The Province of Penang with a total area of 1,031 square km and a population of 1.6 million in 2010 has achieved remarkable economic development over the last four decades. The early phase of Penang's history as pointed out by the Penang Master Plan of 1964 was gripped by “depression, spiraling inflation, labour unrest and political instability (Munro, 1964: 132; Goh, 1988: 6). The situation worsened when the federal government revoked Penang Island's free port status in 1969. Penang was actually classified among the poor states when the New Economic Policy was launched in 1971 (Malaysia, 1971). It was under such difficult circumstances that Gerakan defeated the ruling Alliance government to take control of Penang in 1969.

Gerakan's president then, Dr Lim Chong Eu, negotiated with Malaysia's Prime Minister then, Tun Abdul Razak Hussein, and tacitly agreed to certain conditions for the party's entry into the newly created National Front coalition government. Dr Lim followed the advice of the Nathan Report prepared in 1970 to situate heavy industries in Province Wellesley and light export-oriented industries in Penang Island (PDC, 1988; Rasiah, R. 1991: 95). Consistent with the Second Malaysia Plan, foreign direct investment targeted at manufacturing growth became the prime pillar of economic promotion of the province. Semiconductors and textiles comprised the earliest of multinational corporations (MNCs) to be wooed by the Penang government to generate investment and employment.

Penang faced stiff competition to attract MNCs not only from Klang Valley but also from Singapore and the Philippines. National Semiconductor from California was the first to relocate assembly operations to Penang in 1971. Other Californian IC firms to follow in the 1970s were Advanced Micro Devices, Intel and Hewlett Packard. Although unemployment rates in the province began to decline as waves of MNCs relocated in Penang, several accounts considered such a relocation an extension of ‘super-exploitation’ with grievous underdevelopment consequences for Penang (see Kamal and Young, 1985; Khor, 1987).

The doubts on the ability of Penang's leadership to steer successfully its economy towards industrialization and industrial upgrading arose not only because of the influence of radical theories of underdevelopment (see Baran, 1950; Frank, 1972; Heinrich Frobel and Kreye, 1980), but also because of the redistribution policies of the federal government which favoured the ethnic Malay-dominated provinces.