Revisiting the productivity growth and spillovers debate: the case of Malaysian manufacturing sector

Malaysia, a country which aspires to be an industrialised nation by the year 2020 is now facing the dilemma of industrialisation slowdown - 'the middle-income trap'. The search for sources of economic growth in this paper drew attention to the productivity growth debate a la Krugman's 'Perspiration vs. Inspiration' discussion. The paper hypothesised that increase in productivity growth is viewed as the key for breaking free from the middle-income trap. Based on Malaysia's early experiences in hosting multinational corporations, this paper also examines the incidence of spillovers from foreign to local industries as a way to improve productivity growth. Findings suggest that increase in skill intensity and capital utilisation may allow countries to move up the value chain and move out of the middle-income trap. Finally, evidence of spillovers may imply that the industrial dualism concerns may be less profound in the later years of a country's industrialisation phase.