Trade Openness and the Development of Domestic Business in China and Malaysia

Topics: Economics, International trade, World Trade Organization Pages: 8 (2903 words) Published: March 9, 2012
Trade Openness and the Development of Domestic Business in China and Malaysia I. Introduction
Economic growth for many emerging East Asian economies has gone hand in hand with their trade openness to the world. As Stiglitz (2000, p.A17) puts it, “Of the countries of the world, those in East Asia have grown the fastest and done most to reduce poverty via globalisation.” Jin (2006) also points out that the East Asian countries have achieved rapid economic growth over the last twenty years, and this growth has been accompanied by persistent openness to world trade. However, when we do further research, we may start to doubt whether those emerging countries are really bigger winners in the game of trade openness. Will the economic growth accompanied by the opening of their economy last long? Will trade openness harm domestic business in the long run? It seems that too much attention has been paid to economic growth of these open countries. In contrast, the development of the domestic business has not received sufficient concerns. This paper will critically discuss the impact of trade openness on the development of domestic business by employing empirical evidence from two of the emerging countries in East Asia: China and Malaysia. For this study, two cases are taken, of which one is from China’s automobile industry and the other is Malaysia’s manufacturing industry. The automobile industry is chosen for China because it is a key industry. It has expanded remarkably over the reform years and typically accounts for an increasingly larger share of industrial production, output, exports, and employment (Buckley et al., 2007). The development of the automobile industry has a great impact on China’s domestic business. The manufacturing industry is chosen for Malaysia because since the middle of the 1980s, the manufacturing industry has been an important engine of growth for the Malaysian economy (Nair et al., 2006). By means of probing deeper into the dimension of domestic industries in both China and Malaysia, we seek to explore the benefits and losses of these emerging countries resulting from trade openness and ultimately to broaden the debate on the consequences of trade openness for emerging economies. The rest of the paper is organised as follows. The next section discusses theoretical framework and reviews the literature associated with this study. The empirical evidence from China and Malaysia is showed in Section III and Section IV, respectively. The final section provides an analysis of the cases from China and Malaysia, and concludes the paper with a summary.

II. Theory and Literature on trade openness and business development The effect of a country’s trade openness has long been an intensively studied topic. For the study of this topic, Adam Smith’s theory of absolute advantage and David Ricardo’s theory of comparative advantage are far from enough to clearly explain the impact of trade openness. More recently, the impetus for much of this study is New Growth Theory, which suggests that a country’s trade openness improves its domestic technology, and hence an open country grows faster than a closed country through its influence on technological enhancement (Jin, 2006). However, Jin (2006) also points out that there is no consensus on the theoretical appropriateness of the new growth theory. Mitchell (2006) uncovers a pitfall of new growth theory in his studies. Furthermore, Batra (1992) critically argues that the primary source of economic downturns is freer trade. As a result of trade liberalization, tariffs will be reduced and foreign goods will be much cheaper and more attractive than domestically manufactured goods. Thus domestic business may suffer a loss (Batra, 1992). In addition to theoretical disagreement, empirical literature associated with this topic also provides different results. Frankel and Romer (1999) show evidence in their study that increasing trade openness boosts GDP growth. In contrast,...
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