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Foreign direct investment in Malaysia

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Published: Fri, 12 May 2017

Political Instability & Policies Inconsistency

The Malaysian government has provided various incentives to encourage FDI but most of our competitors have also provided similar incentives package (Lim, 2002). So, government had formulated various policies from the mid 2009 including the New Economic Model, 10th Malaysia Plan, Government Transformation Plan and Economic Transformation Plan to attract foreign investment.

What are the factors affect foreign investor decisions to invest in our country? One of the key factors affects the FDI to invest in Malaysia because of the good environment (Har, Teo & Yee 2008). The good environment will encourage foreign investor to invest in our country because with the good conditions make investors face fewer problem and they can run their business conveniently and make more profits. The social and political situation of Malaysia was encouraging factors for the realisation of FDI because Malaysia is among the friendliest and hospitable places in the world to work and live in.

Previous researchers indicate that political stability is a pre-requisite to attract FDI, but it is not a strong drive for FDI inflow (UNCTAD, 1998). While political instability reduces the inflow of FDI and also changes the nature of FDI from an investment in the country’s future into a drain on a country’s future (Henley, 2004). Political instability could be a serious deterrent for FDI as it creates uncertainties and increases risks and costs (OBwona, 2003). According to Ajami and Ricks (1981) and Nigh (1985) a country with political stability has a positive influence on FDI. Political stability is important for creating a climate of confidence for investors. This is also supported by (Henley, 2004) because, the foreign investors need to confident with the government for will not to take over their investments, that their agreement will be honoured, that conflicts will not destroy their investments, and make business too expensive (Henley, 2004). Thus, political stability is essential for FDI inflow which has large effect whether the foreign investors will invest in Malaysia or not and it will encourages investments in long-term business. So, Government plays an important role in maintaining political stability, because the investor have to adjust their strategies in accordance with the new policies if a new government come in with highly different policies. The long term political stability then will make foreign investor confident with their businesses will succeed and remain profitable.

After former Deputy Prime Minister Anwar Ibrahim was released sodomy charge in 2004, he went to be the opposition leader for the coalition known as Pakatan Rakyat. He put pressure on the government under the Prime Minister Najib Abdul Razak for many accusations of cronyism, bribery and seeking advice from APCO, a jewish firm. In 2008, a new allegation of sodomy was made surface by his former aide, accusing him of sodomy. Popular with Sodomy II, this allegation went public and popular all over the world as the world leaders and foreign investors keep watching at close distance. This political chaos has tarnished Malaysia reputation among foreign investors and several of them even warn Malaysia government for a fair trial of Anwar Ibrahim. One of the famous example here came from British tycoon Richard Branson when he said that the ongoing sodomy trial against opposition leader Anwar Ibrahim was discouraging investors from coming to Malaysia. The case is like a thorn because it has gone on for a long time and it damages Malaysia a lot as Malaysia has a good reputation. Malaysia can be more liberal and a lot more people will invest. Malaysian leader should get rid of these things that are damaging the country’s reputation quickly. Branson, the founder of the sprawling Virgin business empire, said Malaysia would have more success in wooing foreign funds if it adopted a more open and competitive business policy. The Malaysian political environment which has continuous crises between the government and opposition parties can be the reason why FDI declined last year, as the Deputy International Trade and Industry Minister, Mukhriz Mahathir said. He accused the opposition actions often maligned the name of country caused many foreign investors are afraid to come to Malaysia.

Variables that will come under government factors are government incentives, economic policies, and political environment and government promotions towards FDI. The Malaysian government has provided various incentives to encourage FDI. Brewer (1993); Woodward and Rolfe (1993); Kerr and Peter (2001); Tung and Cho (2000) and He and Guisinger (1993) found that tax incentives had a positive effect on FDI. The tax is expected to have an inverse relationship with FDI, which means lower taxes will promote FDI and vice versa (Kerr & Peter, 2001). However, according to Lim (1983) the tax incentives do not affect FDI because most of our competitors have also provided similar incentives package (Lim, 2002).

