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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

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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.