GEORGE TOWN, Malaysia -- It is mostly cranes, earthmovers and rubble now, but the Penang Industrial Technology Park at Batu Kawan, on the northwest coast of peninsular Malaysia, will eventually become the region's next high-tech hub, if the enthusiasm of Chief Minister Lim Guan Eng is anything to go by.

Seagate is to construct a plant on this site in Batu Kawan, Penang. (Photo by Simon Roughneen)

      "We call it the Fortune 500 road," said Lim, running a finger across a map showing the 24km Second Bridge linking Penang Island to the peninsula, and pointing out Batu Kawan, a 6,000-acre area that will be a hub for data storage companies SanDisk and Seagate, both headquartered in the U.S.

     Other companies have either established factories in the new park across from Penang Island or are building plants there. Around 300 multinationals have set up operations in the state of Penang since the early 1970s.

     "It all relates to good governance and on getting the right people," said Lim, secretary general of the Democratic Action Party. Malaysia's second largest parliamentary party is mainly supported by the country's ethnic Chinese minority, who account for around a quarter of Malaysia's population of 30 million.

A base since the 1970s

Situated on the southern part of Penang Island, near an increasingly busy international airport, the older Bayan Lepas industrial park has been a base for companies such as Intel and Bosch since the early 1970s. It is the reason Penang became known as "Silicon Island."

     Along with the industrialized states of Johor and Selangor, Penang is one of Malaysia's most economically dynamic states. According to the Organization for Economic Cooperation and Development's most recent investment report on Malaysia, published in 2013, Penang is home to the country's most advanced technological sector and the source for 25% of Malaysia's electronic exports.

     The Malaysian Investment Development Authority says 5 billion Malaysian ringgit (about $1.31 billion) in tech investment is expected to flow to Penang in 2015. Among Malaysia's 13 states, Penang in 2014 received the third highest amount of investment -- behind Johor, the Malaysian state that borders Singapore, and Sarawak, the vast and resource-rich state on the island of Borneo.

Honda's new facility in the Batu Kawan industrial park in Penang (Photo by Simon Roughneen)

     Penang's metamorphosis into a tech hub began when U.S. tech giant Intel set up its first base outside the homeland. Intel now employs 7,000 people in 12 buildings across the state; its total investment of $4 billion has resulted in the production of 4 billion microprocessors.

     "What drew Andy Grove and Intel to Penang in 1972 remains true today: an openness to investment and partnership, an avowal to innovation, and a long-term commitment to education," Intel spokesperson John Mandeville told the Nikkei Asian Review.

     "One of the main drivers was the establishment of a Free Trade Zone in Penang in the early 1970s, which provided attractive incentives to foreign investors," said Simon Song, managing director of Bosch Malaysia, which has three manufacturing facilities in Penang, making power tools, car multimedia systems and automotive steering units.

     Song said Penang's education system has ensured a steady pool of skilled employees for the 300 multinationals that have set up in the state. "We've also seen the emergence of reputable training facilities," he said, "such as [the Penang Skills Development Centre] in 1989, alongside curriculum developments within the local universities of Universiti Sains Malaysia and Universiti Teknologi MARA to meet the increasing demand for skilled labor in manufacturing."

Silicon Valley of the East

"The Silicon Valley of the East" is another nickname for Penang, according to Kai Fai Ng, president of the Southeast Asian branch of Semiconductor Equipment and Materials International, a global semiconductor industry association.

     In April, the association staged a major industry showcase event in Penang because the state, Ng said, "accounts for 8% of the global back-end production of the semiconductor industry."

     The Silicon Valley brand names have arguably contributed to Penang's distinct identity. The island used to be a pirate haven and remains a popular tourist destination. Almost half of Penang's 1.6 million people are ethnic Chinese, most of whom support the Democratic Action Party.

Worshipers pray in one of Penang's many Chinese temples. Almost half of Penang's population is of Chinese ancestry. Ethnic Malays, who are Muslim, make up most of the rest. (Photo by Simon Roughneen)

     The Chinese minority and the country's ethnic Malay majority have grown increasingly polarized since the 2013 general elections, contributing to Penang's sense of alienation.

     Many in Penang accuse propaganda organs linked to the United Malays National Organisation -- which formed a coalition government despite a poor showing in the elections -- of whipping up anti-Chinese sentiment. Many in Penang also accuse the Malay business and political elite of graft.

     Indeed, controversy recently swirled around Prime Minister Najib Razak and 1Malaysia Development Bhd., an indebted state development fund. It is the latest in a series of scandals involving state companies and the political parties that make up the long-ruling National Front coalition government.

     Lim has called for the prime minister to step down if he cannot disprove recent allegations that nearly $700 million in 1MDB money was transferred into his bank accounts.

     But Lim prefers to focus on Penang's prosperity and dynamism as an example to the rest of Malaysia, which he described as beset with "crony capitalism," than dwell on the scandals in Putrajaya, Malaysia's administrative capital.

     "I'm a Malaysian, a true Malaysian," Lim said. "We have shown we can succeed with the right policies," citing "open competitive tenders, public declaration of assets [and] making sure family members cannot bid for contracts."

     Penang's competitiveness is key to Malaysia's solid showing in a variety of global commercial and economic rankings. The World Economic Forum's Global Competitiveness Report 2014-15 lists Malaysia 20th among 144 economies, while the World Bank's report on Ease of Doing Business 2014 puts Malaysia 18th of 189 countries.

     "Our thrust now is to focus on attracting high-knowledge, high-value-added and high-technology industries ... in line with our aspirations to establish Malaysia as a high-income economy by 2020," Mustapa bin Mohamed, minister of international trade and industry, said in a statement issued June 24.

     Government spending on roads, airports and universities has facilitated Penang's rise, officials say.

     "The government's continued efforts in providing adequate and quality infrastructure have enhanced the investment attractiveness of Penang," an official at the Malaysian Investment Development Authority said in response to questions from the NAR.

Big challenges

The Penang state government has big plans for a 6.6km underwater tunnel and separate cable car system to link the tourist island to the mainland and to Batu Kawan. But critics say these plans lack clarity; they also wonder whether environmental impact studies will be carried out.

     Mohamed Idris, president of the Consumers Association of Penang, questioned the projects in remarks to local media. "Do we even need these expensive projects?" he asked, "And are they feasible or economically viable?"

     Uncertainty swirling around these infrastructure projects could dent Penang's reputation for good governance. Already, there is little doubt that Penang will have to stay on top of its game as lower-cost rivals emerge, with Intel making major investments in Vietnam in recent years.

     The government there, Ng said, "is offering favorable investment conditions and incentive schemes. The Vietnamese prime minister ​has just given approval-in-principle for the development of its first domestic wafer fabrication facility, in Ho Chi Minh City."

     Malaysia itself could end up undermining Penang's appeal to investors, with the national government trying to induce companies to set up in Malaysia's less well-off regions.

     "Newly established companies or existing companies that expand operations into less developed areas will be eligible for 100% income tax exemptions for up to 15 years," the spokesperson from the Malaysian Investment Development Authority said. "These companies would also be eligible for stamp duty exemptions on transfer or lease of land or building used for development in relation to manufacturing and service activities."