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Impact of foreign direct investment on Malaysia

Info: 1704 words (7 pages) Essay
Published: 8th May 2017 in Economics

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In 2007, malaysian economic growth is strengthened though uncertainties in the external.The real gross domestic product(GDP) was raised to 6.3% (2006:5.9%).Growth was expected to be driven by domestic demand,particlurary private sector expenditure and investement activities. The main sources of growth are the services,manufacturing and farming sector on the supply side.Growth was led by the services sector since the economic structure has changed.Furthermore,services sector was supported by the event of VISIT MALAYSIA 2007 of tourism activity.The strong overall 2007 growth performance reflected positive growth rate in all sectors of economics.

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2008 world economic growth was slowing down, significant changes in the world economy, the U.S. subprime mortgage crisis evolved into a global financial crisis.In 2008,it showed that the economy growth in Malaysia is 4.6%.During the year,malaysian economics growth was supported by strong domestic demand,strong public spending and also private expenditure.However,in the first half of the year ,though the foreign demand was strong,the increasing in commodity prices and the inflation rate declined the export performance in the latter year.


Malaysian economy was affected by fallout of the US subprime mortgage crisis, impacting on the real economy in the USA and the global economy. The prolonged subprime mortgage crisis, oil price shocks leading to higher world inflation. Malaysian economy was hit badly by the global financial crisis.

Impact on trade:

The global financial downturn was transferred to Malaysia through the business and financial sector. Malaysian exports trend are closely connected with developed countries especially the US and the European countries. Economic was seriously affected by the drop in exports especially in the manufacturiong sectors. The crisis revealed the weakness of Malaysia’s export dependent growth. In the first half of the 2008, stronger growth in the both commodities and resource owing to the high commodity prices extend to a large trade surplus. The gross exports increased by 9.6% in 2008(2007:2.7%).However, there was a big drop in exports in the last quarter. The investment was decreased and the exports became worse. The manufactured export was the most worrying fall, especially electronics, electronical (E&E)products and appliances. Total manufactured exports fell 20% led by semiconductors and electronics.

Impact on finance:

In the first quarter of 2008, a strong net inflow of FDI were amounting to RM21.1 billion for investment in the debt securities market which more than contra the net outflow from the equity market. Since the second half year of 2008, as other Asian countries Malaysia facing capital outflow this problem. Due to the US reduce their international business and focus on their own market, Malaysia was suffered a big drop in funds. The deleveraging activities by foreign financial instistutions caused the large reversal of portfolio investment flows arising. The reversal of the portfolio capital flows as a result of repartriation by foreign participants influence the stock market.In Malaysia stock market,foreign contries involvement occupied a high level.In Malaysia,net portfolio flow and stock prices are vitally interrelated. In the second half of 2008,the reversal of portfolio capital flow because of divestments by foreign financial institutions with the onset of the global crisis led to a fall in reserves.

Impact on unemployment and labour

There was a strong labour market condition in 2007 and endure into the first half of the year 2008.Nevertheless,the labour market status started to soften in the third quarter of the year because of the businesses,especially in the manucfacturing sector.In 2008,there is an increasing 3.7% of the unemployment rate. Foreign labour in Malaysia most graveness affected by the ecomic crisis because they are most vulnerable and unprotected section of the working population.As the unemployment in country rises,many of them have been sent back.But overall,unemplyment in Malaysia that caused by economic crisis was not as graveness as other countries.

Impact on exchange rate

Global financial crisis led to the downward trend in ringgit versus the US dollar. Internal and external factors had influenced the ringgit exchange rate.Ringgit was impacted by the capital flows since the de-pegging from the US dollar.The decreasing in portfolio capital outflows and in the demand in exports led the value of ringgit depreciated.In May to December of 2008,the ringgit flapped around a wide depreciating trend alike with other regional currencies following rapid change in sentiments in the financial and the currency markets.

