Petronage: The Political Economy of a National Oil Company and Local Content in Malaysia

Abstract

This thesis examines the role of a National Oil Company (NOC) in promoting local content within Malaysia’s oil and gas industry. Much scholarly attention focused on local content policies and firm upgrading in supply chains of private International Oil Companies (IOCs), despite few success stories from late industrialisers. However, a state-owned NOC as a local content tool is dismissed by prevailing neoclassical, new institutional, and resource curse frameworks. This study explores the mechanisms of state capitalism in Malaysia’s petroleum sector from a political economy perspective, focusing on the interaction between ideas and power configurations. Specifically, it analyses inter-firm relations between Malaysia’s NOC Petronas and the largest, politically connected, and globally competitive suppliers. Challenging new institutional theories, Petronas emerged as an effective NOC against all the odds. This thesis finds that Petronas’s high performance resulted from the state’s imperative for a cash cow. Given the ruling coalition’s dependence on Petronas’s rents to manage an internal conflict, Petronas faced a hard budget constraint while being disciplined by its partnerships with IOCs. Defying the enclave thesis, Petronas has successfully created a domestic supplier market. In contrast to the conventional wisdom that stresses the importance of a single mission, it was precisely the coexistence of Petronas’s conflicting commercial and developmental missions that resulted in a successful outcome. Concentrating missions into one NOC was a crucial organisational precondition of their successful management that resulted in credible commitments and disciplining of suppliers. As a main contribution, this thesis finds that petronage or Petronas allocating rents to insider firms has led to productivity-enhancing outcomes. Petronas has nurtured insiders, which were selected as ‘winners’ ex-post their initial formation. A different reciprocal control mechanism than highlighted by the developmental state literature counterbalanced this selection problem. Petronas’s institutionalised role as a powerful, domestic monopoly prevented rent capture among insider firms.