Besides government incentives, Malaysia government also had formulated various policies from the mid 2009 including the New Economic Model, 10th Malaysia Plan, Government Transformation Plan and Economic Transformation Plan as part of the economic development strategy to FDI and acquire foreign technology, capital, and skill.

One of the key factors affects the FDI to invest in Malaysia because of the good environment (Har, Teo & Yee 2008). According to them, the good environment will encourage foreign investor to invest in our country because with the good conditions make investors face fewer problem and they can run their business conveniently and make more profits. The political environment refers to the laws and regulations passed by governments that can affect viability of multinational company operations in the host country (Griffin & Pustay 1999). Sound political environment can encourage FDI due to the role they play in lowering profit uncertainty (Agarwal, 1980; Schneider and Frey, 1985).

Previous researchers indicate that political stability is a pre-requisite to attract FDI, but it is not a strong drive for FDI inflow (UNCTAD, 1998). Political instability reduces the inflow of FDI and also changes the nature of FDI from an investment in the country’s future into a drain on a country’s future (Henley, 2004). Political instability could be a serious deterrent for FDI as it creates uncertainties and increases risks and costs (OBwona, 2003). According to Ajami and Ricks (1981) and Nigh (1985) a country with political stability has a positive influence on FDI. Political stability is important for creating a climate of confidence for investors. This is also supported by (Henley, 2004) because, the foreign investors need to confident with the government for will not to take over their investments, that their agreement will be honoured, that conflicts will not destroy their investments, and make business too expensive (Henley, 2004). Thus, political stability is needed to attract and essential for FDI inflow which has large effect whether the foreign investors will invest in Malaysia or not and it will encourages investments in long-term business. So, Government plays an important role in maintaining political stability, because the investors have to adjust their strategies in accordance with the new policies if a new government come in with highly different policies. The long term political stability then will make foreign investor confident with their businesses will succeed and remain profitable.

From 2007 to 2009, Malaysia experienced political instability and considerable macroeconomic fluctuation (BTI, 2010). The Malaysian political environment which has continuous crises between the government and opposition parties where opposition actions often maligned the name of country may caused many foreign investors are afraid to come to Malaysia, the racial issues between the majority Bumiputras and the minority Indians and Chinese also affect the country’s FDI attractiveness.

The major and the biggest change in policy involving Malaysia was back in 1998 when the Asian financial crisis attacked and the Malaysian ringgit was falling very fast to almost 60% of its value, the Prime Minister at that time Mahathir Mohamad had to make a radical decision. He decided to impose a strict capital controls that prevented investors from taking money out of the country and then he pegged the ringgit at RM3.80 to the U.S. dollar. His action enraged foreign governments and investors whereby many of them felt threaten until some of them even declared to never set foot in Malaysia again. This action in changing policy overnight and make the investors felt uneasy had led to the fall in the foreign investments.

The threat and uneasiness were dissolved over time along with the capital control introduced by Mahathir as the only thing that didn’t change was the ringgit’s peg to the dollar. Mahathir’s initial intention to peg the ringgit was to prevent the ringgit value to fall and weaken further. As the time passing by and Malaysian economy grew rapidly had led to the undervaluation of ringgit up to 15% at one time. This hurt Malaysians because the cost to import foreign products became expensive and it led to inflation in Malaysian economy. For foreign investors it was another story, the situation led them to bring more capital into the country, with the labor and goods became cheaper they hoped to earn more profit from the economic situation.

In 2005, immediately after China announced to call off its yuan peg, Malaysia made the call on July 21, 2005 with announcement from Bank Negara Malaysia to abandon the ringgit peg to the U.S. dollar. This move comes with immediate effect to float the ringgit and let the value being determined by economic fundamentals. Although the ringgit was floated but Bank Negara Malaysia still keep monitoring closely to ensure the exchange rate remains close to its fair value to promote stability of the exchange rate as their primary objective of policy.

