Leading Sector and Dual Economy: How Indonesia and Malaysia Mobilized Chinese Capital in Mineral Processing

As the fastest growing source of foreign financing, China and Hong Kong foreign direct investment (FDI) surged to a total of $3.2 trillion in 2019. Chinese capital offers a novel opportunity for host country political and state elites to strongly foster industrialization by enacting policies outside the rules of the World Trade Organization (WTO) and the Organization for Economic Co-operation and Development’s Development Assistance Committee (DAC). 

How do states pursue industrial policies in the context of China’s rise? Studies on industrial policies have yet to systematically examine how states have mobilized China’s capital, like FDI, development finance and other monetary inflows, to pursue industrial objectives.

In a new journal article published in Third World Quarterly, Alvin Camba, Guanie Lim and Kevin P. Gallagher examine Indonesia and Malaysia’s mineral processing sectors, arguing these countries illustrate two distinct pathways for states to bolster their industrial policies. 

Main findings:

• In the context of China’s rise, countries in the Global South have pursued a leading sector or dual economy strategy, generating short- or long-term trade-offs on development strategy through the issues created by either strategy.
• 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’, maximizing 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 products to be exported abroad. 
  • Chinese firms and the Malaysian government established the Malaysia–China Kuantan Industrial Park to import, process and export steel products. 
  • 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.

As the literature on industrial policies does not specifically focus on China and the works on Chinese capital examine changes in industrial policy only sporadically, Camba, Lim and Gallagher connect the two literatures by developing these concepts. They hope their insights will stimulate future analysis comparing and contrasting the economic trajectories offered by Chinese firms relative to their more mature Western and Japanese counterparts.