The SIJORI Growth Triangle: Territorial Complementarities or Competition for FDI in the Oil and Gas Industry?

AuthorDiez, Javier Revilla
PositionORIGINAL RESEARCH ARTICLE - Singapore, Johor and Riau Islands; - Report

After some initial euphoria, the SIJORI Growth Triangle--formed by Singapore, Johor (Malaysia) and Riau Islands (Indonesia)--seems to have been forgotten. The growth triangle concept was developed to enhance the attractiveness of the three territories for foreign investment. This paper aims to explore whether firms in the oil and gas industry are making use of the different factor endowments accessible in close spatial proximity. Based on FDI data and expert interviews, it is observed that Singaporean firms are, in fact, taking advantage of the different factor endowments that SIJORI offers, especially in sectors related to storage and and offshore equipment manufacturing. However, in the case of Johor and Riau Islands, the focus continues to be on lower value-added activities.

Keywords: Singapor-Johor-Riau Islands (SIJORI), cross border strategic coupling, global production networks, FDI.

Article received: April 2018; revised: December 2018; accepted: December 2018

  1. Introduction

    Over the last three decades, industrialization processes have closely linked together Singapore, the Malaysian state of Johor and Indonesia's Riau Islands province. Initiated by the Singaporean government at the end of the 1980s, the political objective behind the so-called SIJORI Growth Triangle was to offshore Singapore's land- and labour-intensive economic activities for attracting higher value-added activities (such as high-value manufacturing, trade and business services) to the Malaysian and Indonesian border regions. Johor would serve as a base for intermethate level industry, while the Riau Islands would be used as a region for low-value and labour-intensive manufacturing (Hutchinson 2015; Hutchinson and Chong 2016).

    Based on the promotion of complementary specialization and cooperation in national border territories, the "triangulation" aimed, at least theoretically, to capitalize on the territory's comparative advantages such as geographic proximity, distinct factor endowments and good logistic connections (Grundy-Warr, Peachey and Perry 1999).

    In terms of results, an economic boost was observed in Johor and Riau Islands, mainly driven by the export-oriented electrical and electronics industry (van Grunsven and Hutchinson 2016, 2017). At the same time, in the discourse of complementarity and spatial fix (as well as borderless regionalization and "hinterlandization"), many scholars have questioned the fragmented development within the Triangle (see Grundy-Warr, Peachey and Perry 1999; Sparke et al. 2004). Sparke et al. (2004), for instance, highlighted that the relations are by no means equilateral, especially in regard to Johor-Riau ties. Likewise, recent stuthes by Hutchinson and Chong (2016) and van Grunsven and Hutchinson (2016, 2017) have pointed mat the territories have acquired varying levels of economic and political sophistication. Overall, Riau and Johor continue to be linked to Singapore especially in terms of investments and serve as low value-added production "spaces".

    However, there is still little understanding of whether and to what extent complementary specialization takes place within the region and how the three territories are competing with each other over which types of investments. So far, no stuthes have combined quantitative and qualitative methods to analyse the functional and sectoral specialization across the SIJORI Growth Triangle. Against this background, the paper aims to explore in more detail how the functional division of labour within the Triangle is evolving in the oil and gas industry. Specifically, it tries to identify whether firms are making strategic use of the different factor endowments accessible in close proximity.

    In contrast to worldwide scepticism concerning a fossil-based economic development model, the past few years have seen a massive investment into oil and gas related activities in all three regions (Revilla Diez, Breul and Moneke 2018). Compared to the SUORI Growth Triangle construct, the emergence of a "greater Singaporean oil and gas hub" expanding beyond the city-state to the neighbouring Riau Islands and Johor, is a rather recent development. It, therefore, provides a suitable case study to explore the current configuration of the SIJORI Triangle and deliver new empirical insights from an industry yet to be fully understood.

