinkedtothewagelevel,9thiscouldhaveaccountedforthepositiverelationshipbetweenK/LandWb.
ThepresenceofMWwithanegativesignsuggeststhatthedegreeofjobsecuritymayvaryinverselywiththewagerate.Workerswhodonotenjoysecurityofemploymentmaybecompensatedtoacertainextentbybeingpaidahigherwagerate.TheappearanceofXwithanegativesignshowsthatindustrieswhichexportmoreoftheirproducepaylowerwagesthanthosewhichcatermoretothedomesticmarket—afindingthatisinlinewiththeHeckscher-Ohlinhypothesisofinternationaltrade.ThepresenceofU,withapositivesignsuggeststhatestablishmentspassonsomeofthebenefitsoftheirgreaterefficiencyintheuseofcapitalplantandmachinerytotheirworkers.Mappearsasadeterminantwithanegativesigntoshowthatthesmallerthecontrolthatestablishmentshaveoverthemarketsfortheirproducts,thelowertheirabilitytopassonmonopolisticgainstotheiremployees.
ThesecondthingthatshouldbenotedinexaminingtheinfluenceofthedemonstrationeffectonwagedifferentialsbynationalityinWestMalaysianmanufacturingisthatF0doesnotappearasadeterminantofthebasichourlywagerate,Wb,atanyofthethreelevelsofanalysis,anditalsodoesnotcomeoutasadeterminantofthegrosshourlywagerate,Wg,atthe3-digitMIC/ISIClevel.
ForeignownedandcontrolledestablishmentsdonotdifferfromMalaysianestablishmentsintheirmethodofwage-payment,nordotheyhaveagreaterpropensitytoexportorthetendencytobeconcentratedinindustrygroupswhichfaceagreatdealofcompetitionfromimportedproducts.Theyare,however,muchmorecapitalintensiveandutilizetheircapital
plantandequipmentmorefullythantheirMalaysiancounterparts.10Thus,ofthegroupofdeterminantsofcapitalintensityandusage,securityofemployment,exportperformanceandcompetitionfromimports,itistheforeignfirmswhichpossesstheoverallcharacteristicsthatresultinhighwagerates.
Theimpressionobtainedthenfromthelinearstep-wiseregressionanalysisisthattwogroupsoffactorshaveaccountedforthehigherwageratespaidbyforeignownedandcontrolledestablishmentsinWestMalaysianmanufacturing.Thefirstistheirtendencytopaywagesthattheyconsiderorthatareconsideredtobecompatiblewiththeirinternationalstatus.Thesecondisthegreatercapital.intensityoftheirproductionprocessesandthehigherutilisationoftheircapitalplantandmachinery.Theresultsdonotenableustosayexactlywhichofthesetwogroupsoffactorsisthemoreimportant,butitwouldprobablybefairtosaythatthesecondgroupisslightlymoresignificant.ThevariableK/Lcomesoutasadeterminantinfiveofthesixequationsestimated,andinthreeoftheseitisthemostimportantdeterminant.ThevariableFOappearsasadeterminantinonlytwoofthesixequationsestimated,thoughintheseitisthefirstandthesecondmostimportantdeterminant.
4.Policyimplications
OurstudyshowsthatforeignownedandcontrolledfirmspayhigherwagesthantheirlocalcounterpartsinWestMalaysianmanufacturing.Italsoshowsthatthereissupportforthecontentionthatthismayhavebeenduetothetendencyofforeigncompanies,whetherwillinglyorunwillingly,topaywagesthataremoreinlinewithwhattheypayintheirhomecountries.Otherequallyandperhapsmoreimportantreasonsarethegreatercapitalintensityoftheirproductionprocessesandthegreaterutilisationoftheircapitalplantandmachinery.
ThesefindingshavesomeimplicationsforthediscussionontheroleofdirectforeigninvestmentinMalaysia.Foreigncompaniescannotbeaccusedofnotpayingcompetitivewages.However,itdoesseemthatthenumberofworkerswhocanbenefitfromthesehighwagesarelimitedinviewofthelowlabour-absorptivecapacityofforeigncompanies.AtthesametimethepresenceofFOasadeterminantofWbsuggeststhatsocialforceshaveoperatedinpushingupthelevelofwagerates.Animportantconsequenceofthismaywellhavebeentheadditionofyetanotherfactorinthepreferenceforcapitalintensivetechniquesofproductionwheneverthishasbeentechnologicallyfeasible.
