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Importance Of FDI In Developing Malaysian Economic Growth

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Published: Mon, 5 Dec 2016

The federation of Malaysia was formed in 1963, initially consisting of Malaya, Singapore, Sabah and Sarawak. Due to internal political reasons, Singapore was asked to leave the federation in 1965 to become an independent state. Malaysia is separated into two regions namely the West and East Malaysia by the South China Sea. Malaysia is blessed with an abundance of natural resources such as gas, coal, petroleum and the humid tropical climate creates a great condition for plant growth such as palm oil and rubber. These raw materials are what contribute to the economy.

Before the 1970’s, Malaysia was previously a raw material producing economy that produced rubber, tin, etc that exported to the industrialised countries. Much later, petroleum and palm oil were also one of the raw materials being exported. However, since the 1970’s a change has been noted in the development of the economy of being a more export-oriented manufacturing industry that produced textile, rubber products, electric and electronic goods etc. The government realised to increase GDP growth, the country had to shift from an export-oriented raw material producing economy into an export-oriented manufacturing economy. Not only will employment rise, but it will also benefit GDP growth and economic welfare.

Importance of Foreign Direct Investment (FDI)

“FDI is defined as a company from one country making a physical investment into building a factory in another country.” In other words, it is the establishment of a company by a foreign investor. To invest in Malaysia, it is required that 10% of the total equity in a resident company be held by the foreign investor. Generally there are two types of FDI’s; outward-bound FDI and inward-bound FDI. An outward-bound FDI is when local capital is invested in foreign resources while an inward-bound FDI, the opposite of an outward-bound FDI is when foreign capital is invested in local resources.

FDI is an important and effective way to stir up the economy as it is a major catalyst to development. This is because with the setting up of companies and factories, employment will rise. With foreign money being pumped into the economy to pay of wages and salaries to the employees, a multiplier effect will create an injection of several times that will cause a huge influx of foreign money. As more foreign money is being pumped into the local economy (assuming there are no outflows of money) GDP growth will soar that goes hand in hand with vision 2020 where Malaysia will achieve a developed nation status with a constant 8% growth rate every year. This will in turn, bring confidence into the economy, further generating more FDIs. As the economy is doing well, development will naturally take place to improve the quality of life.

Furthermore, the acquisition of knowledge for the transfer of technology is a tremendous advantage for the country. As companies and factories are being set up, heavy machineries and sophisticated technology are being passed on to the local employees to operate the business. In order to work the technology, the local employees will then have to go for training. Thus the passing on down of knowledge and technology to the country is an integral part for developing countries to further improve itself on a global scale.

Suitable Industries and Businesses

Foreign Investors from China can consider venturing into the renewable energy sector. This is because, Malaysia have an ample supply of raw material and land availability for such investments. Furthermore, a company from the Hong Kong called Sun Bear Solar Ltd. has made the first move to venture into the renewable energy industry in Malaysia. This is a stepping stone for future FDI from China into this sector.

Foreign investors from India can consider venturing into the IT industry of Malaysia. This is because Malaysia is fully equipped with high speed internet due to Multimedia Super Corridor (MSC) and thus this can facilitate with the FDI when they invest and set up companies in Malaysia.

Foreign investors from the Middle East can consider venturing into the oil and gas industry. The Middle East is rich with an abundance of oil and gas and so is Malaysia. Investors from there have a high expertise in the field and thus, are suitable in venturing into this sector. It is highly recommended that the Middle East investors invest into the oil and gas industry to further enlarge the scale of production and thus earning billions to stimulate the economy.

Strengths

The political status in Malaysia isn’t a huge concern to foreign investors as it is considered stable compared to neighbouring countries like Thailand. In Thailand, where street protests have escalated in recent years have kept foreign investors pending on their investment into the country due to national security. The political instability and unrest has caused a huge deterrence for the country’s FDI and thus, alternatives have been considered. Malaysia, south of Thailand is an option for the disturbed political atmosphere. With a stable political status in Malaysia, foreign investors can and will benefit from their investments into Malaysia.

A strategic location between the East and the West, Malaysia is in the epicentre of the ASEAN countries. Investors from the Middle East, India and China will find that Malaysia is the gateway to the ASEAN market that is some 558.2 million people. Malaysia boasting a population of only 28 million will be the focal point of foreign investors as they can easily distribute their products to the neighbouring countries.

Natural resources in Malaysia are in abundance. Natural gas, oil, petroleum and coal have been found along the coastal waters of the country. As such, Malaysia has kept a competitive edge to neighbouring countries as the price of fuel is remarkably lower than other ASEAN countries. This is an effective cost minimiser. Furthermore, raw materials such as rubber and palm oil are also found in abundance in the country. For those foreign investors who are planning to invest in these sectors will benefit as they will save on transportation cost as they can produce the industrialised goods in Malaysia rather than importing raw materials to their countries to produce the respective goods.

Malaysia is a multicultural country where three main races namely the Malays, the Chinese and the Indians live harmoniously together. This has proven to be an advantage to foreign investors from China and India as they will have no problem communicating with the local employees as they can speak in the same language or dialect. This is definitely a strength compared to other ASEAN countries such as Thailand whose locals speak mostly Thai and the Indonesians, Bahasa Indonesia. Although instructions can be conferred through a medium, it is at the foreign investor’s best interest that they communicate directly with their employees.