    In this paper, the oil and gas production chain has been defined as a series of distinct but interrelated activities that are broadly organized into three main value chain segments--upstream, midstream and downstream. The upstream sector covers the exploration and extraction of crude oil and natural gas from both onshore and offshore fields. The segment includes service companies such as Schlumberger, Baker Hughes or Diamond Offshore, which are important technical service providers (Bridge 2008; Wirjo and Pasadilla 2016; Breul and Revilla Diez 2017). The midstream sector involves transport, storage and wholesale marketing of crude or purified/refined products. Following further processing and refining, downstream firms market and distribute petroleum end products to gas stations and end consumers (Bridge 2008; Clews 2016). Besides this, the refining and processing industry also produces various valuable byproducts which serve as important feedstocks for the petrochemical industry (Clews 2016).

    The theoretical and empirical analyses employed in this study are based on two research questions:

  2. In terms of functional and sectoral specialization within the oil and gas industry, what are the territorial complementarities between Singapore, Johor and Riau?

  3. To what extent is cross-border strategic coupling taking place in SIJORI's oil and gas industry?

  4. Conceptual Considerations

    2.1 Functional Disintegration within Global Production Networks

    Today's global economy is characterized by spatially fragmented production. Advances in transport and communication, and deregulation and liberalization of markets have enabled transnational corporations to split their production networks across numerous territories. Instead of being vertically integrated in one or a few places, distinct business functions are localized in different places based on available factor endowments at the locations. Consequently, high-end business functions like R&D, design, business services and low-end business functions like logistics, sales, marketing, and retail take place at the most suitable places for the specific function. This leads to more flexible intra-firm networks, and even vertical disintegration with the option of subcontracting functions to otber companies and spinoffs. It is, therefore, no surprise that the R&D labs are found in the knowledge hubs of the world (the usual suspects like Silicon Valley, Route 66, Oxford-Cambridge, but also new places like Singapore and Bangalore) and production has moved to countries in Asia. In principle, the new division of labour opens up the opportunity for firms in developing countries to enter global production networks. The advantages proposed by the advocates of global value chains and global production networks are straightforward (Ye, Meng and Wei 2015). First, latecomer firms can specialize on their competitive advantages and focus on a specific task within the production process instead of building up the entire production capacity (Kowalski et al. 2015). Second, integration into global production networks will create employment opportunities (UNCTAD 2013). Third, through technology transfer and spillover from lead firms, upgrading can be induced (Pietrobelli and Rabellotti 2010; Kawakami and Sturgeon 2011).

    Another important concept is that of value capture. The functions that a firm performs determine the value it can capture. First introduced by Shih (1996), the smile curve illustrates that higher value-added activities are to be found at both ends of the value chain. Transferred to the oil and gas industry, Figure 1 shows that functions like R&D, design, and commercialization at the upstream end and operations like marketing, advertising, brand management at the downstream end capture higher value-added than the middle part of the value chain comprising manufacturing and standardized services. However, each function requires specific factor endowments that are not available everywhere. The more knowledge-intensive and intangible functions at both ends of the value chain require well-qualified personnel, financial resources, and often a network with research institutes and highly specialized producer service firms (Bridge 2008; Mudambi 2008; Shin, Kraemer and Dedrick 2012). Although the actual extraction and production sites remain locationally fixed, high value-added functions of the upstream segment are often found in core city regions outside the resource periphery as these functions depend on access to industry-specific knowledge, qualified human capital as well as a safe and predictable institutional environment (Breul and Revilla Diez 2018). Standardized manufacturing and services with a strong pressure on cost efficiency, instead, need sufficient low-wage workers and land, both of which are more generic regional assets that can be found more in non-core regions around the globe and provided by smaller independent firms (Bridge 2008; Breul and Revilla Diez 2018).

    Against this background, it is not surprising that many national governments in late-industrializing countries are drafting upgrading policies, especially focussing on functional upgrading.

    2.2 Division of Labour and Territorial Complementarity

    Already in the early 1990s authors like Ohmae (1993) were stressing that global production is spatially concentrated in what he called "region states" characterized by dynamic cross-border activities. So called "growth triangles" were identified especially in Northeast and Southeast Asia like SDORI, Southern China Growth Triangle and the Yellow Sea Economic Zone (Hutchinson and Chong 2016).

    The key...

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