Impact on investment

In 2008,net direct investment overseas by Malaysian raised to RM47.1 billion.While,in the overseas investments were led by companies in the service sector.Private investmentThe outward of direct investments by Malaysians surpassed the inflow of foreign direct investment.External direct investment into Malaysia was plunged badly.Compared with 2007,the external direct investment in 2008 was dropped 17%.In the second half of the year,FDI inflow was moderated by the global economic crisis. Malaysian increased the direct investment in overseas to RM50.2 billion.

Impact on balance of payment

In the overall balance of payment(BOP),the goods surplases was significant turned to deficits in the third quarter of the year.In the second quareter,the BOP showed a positive surplus of RM62.2billion.However,in the third quarter,it became a loss of RM31.5 billion,and followed by a loss of RM62.5 billion in the last quareter.The main cause of the deterioration in BOP was the large outflow of capital.The overall BOP was recorded a deficit though the current account balance remainded high surplus because there was a massive outflow of capital.

Government’s actions

To recover the economy downturn,Malaysia government intoduced two stimulus packages.The main support of the economy is domestic demand in publics sector expenditure.The first stimulus package that the government announced on 4th November 2008 was amounted RM 7 billion.The government professed that they would use the funds to distributed projects with a high multiplier impact on the economy.Due to the global develoment became worse in the last quarter of 2008,Malaysian economy foreground faced a serious recession. Therefore,government introduced second stimulus package that was larger,totalling RM60 billion in March 2009.In Malaysia economy history,this was the largest stimulus package.It’s equal to 10% Malaysia’s GDP of that two stimulus packages.

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On 31st December 2008,the net international reserves declined by RM18.2 billion to RM 317.4 billion.During the year,the movement in the international reserves was characterised by two diverse period.In the first six months,the reserve increased by RM 75.2 billion to RM410.9 billion as at end of June.Malaysia remains a participating member in the Financial Transactions Plan of the IMF.In 2008,the increase in reserve position with the IMF revealed net purchases of currencies by several member countries under the Financial Transactions Plan.

Several measures have been introduced to advance beyond to financing for all economics sectors. These include the organisation of financing guarantee facilities for businesses, special funds, sufficient liquidity including the availability of US dollars for the trade financing, and the organisation of the Financial Guarantee Institution to provide credit enhancement to companies for fund-raising in the domestic bond market. To support private consumption, the rate of EPF was also reduced from 11% to 8% and higher vehicles loan qualification for officials.

Between November 2008 and February 2009, the central bank lowered three times of the Overnight Policy Rate by a sum of 150 basis. The Statutory Reserves Requirement (SRR) was lowered by 200 basis to 1.0%.

The effectiveness of the measures taken by government

To recover the economy slow down, the government introduced two stimulus packages which amounted RM7 billion and RM60 billion.In the first package,it led to a high multiplier that’s from the projects of the fund.The second package will use for spending on create job opportunities, labour training, improving public facilities, school facilities,basis amenties,and also guarantee facilities.The execution of these two stimulus packages appeared to be slow.The full impact of these measure need time to take effects.Out of the RM7 billion from the first package,it’s only RM2.3 billion spent.However,for the second package the direct stimulus package is only RM18 billion, and the rest RM42 billion are used in, private finance initiatives ,equity interests, guaranteed funds and off budget initiatives. On the other hand, in the construction sector, there are more foreign workers. When they remit back the money to their country, actually they’re creating leakages in the internal economy; therefore it might influence the multiplier effect from the stimulus spending. The other causes of leakages are the corruption and fiscal mismanagement contributed.The monetary policy response has been forward-looking in this environment of shifting challenges. Most economies in the region world attempted the expansionary monetary policy and the countercyclical fiscal policy. To access the inceptive risks to price stability, bank used several kinds of core inflation measures components of the group of indicators. In the same time, by lowered the cost of the intermediation, the expansionary monetary policy has been front-loaded and sustained internal economic activity.


In 2009, Malaysia economy is expected to continue to weaken and highly challenging year. The full impact of the 2008 financial crisis was felt in the first quarter of 2009. The real GDP of Malaysian economy performance was projected to be between -1% to 1% due to the weaker global condition in 2008.


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