It is widely acknowledged that foreign direct investments (FDI) play an important role in developing countries. FDI benefit the recipient country in a number of ways: they provide additional capital resources to finance investment activities in the country; and they are often accompanied by technology and, therefore, the country benefits from the new technologies introduced. Furthermore, FDI enable the country to have access to overseas markets since the foreign investors often have international market links before they come to the country.

There are strong links between international trade patterns and foreign investment patterns, especially since the majority of FDI are accounted for by MNCs (multinational companies). A number of theories have been developed to explain the relationships between the MNCs, FDI and international trade.

Tsuyoshi Koizumi (1987) has reviewed the literature on FDI in Asian LDCs. Among the general theories of FDIs and MNCs, the one developed by Dunning explains the ability and willingness of firms to serve markets, and the reasons why they choose to exploit this advantage through foreign production rather than through domestic production, exports or portfolio resource flows. According to Dunning's hypothesis, a firm will engage in FDI if three conditions are satisfied:

1. It must possess net ownership advantages over firms of other nationalities in serving particular markets. These ownership advantages largely take the form of the possession of intangible assets, which are, at least for a period of time, exclusive or specific to the firm possessing them;

2. When the net ownership condition is met, it must be more beneficial to the enterprise possessing these advantages to use them itself rather than to sell or lease them to foreign firms, that is, to internalize its advantages through an extension of its own activities rather than externalize them through licensing and contracting with independent firms;

3. When the first two conditions are met, it must be profitable for the enterprise to utilize these advantages in conjunction with at least some factor input (including natural resources) outside of its home country; otherwise foreign markets would be served entirely by exports and domestic markets by domestic production.

Malaysia and Thailand are members of the Association of Southeast Asian Nations (ASEAN), a regional grouping formed in 1967 with the declared aim of fostering greater regional co-operation among member-states. The other members of ASEAN are the Philippines, Indonesia and Singapore. Brunei's admission as the sixth ASEAN member was more recent. Thus far, ASEAN co-operation has been largely limited to the political and cultural spheres but it is anticipated that there will be more co-operation in the economic sphere in the near future (Mahathir bin Mohamad 1989). The Malaysian Prime Minister has argued that although co-operation in agriculture may be more difficult because of the similarity of climate and other geographical factors, co-operation and complementation in industrialization rather than competition will not only be desirable but may even be necessary for the ASEAN countries in the face of protectionism and other economic developments in the industrialized nations. Given the importance of such regional co-operation, particularly in future industrialization, it will be useful to examine the situation vis-à-vis foreign investments in resource-based industries in the other ASEAN countries as well, so as to be able to place the RBI developments in Malaysia and Thailand within the ASEAN regional context as well as to make comparative evaluations. Since the focus of this study is Malaysia and Thailand, time and other resource limitations only allow a brief examination of the situation in the other ASEAN states.

Among the other ASEAN countries, the Philippines, Indonesia and Brunei are rich in resources. Indonesia and Brunei are particularly well endowed with petroleum resources whereas agricultural and related activities are important in the Philippines and in Indonesia. As in the case of Thailand and Malaysia, Indonesia and the Philippines too began shifting the emphasis of their industrial strategies from the 1970s, from import substitution to promoting industrial exports. Brunei has remained primarily a petroleum exporter and has no substantial industrial development. On the other hand, industrial development is an important facet of the Indonesian and Filipino economies and resource-based industries are important in both these nations.

As stated earlier, in Chapter I, resource-based manufacturing industries are generally taken to mean those industries that are involved with downstream processing and manufacturing of the country's agro- and mineral products, that is, the products of the primary resource industries. In the past and to a great extent even today, these primary products (such as rubber, palm oil, tin and rubber) are being exported with only minimal processing, if any. It is in the countries that import these primary products that further processing and manufacturing into finished products take place. The implication is that much of the potential value- added that comes from the further manufacturing of these primary products is lost to the developing countries that export them. Some of the theoretical considerations of resource-based industrialization were reviewed earlier. While constraints exist, so do opportunities for nations wishing to embark on RBI development. Careful study and planning is required by governments to select and promote the development of the right RBIs within the context of the country's overall industrial development strategies.

