Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Malaysian Automobiles and the Infant Industry Argument

Written by johnleemk on 5:25:44 am Mar 12, 2007.

One reason often cited by protectionists to defend artificial props for local firms is that by virtue of being "infant industries", they must be protected until they can catch up with the advantages of foreign exporters. An excellent case study of how the infant industry argument pans out would be that of the Malaysian automotive industry.

In the 1980s, Prime Minister Mahathir Mohamad launched the national automobile company, Proton. Proton would be protected by massive subsidies, in order to help it attain the same economies of scale and other advantages enjoyed by established automobile exporters.

From the very start, Proton cars were sold at a loss. The first car, the Saga, enjoyed massive market penetration, and future models of Proton cars continued to dominate the Malaysian market. With almost literally rock-bottom prices for Proton-produced cars, only the very rich could afford to buy imported models.

The trouble, of course, is that the supposed efficiencies Proton was meant to take advantage of never materialised. The economies of scale it sought to achieve under protectionism were never attained.

The protectionist argument for infant industries admits that competition is necessary in the long run to achieve an optimal outcome. However, it assumes that protectionism can be beneficial in the short run by keeping firms in business long enough to achieve similar advantages enjoyed by those of more established competitors.

Unfortunately, what this creates is a cosy trap of comfortability that the infant industries are reluctant to leave. The will is never sufficiently mustered to end the protectionist policies, even if the infant industry is all grown up. Today, over 20 years after Proton's establishment, the protectionist tariffs and subsidies are now only beginning to be dismantled, and even then, at a glacial pace.

The artificial and insulated environment created by protectionism actually stymies efforts to introduce efficiency and competitive business practices. After all, as anyone can attest, Proton is suffering greatly today because it is now only beginning to feel the need to adapt to global economic norms.

A competitive environment is harsh, but the Darwinist atmosphere it creates is truly egalitarian and efficient. Only the fittest survive. If your product is good enough, it will survive, even though the odds are stacked against you, because the market will recognise its benefits. If you can't take the heat, as the saying goes, get out of the kitchen. Your comparative advantage may not be in the field you've been considering.

In the mid-1990s, some modicum of real competition was introduced to the Malaysian automobile industry. A new national car company, Perodua, was incorporated. Although also protected and subsidised by government policies meant to favour local enterprises, it was not given the same breaks that Proton was.

The result is that Perodua has come out of nowhere to become a major player on the Malaysian automobile scene. Not too long ago, it outsold Proton for the first time. By being forced to compete with Proton, and not being given any special breaks because of its "infancy", it was forced to adapt its business practices and develop an efficient system, and the results are clear for all to see.

The infant industry argument is well-meaning, and even logical at first glance, but the practical evidence suggests it is ill-founded. By insulating infant industries from competition, these firms never outgrow their coddled protectionist infancy, and remain childish well into adulthood. The infant industries are better off being the hatchlings pushed out of the nest by the mother bird. Either they fly, or they don't. Survival of the fittest.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

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