Opportunities in Cross-Border Production between Sabah and North Kalimantan

Date Published
February 25, 2020
Tour boats on the Kinabatangan River in Sabah. Photo: iStock/michaelcurwood.

A study identifies four potential areas for building cross-border value chains between Sabah in Malaysia and North Kalimantan in Indonesia. These are medical tourism, multi-destination tourism, skills training and higher education, and trade of certain goods.

The state of Sabah and North Kalimantan province share a 330-kilometer border and are part of the BIMP-EAGA subregion.

The pre-feasibility study backed by the Asian Development Bank notes that setting up cross-border value chains makes sense because the economies of Sabah and North Kalimantan complement each other. Investments in transport and trade infrastructure, such as the Trans-Borneo Highway, are also making production sharing across borders possible and viable.

“In the North Kalimantan–Sabah context, the spatial concentration of industries along the border region combines the traditional growth area model of trade and investment, based on comparative advantage and complementarities, with one based on scale economies from regionalization of production activities. Clustering of industries across the neighboring countries then allows producers to bypass the need to handle the entire production process, and instead concentrate on processing stages,” the study says.

The study notes that North Kalimantan has abundant natural resources and can deliver basic agricultural, forestry, fishery, and mining products needed by Sabah in exchange for technology and knowledge transfers. Sabah has started shifting from an economy that depends on exports of primary commodities to one that is driven by high-technology and service-based industries.

Medical tourism

Sabah can be developed into a medical tourism center for medical tourists from North Kalimantan. Over 80% of Malaysia’s inbound medical travelers are from Indonesia, This makes Sabah a good location since it borders North Kalimantan, where medical facilities offer only basic services. Yet the medical tourism industry in Sabah is still at its infancy. Many private hospitals lack experience in dealing with medical tourists but are highly price-competitive. They offer state-of-the-art medical facilities and have received both national and international accreditations.

TVET and higher education

The study suggests developing technical and vocational education and training (TVET) and higher education institutions in Sabah that will support industries with cross-border production sharing arrangements. This can help develop skilled workers, facilitate technology transfer to North Kalimantan, and transform the Indonesian province from a resource-based to a capital- and technology-intensive economy with more downstream activities in the value chain.

For Sabah, a TVET and higher education agenda supports efforts to diversify its economy to high value-added service industries and attract greater numbers of international students.

Multi-destination tourism

Packaging and marketing their tourist attractions can help North Kalimantan and Sabah gain a competitive edge in tourism. North Kalimantan lacks technical expertise in tourism development and has scarce financial resources to promote tourism and limited infrastructure to support the industry. Likewise, Sabah has a modest visitor advertising budget and needs to spend more to attract more visitors. By working together, Sabah and North Kalimantan will be able to offer multi-destination travel options featuring different natural, historic, and cultural attractions.

Trade in goods

The study also notes the benefits of developing cross-border value chains in palm oil, wood products, fisheries, and organic foods.

  • Palm Oil. Sabah is Malaysia’s largest palm-oil-producing state and the world’s third largest producer of palm oil. However, the land planted to palm oil is getting scarce. There is also a dearth of skilled workers and insufficient mechanization in palm oil processing. Tapping North Kalimantan as a supplier of palm oil can boost palm oil production in Sabah.
  • Fisheries. Crustaceans and fish contribute $185 million to Sabah’s exports and $28.8 million to North Kalimantan’s. Sabah imports $181.3 million worth of crustaceans and fish from North Kalimantan annually and demand is continuing to rise. North Kalimantan can supply more to Sabah as it develops both sustainable fish farming and commercial fishing.
  • Wood Processing. The wood-based industry is a major revenue contributor to Sabah’s economy. The wood comes mostly from plantation forests. As a result, Sabah has the lowest proportion of natural forest wood harvesting in Malaysia. North Kalimantan can supply wood to help Sabah bolster its carpentry products and advance its premium branded furniture industry.
  • Organic Foods. Organic foods are the fastest growing sector of the food industry worldwide, with premium prices 3 to 4 times higher than conventional foods. In both Indonesia and Malaysia, consumption of organic foods is growing rapidly for health reasons, yet both do not produce enough supply. Malaysia, for example, imports over 60% of organic food products.

Sabah and North Kalimantan have a large potential for organic food production, but existing farming practices are fragmented and there is often a lack of awareness of premium markets and distribution mechanisms. Cross-border collaboration in clustering of organic food producers, from both the agricultural and fisheries industries, could lead to economies of scale and provide access to premium markets.

Source: Pre-Feasibility Study of Sabah—North Kalimantan Cross-Border Value Chains