In 1987, 36 per cent of Thailand's exports (Bank of Thailand 1988) was made up of primary products, mainly rice, rubber, maize, tapioca products, prawns and sugar. In the case of Malaysia, 47 per cent of exports in 1987 (Ministry of Finance, Malaysia 1987) was made up of primary products. However, 15 per cent of this was accounted for by crude petroleum and 4 per cent by liquefied natural gas (LNG). The remainder consisted largely of rubber, palm oil, saw logs, tin and cocoa.

Primary products, thus, make up nearly 40 per cent of exports of the two countries. The importance of primary commodities in the export structure also calls attention to the vast amounts of produce being exported without much processing or manufacturing. Such raw produce could potentially be used in domestic downstream processing and manufacturing activities to generate further value-added benefits to the country before export.

In Malaysia and Thailand, the manufacturing sector has overtaken agriculture as the leading economic sector in recent years. However, both countries are resource-rich and primary commodities continue to play important roles in their production and export structures. The earlier phases of industrialization of the two countries were characterized by import substitution but with the increasing saturation of domestic markets and for other economic reasons, this has been replaced with export substitution strategies. Resource-based industries (RBIs) which are concerned with the downstream processing and manufacturing of the country's agro and mineral products have excellent prospects for development and can feature importantly in this drive to develop export-oriented manufacturing industries.

In Thailand, current industrial policies aim to promote manufactured exports, labour-intensive industries and resource-based industries in order to solve the basic problems of unemployment, unequal distribution of wealth, and income and trade deficits. Malaysia has chosen a fairly strong emphasis on exports but has paid some attention to the promotion of selected, import-substituting industries, mainly in consumer durables, intermediate inputs and certain capital goods industries. In the export manufacturing sector, the direction of expansion is towards more capital- and technology-intensive products, including resource-based products as well as machinery and electronics products.

The right amounts of capital and appropriate modern technologies are crucial requirements for the successful industrialization of any developing country. But capital is often a major constraint to the industrialization efforts. However, the influx of foreign capital (and technology) has enabled many a developing country, including Malaysia and Thailand, to achieve a more rapid rate of industrial growth than would otherwise have been possible. As with any industrial development, resource-based industrial development too requires large amounts of capital and appropriate technologies. Some of the required capital can be provided from the limited domestic sources, but others will have to come from foreign sources.

Primary resource products make up nearly 40 per cent of the exports of the two countries.

If the establishment of the John R. Commons Lecture is a new experiment for Omicron Delta Epsilon, so is its preparation for me. For these “Reflections” are not a research paper but a discourse. They contain no formulas, mathematical appendixes, statistical tables, and footnotes, the indispensable props of my other efforts. I believe that it behooves an economist between ages of maturity and senility to engage in such a discourse occasionally, and Commons' words give me the courage to try. But they do not remove my fear that this discourse, like many such, will be trivial.

In a game of free associations among economists, the expression “economic development” is likely to be followed by “model” and “plan.” A plan usually aims at maximizing the rate of growth of consumption or income either by solving an explicit system of equations (and inequalities), or by selecting a preliminary target rate and adjusting it by iteration. In either case, a so-called bill of final goods (or its equivalent) is customarily drawn up and is combined with a matrix of input coefficients to find the required inputs (labor, capital, materials, foreign exchange), and the resulting outputs.

An historical play about growth models might consist of three acts: in the first, labour, supported by an invisible chorus of capital, land and technological progress, holds the stage; in the second, capital and labour exchange roles. Finally, in the third act now being performed, labour, capital (and sometimes land) and technological progress appear on the stage together, with the first two (or three) reading from the script while technological progress holds forth the rest of the time. So treated, this newcomer has done remarkably well. According to several recent American studies, it has been responsible for some 80–90% of the growth of output per unit of labour, the remaining 10–20% being all that capital (and land) could claim. True enough, this large contribution has not been made by technological progress alone; a whole group of actors consisting of technological progress in the narrow sense, economies of scale, external economies, improved health, education and skill of the labour force, better management, changes in product mix and many others have been involved. For this reason, the names given to this group have ranged from “output per unit of input,” “efficiency index,” “total factor productivity,” “change in productive efficiency,” “technical change,” all the way to “measure of our ignorance.” To emphasise the nature of this concept and to avoid loaded words, let us call it the “Residual”.

