The Case of Malaysian Palm Oil
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Agro-Commodity Global Value Chains and Upgrading: The Case of Malaysian Palm Oil Yee Siong Tong Queens’ College University of Cambridge This dissertation is submitted for the degree of Doctor of Philosophy August 2018 Agro-Commodity Global Value Chains and Upgrading: The Case of Malaysian Palm Oil Yee Siong Tong Summary This dissertation consists of three closely related essays on upgrading in agro-commodity value chains, which is an important issue for many developing countries that produce and export commodities in mostly unprocessed form. The essays are based on fieldwork in Malaysia and focus on its palm oil, which is the world’s largest oils and fats product by production and export volumes. The first essay examines the suitability of vertical specialisation for participation and upgrading in agro-commodity value chains based on the case of Malaysian palm oil. It uses data from interviews, site visits, and industry and economic statistics to analyse upgrading at the sector and firm levels. The essay suggests that upgrading is prone to sectoral linkage development and vertical integration at local lead firms. The development is driven by production characteristics, sectoral dynamics, eco-historical settings that are unique to agro-commodity value chains, as well as firm motives seeking resources, markets, efficiency gains, and strategic assets. The second essay studies Malaysia’s industrial policy for its palm oil sector through three distinct stages of development. The findings show that resource-based industrialisation (RBI) requires selective state intervention targeting macroeconomic conditions, infrastructure, business climate, and human capital. The Malaysian experience also highlights the importance of local firms in driving RBI investments, contrary to the emphasis in the literature which either overplays the importance of foreign linkages or dismisses nationality of firms as a non-factor for industrialisation. The third essay investigates economic and social outcomes from upgrading in the Malaysian palm oil sector using gross value added data. It shows that economic upgrading can but does not automatically lead to social upgrading. The essay finds that economic upgrading in value chains improves income of groups of individuals at different rates depending on their position in the value chains. Skills and productivity performance provide only partial explanation for the uneven social outcomes; the differences in institutional arrangements and political representation accorded to the groups are likely to be important factors as well. i For Ho-Yan and Our Parents ii Acknowledgements My sincere gratitude goes to my advisor Peter Nolan for his continuous support of my doctoral study and research, and for his patience, motivation, mentoring and immense knowledge. His guidance helped me in all the time of research and writing of this dissertation. I would also like to acknowledge the generous financial support from the Gates Cambridge Trust, as well as institutional support from the Centre of Development Studies and Queens’ College at the University of Cambridge. I would like to thank Élise Lapaire, Doreen Woolfrey, Nathalie Henry and Emma Cantu for their help. I thank Vasiliki Mavroeidi, Albert Hoon Park, Terry van Gevelt, and my colleagues and friends at the Centre of Development Studies for the stimulating discussions, the exchange of ideas, the sharing of knowledge and all the fun we had in the last four years. The camaraderie forged was truly one of the greatest experiences in the PhD journey. I place on record my appreciation for the invaluable help I received for my fieldwork in Malaysia from a number of individuals. Among them are Kalyana Sundram, Normala Majid, Yusof Basiron, Norihan Husain and N. Balu at the Malaysian Palm Oil Council; M. Nagarajan at the Ministry of Plantation Industries and Commodities; Choo Yuen May at the Malaysian Palm Oil Board; Lee Yeow Chor at IOI Group; Lee Hau Hian at KLK, Tan Siok Choo at United Malacca; Mohd Haris Mohd Arshad at Sime Darby Plantation; Edward Clayton at PwC's Strategy&; Khor Yu Leng at LMC International; and others who wish to remain anonymous. I am indebted to Raphael Kaplinsky, David Croft, Jonathan Smales, Neil Lacroix, Julia Tijaja, Gary Gereffi and Patrick Low for our discussions that helped me think through my research during the early stage. I am grateful for the feedback provided by the anonymous reviewers as well as Guy Robinson at Land Use Policy. I would also like to thank my examiners, Ha-Joon Chang and Christopher Cramer, for their extremely insightful comments. I give special thanks to Ho-Yan Chan and our parents for their unceasing, unconditional and tireless support throughout the writing of this dissertation and in life. Without them the completion of this study would not have been possible. iii Contents List of Tables ............................................................................................................................. vi List of Figures ........................................................................................................................... viii List of Abbreviations .................................................................................................................. ix 1 Resources, Industrialisation and Globalisation .................................................................... 1 1.1 Resources and Industrialisation .................................................................................... 2 1.2 Globalisation and Global Value Chains ........................................................................ 8 1.3 Malaysian Palm Oil in the World Oils and Fats Market ............................................... 16 1.4 Malaysian Palm Oil in the National Development Context .......................................... 22 1.5 Institutional Framework of the Malaysian Palm Oil Sector .......................................... 30 1.6 Structure of the Dissertation ....................................................................................... 37 2 Vertical Specialisation or Linkage Development in Agro-Commodity Value Chain Upgrading? Evidence from the Malaysian Palm Oil Sector .......................................................................... 39 2.1 Introduction ................................................................................................................ 39 2.2 Vertical Specialisation and Value Chain Taxonomy .................................................... 40 2.3 Methods and Data ...................................................................................................... 43 2.4 Sectoral Upgrading ..................................................................................................... 43 2.5 Firm Upgrading .......................................................................................................... 59 2.6 Conclusion ................................................................................................................. 72 3 The Role of Ownership and Firm Innovation in Resource-Based Industrialisation: The Malaysian Experience .............................................................................................................. 74 3.1 Introduction ................................................................................................................ 74 3.2 Industrialisation and Intervention ................................................................................ 75 3.3 Methods and Data ...................................................................................................... 78 3.4 Industrial Policy in Three Stages ................................................................................ 79 3.5 Firm Ownership .......................................................................................................... 90 3.6 Firm Innovation ........................................................................................................ 101 3.7 Conclusion ............................................................................................................... 106 4 Economic Upgrading for Whom? Distribution of Gains from Development of the Malaysian Palm Oil Sector ...................................................................................................................... 109 iv 4.1 Introduction .............................................................................................................. 109 4.2 Economic and Social Upgrading ............................................................................... 110 4.3 Methods and Data .................................................................................................... 113 4.4 Findings ................................................................................................................... 115 4.5 Discussion ................................................................................................................ 126 4.6 Conclusion ............................................................................................................... 134 5 Falling Behind, Keeping Up or Catching Up? ................................................................... 136 5.1 Upgrading in the Age of GVCs ................................................................................. 137 5.2 Conclusion ............................................................................................................... 141 Annexes ................................................................................................................................