The labour market in Malaysia is fairly educated with a literacy rate of 87.4% (estimated by UNESCO Institute for Statistics, July 2002). With a higher literacy rate compared to other ASEAN countries such as Laos 76%, gives Malaysia the advantage of attracting FDI. Foreign investors will find it easier to communicate and to train the local employees to fit the demands of the job and thus, minimising the cost of training.

Technology and transportation in Malaysia is considered better than many neighbouring countries. With proper tar roads and internationally-recognised ports, imports and exports can be done easily without having to worry about the lack of infrastructure. This will ensure FDI to invest in Malaysia as they will not have to worry or invest extra security towards their transportation of their goods. Furthermore with Multimedia Super Corridor (MSC), a high speed internet connection, FDI will be ensured that work in the resident country will not be restricted by communication troubles.

Challenges

One of the main challenges of attracting FDI to Malaysia is the Islamic image of the country. With the recent attacks on churches over the use of the word “Allah” by Christians in publications has deterred foreign investors from investing in Malaysia. Concerns are being raised by foreign investors as they fear a religious conflict would turn deadly.”This is not a healthy thing for perceptions of Malaysia,” Nicholas Jeffreys, president of the American Chambers of Commerce in Malaysia, told a business conference.

As mentioned, the political status in Malaysia is considered stable compared to other ASEAN countries. However so, the recent formation of opposition party Pakatan Rakyat consisting of DAP, PAS and KEADILAN have proved to be a problem to the economy of Malaysia. During the recent general election, the opposition party garnered five states that were previously held by the main political party, Barisan Nasional. Politically shaken, both parties have been on each other’s throat, fighting for power. The political unrest in Malaysia has kept investors pending about investing in Malaysia as it is difficult to get both state and federal government to accommodate at the same time.

In recent months, Malaysia’s currency has been steadily rising against the US dollar, Euro and the British Sterling. It is important to note that a strong currency is not what foreign investors want as more money will have to be forked out to buy Malaysia’s currency. Furthermore, a strong currency will mean labour cost will increase. This will be a setback for the economy as foreign investors will want to choose other ASEAN countries of lower currency for a lower labour cost such as Vietnam or Cambodia.

A drop in GDP rate over the last few years is another reason why foreign investors are still pending with their investment into Malaysia. With a fall in growth rate, the economy will contract and thus, foreign investors will not be able to expand their business fully and this will deter foreigners from investing into Malaysia.

Corporate taxation on profit has a huge impact on foreign investors wanting to invest into countries. Among ASEAN countries, Malaysia does not have the lowest corporate taxation rates and thus foreign investors may think twice about investing into Malaysia.

Heavy competition from other ASEAN countries is also another deterrent for investors to invest in Malaysia. This is because, other neighbouring countries may lower corporate taxation rate in order to accommodate with the increasing FDIs. Furthermore, the other countries may design or propose better government policies to attract FDI into their respective countries. Vietnam, known as the “second China” has shown a remarkable performance in attracting FDI and is one of the fastest growing economies of the world, behind China. Thus, with a reputation of that, Malaysia will have to work harder to garner more support and FDI.

Recommendations

It is impossible to avoid the world to know about Malaysia’s image of being an Islamic country. However so, precautionary methods can be done to enhance the peaceful and harmonious relations in the country. Advertisement on a global scale to promote Malaysia as a symbol of racial and religion unity can improve Malaysia’s image.

Political instability in Malaysia may not be a major issue; however, it is still a pressing matter that the federal government and the opposition are at constant loggerheads. Disagreement is bound to stir up situations hence; agreements must be made in order to ease the tension. The federal government and the opposition will have to come to an agreement to provide the best facilities and services to current and potential foreign investors. With both parties working hand in hand, foreign investors will have the confidence to want to invest in Malaysia.

A strong currency deters investors from investing into Malaysia as total costs will increase. In order to remain competitive, Malaysia can and may revoke back to the pegged exchange rate against the USD where economy uncertainty can be abolished as investors will be certain that their current expenses will not increase or decrease readily.

A falling GDP due to the recent economic recession is not something the government can change overnight. However, the government can encourage spending by lowering interest rates. This will cause a multiplier effect and stimulate the economy. Investors will then see a growth in GDP rate and invest in Malaysia. With public confidence, this will become a whole cycle.

Heavy competition from other countries is due to attractive and lucrative deals made by the government to attract FDI. The Malaysia government can do the same by introducing attractive deals, low corporation tax, etc to attract FDI.

Conclusion

FDI is an important and effective way to stir up the economy as it is a major catalyst to development. There are many pros and cons to investing in Malaysia, pros being, political stability, strategic location, an abundance of natural resources and raw materials, a multicultural country, a high quality workforce, good transportation, while cons being, political instability, Islamic image, high currency, high corporate taxation and heavy competition. However so, recommendations have been made to minimize the challenges faced by foreign investors. Invest in Malaysia, and it shall invest in you.


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