The government at that time, under Prime Minister Abdullah Ahmad Badawi believed that the change in policy will strengthen the economy. The ringgit showed strong appreciation after the announcement and the value of ringgit grew strongly until it reached RM3.00 to the U.S. dollar in October this year. These moves made the Malaysian import of foreign products become cheaper and increase the Malaysians buying power. But on other hand, Malaysia revenue from oil and gas sector suffers huge loss since the trading was conducted in U.S. dollar.

As the Malaysia ringgit appreciate and getting more value, Malaysian products has become more expensive to foreign importers. This is a major impact because Malaysia’s main exports are electronic goods and the expensive currency will make the country less attractive as a cheap production centre. It has to take note that Malaysia is facing a major competition from China for low cost production as well as from Vietnam and other country. This affected the value of foreign investment into the country as it value keeps decreasing.

Malaysia government has a unique policy of controlling the capital market in Malaysia through GLC (government linked company). This policy makes most of the big companies, especially companies that involve in commodities goods and utilities services such as electricity and foods, are under or run by the government. This policy to make sure, even with privatisation the public interests are kept at the best level. But under this policy, it is hard to see a competition inside the country and the GLCs themselves are less competitive, let alone the shares bought by foreign investors.

This has prevented more foreign investors to come and invest hence less and less foreign direct investment (FDI) flows into the country. The government need to break up big companies and let them compete against each other to make the economy become more interesting for foreign investors. For example, the success story of AirAsia, a Malaysia-based budget carrier which they came with a lower cost base and they helped transform Malaysia. And that is because they are more nimble than bigger government-run companies.

Attracting foreign direct investment (FDI) has been a strong point in Malaysia’s economic transformation since industrialization was introduced in the mid-1960s, starting with the import substitution industries. Thanks to that farsighted policy, Malaysia has not only emerged as a semi-industrialised nation, but more importantly, has been able to achieve high economic growth, distribute income more evenly and eradicate poverty. The much-maligned New Economic Policy (NEP) affirmative plan did not stunt growth. On the contrary, FDI flows were quickened during the plan period. Export-oriented industries took hold and Malaysia became a major global manufacturing centre for electrical and electronic goods.

But in recent years, a combination of factors have colluded to make attracting FDI more challenging. Key among them is the rising labour cost. Malaysia no longer has cheap labour and the people are becoming more selective about jobs. Understandably so because the average Malaysian is more educated, has higher expectations and needs a higher income to cope with the rising cost of living. At the same time, the poor and low-income countries of the region are becoming more open and stable, and are offering the kind of incentives that Malaysia can no longer match. There are Indonesia, Thailand, Vietnam, Cambodia, Laos and Myanmar, who offer cheap labour, an abundance of land and a large domestic market, which

Malaysia does not have. One very positive aspect of industrialization that is often neglected or not fully realised is the shift away from land-based development. Had industrialization not been introduced, much more of the country’s tropical rainforest would have been cleared to make way for agriculture. The shift from agriculture to industry has saved the forests and environment.

While the government’s efforts to revive and diversify the economy is laudable, it must make sure the wealth garnered is distributed equitably. In recent decades, income gaps among the races have widened. The move by Prime Minister Najib Abdul Razak to further widen and diversify the base of the nation’s economy is commendable. The Star newspaper, on June 23, reported that the Prime Minister unveil a number of significant liberalisation measures. The target is the services sector. With the new measures, Najib hopes the share of the services sector will increase from its current 55% to 70%. Malaysia are not liberalising to conform to some new economic orthodoxy nor is it for the sole purpose of attracting foreign investments and capital. The objective is clear, to ensure that Malaysians benefit from the competitive dynamics that are shaping the global marketplace for ideas, talents and funds so that we can emerge stronger, become more globalised and ultimately thrive in this new world order.


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