Appendix
Distributionof350WestMalaysianmanufacturingestablishmentsbynationalityandindustrygroup,1972
References
AsianDevelopmentBank,1972,South-eastAsia’seconomyinthel970s(Longman,London).
Lary,H.B.,1968.lmportsofmanufacturesfromlessdevelopedcountries(NBER.NewYork).
Lim.David,I973,EconomicgrowthanddevelopmentinWestMalaysia(OxfordUniversityPress.Oxford).
Lim.David,I976.CapitalutilisatonoflocalandforeignestablishmentsinMalaysianmanufacturing,ReviewofEconomicsandStatistics58,no.2,209-217.
Papola,T.S.andV.P,Bharadwaj.1970,Dynamicsofindustrialwagestructure:Aninter-countryanalysis,EconomicJournal,March.
Singer,W.H.,1970,Dualismrevisited:Anewapproachtotheproblem:ofthedualsocietyindevelopingcountries,JournalofDevelopmentStudies,October.
Winston,G.,1974,Thetheoryofcapitalutilizationandidleness,JournalofEconomicLiterature,December.
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* SomeofthedatausedinthispaperwerecollectedforastudyoncapitaiutilisationinMalaysianmanufacturingfortheWorldbankandsomecollectedwiththefinancialsupportofaFordFoundationSoutheastAsiaFellowship.Iamindebtedtobothoftheseinstitutionsfortheirfinancialassistance.
1. SeeSinger(1970).
2. ThiswasalsoimpliedbyPapolaandBharadwaj(1970,p.89)whentheysuggestedthat‘foreignownershipmaybeanimportantfactorforexplainingthehigh-wageposition,inIndiaandsomeotherlessdevelopedcountries,ofagenerallylow-wage:industry,viz.,FootwearandBeverages.’SeealsoAsianDevelopmentBank(1972,p.229).
3. Forexample,thebeverageindustrygroup(MIC/ISIC3130)accountedfor2.86percentofthetotalvalueaddedofthemanufacturingsectorandwasthusallocated10establishments.
4. Foradescriptionofthe59industrygroupsandthedistributionoftheMalaysian,foreignandmixedestablishmentsamongthem,seetheAppendix.
5. Theweightusedinthecalculationoftheindependentvariablesattheindustrygrouplevelisthusthenumberproductionworkersemployedbyeachestablishment.
6. SupposewehavethesameindustrygroupasthatusedinmeasuringFO,andthe5establishmentshavemonthly,fortnightly,daily,hourlyandweeklymethodsofwagepayment.MW,whichmeasuresthepercentageofsampledproductionworkerspaidonamonthlybasis,willbegivenby100(30)/(30+20+60+50+4;0),whichis15percent.MWmaybeusefulasaproxyformeasuringsecurityofemployment,aspaymentbypiece-rateisrareforproductionworkersintheinformalMalaysianmanufacturingsector.Itismorecommonlyfoundinthe:informalsectorandinthepaymentfortransportpersonnelintheformalsector.
7. SeeWinston(1974,p.1310).8. Otherindependentvariableswhichwereusedintheanalysisbutwhichdidnot
appearasdeterminantsarethescaleofoperation,tradeunionmembership,separationofmanagementfromownership,ageoftheplantandlocationoftheplant.
9. SeeLary(1968)forageneraldiscussionoftherelationship,andLim(1973,pp.284-285)foradiscussionoftherelationshipforWestMalaysianmanufacturing.
10. Atthe4-digitMIC/ISIClevel30industrygroupsarecommontotheforeignownedandtheMalaysianestablishments.ThemeanvalueofthecapitalintensityoftheformerisU.S.$715,600,comparedtoU.S.$40,107forthelatter.Ifweexcludepetroleumrefiningfromthecomparison,therespectivefiguresareU.S.$188,214andU.S.$56,789.Themeanvalueofthecapitalintensityofmixed(foreign-controlled)establishmentsisU.S.$73,714,comparedtoU.S.$61,000fortheMalaysianestablishmentsinindustry-groupswhicharecommontobothcategoriesofestablishments.SeeLim(1976)forthecomparisonofcapitalutilisationbynationality.
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