This essay began as an ordinary comment on Professor Bergson's paper. If by now it has become rather long and involved and has strayed into other, let us hope not unrelated, subjects, the fault is his and not mine: his paper was simply too interesting and too stimulating to be left in peace. On my first reading of Bergson's paper I jotted down even more comments than are reported here, only to find that Bergson, with his usual conscientiousness, had disposed of most of them in the next paragraph or on the next page. Obviously, it is impossible to comment on every aspect of his paper; utilizing my comparative advantage, I shall say very little about his statistical data (except at the very end) and shall concentrate instead on his general methods and on the meaning and significance of his results.

The theory

The theoretical part of the paper continues the discussion of intertemporal and interspatial comparisons of index numbers of inputs and of outputs began by Bergson and Moorsteen some years past. There is no doubt that everyone who constructs index numbers transgresses against honesty, and that every user thereof is an accomplice in the act: it is impossible to reduce a vector of quantities or of prices to a single number in an honest way. But what Bergson and Moorsteen have done is to make clear and explicit the assumptions on which the construction of these index numbers rests, and the rationale involved in preferring one set of weights to another, even if no true set of weights exists.

The essays in this volume have been written since the publication of my first collection, Essays in the Theory of Economic Growth, in 1957. Although all but two of them (Essay 3 and the Special Appendix to Essay 11) have appeared in print before, I hope that, being collected in one place, they may still be of some use to my fellow economists and even to a few historians (Part IV).

A number of minor changes and corrections were made in the original texts.

Unlike the earlier essays which had a definite focus – the theory of economic growth – this book appears to lack one. Actually, most of the essays in the first three parts do have a common theme: the comparative performance of different economic systems, particularly of American capitalism and Soviet socialism (at least as it had existed before Gorbachev's perestroika). My ventures into Soviet economics have not been sufficiently deep or frequent to claim the title of a sovietologist, but they have continued to be a rich source of ideas. They have also aroused my interest in the history of serfdom and slavery, which led to the three essays in Part IV.

Let me now describe the origin and nature of each essay and end with a few brief comments on the perestroika, to the extent that these essays are relevant to it.

The first three essays (Part I) are discourses. They are rather general and nontechnical with one formula and one diagram for all three.

This is a brief summary of a long report on the rates of growth of outputs, inputs, and factor productivities in the United States, Canada, United Kingdom, Germany, and Japan in the post-war period, for the countries as a whole and for major economic sectors. Like many empirical studies, this paper shows numerous scars from battling statistical data: frequent use of the “n.a.” abbreviation, insufficient disaggregation (particularly for Germany), heavy reliance on ingenuity in bridging statistical gaps, and finally a rather weak conceptual framework chosen under duress. For all these reasons, the reader is urged to take our findings with a good dose of salt. Space does not permit us to discuss the numerous qualifications, sources, and statistical procedures.

Since there exists a large literature on the methodology of such studies, we can be brief here. On the whole, we have used the Kendrick method in obtaining what he calls the “Index of Total Factor Productivity” and what is called here the “Residual,” as well as in measuring specific factor productivities, with the following major modifications: (1) the outputs (in their several variants) are expressed gross rather than net of depreciation; (2) labor input is aggregated without being weighted by the average wage of each industry, as Kendrick did; (3) imports (when present) are treated as inputs. Much as we wanted to deviate from Kendrick and to include materials among the inputs (in the several sectors), lack of data forced us to follow him in subtracting material inputs from both sides of the production equation and to express output as value added (in constant prices).

My original assignment stated in the first half of the title implied some comparison between a number of planned and nonplanned economies. The limitation of my knowledge and time and of the reader's (estimated) patience has restricted my set of countries to the Soviet Union and the United States, who appear sufficiently different to make the comparison worthwhile and yet similar enough in many essential features to make it meaningful. A broader coverage would, of course, be preferable, but it should be done by someone better versed in the economic history of a number of countries than I am.

If I had a free choice of variables to be compared, I would try to relate the economic performance of each country to the training given to, and the use made of, the 5 or 10 percent most able persons of its labor force. Some American information on the use of ability exists, but I have never seen any Soviet data. Hence, I had to turn to the more conventional, if less interesting, variables, such as capital formation, price movements, labor productivity, and the like, in the hope that this well-worked mine had not been completely exhausted. Not aiming at the specialist in Soviet economics, I have thought it useful to present a number of tables containing some basic facts about both economies over several periods. But such materials, in their impartial purity, are just as boring to read as they are to assemble from known sources.