Leading sector and dual economy: how Indonesia and Malaysia mobilised Chinese capital in mineral processing

Abstract

How do states pursue industrial policies in the context of China’s rise? Examining Indonesia and Malaysia’s mineral processing sectors, we argue that these countries illustrate two different pathways that states take to bolster their industrial policies. Indonesia has followed the leading sector strategy to increase domestic nickel processing capacity and decrease reliance on resource exports. Chinese firms and the Indonesian government built the Indonesia Morowali Industrial Park to house nickel smelters, fostering a new leading sector. Chinese capital in smelting follows what Albert Hirschman has called ‘intermediate investments’, maximising forward and backward linkages across the Indonesian economy. In contrast, Malaysia has followed the dual economy strategy, where semi-finished goods are imported and assembled into finished ones to be exported abroad. Chinese firms and the Malaysian government established the Malaysia–China Kuantan Industrial Park to import, process and export steel products. However, due to the dual economy strategy, the industrial park impairs the activities of domestic steelmaking companies and inhibits the potential build-up of smelting capacity. In sum, through an examination of an industrial park in each country, our paper connects the literatures on industrial policy and Chinese capital.

Keywords:

• Industrial policies
• political economy
• development
• China
• Indonesia
• Malaysia

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Correction

Acknowledgements

We gratefully acknowledge helpful feedback from the anonymous reviewers. In addition, we thank the interviewees who generously offered their knowledge and insights during our field trips to Malaysia and Indonesia. Special gratitude is owed to Jewellord Nem Singh for his support and comments throughout the review process, and to Yunnan Chen for her feedback on the first version of the manuscript. Any shortcomings that remain are ours alone.

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article was originally published with errors, which have now been corrected in the online version. Please see Correction (http://dx.doi.org/10.1080/01436597.2023.2236873).

Notes

1 The United Nations Development Programme (UNDP 2019) states that there are 99 Chinese overseas economic and trade cooperation zones, a subset of which comprise industrial parks.

2 ‘Elite democracy’ refers to a scenario in which a small group (usually wealthy and well educated) commandeer political decision-making, although conventional democratic protocols are observed.

3 MOFCOM separates Hong Kong from Chinese FDI, thus underestimating the amount of Chinese FDI worldwide. Nonetheless, the data set is still useful for cross-national comparisons. The Financial Times Greenfield Dataset bypasses MOFCOM’s problems, but suffers from the possible conflation of FDI commitment and actualisation.

4 Lateral industries refer to firms at similar stages of the value chain.

5 The China-based Shanghai Decent Investment, a company within the Tsingshan Group, owns 66.25% of IMIP, while Bintang Delapan Group owns 33.75%. As IMIP’s ‘extractive arm’, SMI channels and links its nickel ore to IMIP’s smelter. SMI covers old mineral tenements from Bintang Delapan as well as newly acquired ones.

6 Morowali covers an area of 5472 square kilometres and contains 370.59 million tons of nickel reserves.

7 The much-heralded Indonesia Weda Bay Industrial Park in North Maluku province is a smaller version of IMIP.

8 MCKIP is a joint venture between Kuantan Pahang Holding Sdn Bhd and Guangxi Beibu Gulf, the majority owner of Alliance Steel. The former, a consortium of the Malaysian state and private entities, holds 51% ownership while Guangxi Beibu Gulf holds 49% of equity. As of 2019, the Chinese and Malaysian firms have spent US$3.5 billion on MCKIP’s development. Phase 1 of the industrial park − 1200 hectares – has been completed, with the second and third phases due for completion in the coming years.

9 Only 70% of land was usable in the original plot. Eventually, with some re-planning effort, a decision was made to grow it to the current 3500 acres (split into three phases) (Interview, Trade and Investment Promotion Officers, 29-10-2018).

10 Rimbunan Hijau and SP Setia were unwilling to pay for MCKIP’s initial investments. They were not prepared for this financial commitment as no company in Malaysia has ever built such a large industrial park.

11 Sime Darby stands to gain from MCKIP’s impact on land appreciation. As of 2018, Sime Darby owns about 4000 acres of plantation estate land nearby.

12 The entire population of Kuantan stood at only 500,000.

13 With a peak annual output of 4.65 million and 1.5 million tons of steel products, respectively, these two firms cannot realistically match Alliance Steel’s 3.5 million tons without a drastic improvement of their existing facilities. Furthermore, these firms have not produced at peak level for a considerable period because their existing technology cannot effectively push average cost down.

Additional information

Notes on contributors

Alvin Camba

Alvin Camba is Assistant Professor at the Josef Korbel School of International Studies at the University of Denver and a faculty affiliate at the Climate Policy Lab at the Fletcher School at Tufts University. He has conducted in-depth research on Chinese capital in Southeast Asia and been awarded multiple best research paper awards by the American Sociological Association. More information about his work can be found on his website (alvincamba.com).

Guanie Lim

Guanie Lim is Assistant Professor at the National Graduate Institute for Policy Studies (GRIPS), Japan. His main research interests are comparative political economy, value chain analysis, and the Belt and Road Initiative in Southeast Asia. He is also interested in broader development issues within Asia, especially those of China, Viet Nam and Malaysia.

Kevin Gallagher

Kevin P. Gallagher is Professor of Global Development Policy at Boston University, where he directs the Global Development Policy Centre (GDP Centre). The GDP Centre’s mission is to advance policy-relevant research for financial stability, human well-being and the environment on a global scale.