High dependence on foreign workers erodes the benefits of FDI by substituting employment away from Malaysians and dampening wage growth.
KUALA LUMPUR: Bank Negara Malaysia (BNM) has called for an overall review of the country's investment promotion strategy as in recent years, the net benefits of foreign direct investments (FDIs) have been narrowing.
The central bank said on Friday there should be a holistic review of the investment promotion strategy, instruments and landscape to attract quality investments going forward.
Malaysia presently offers more than 100 different types of incentives to promote investment in the economy. These are disbursed in three main forms: Pioneer Status, Investment Tax Allowance and Reinvestment Allowance.
“More targeted, relevant and effective incentive instruments would ensure that the desired investments are attracted to Malaysia and that positive economic spillovers from these investments are maximised,” it said.
In recent years, however, there is evidence that the net benefits have been narrowing. While FDI has helped create jobs in the economy, the dependency on foreign workers and inputs needs to be addressed.
“Estimates indicate that among FDI manufacturing firms, as a proportion of total employment, the hiring of locals has declined from 74% share in 2011 to 68% share in 2014 amid greater hiring of low-skilled foreign workers,” it said.
High dependence on foreign workers erodes the benefits of FDI by substituting employment away from Malaysians and dampening wage growth, particularly aff ecting low-income earners (bottom 40% or B40 of households).
BNM pointed out investment incentives are one part of the investment landscape, and the review of incentives should be complemented with the enhancement of business enablers, such as infrastructure, public service delivery and talent.
“With all these in place, it is envisaged that Malaysia would stand the best chance to become a future-ready economy, and maximise the intended benefi ts for all Malaysians,” it said.
BNM said in the past, the presence of FDI was indeed a game-changer in transforming the Malaysian economy.
FDI has been an important catalyst for manufactured exports, job creation and productivity. For example, the increase in FDI to 10.5% of GDP in the 1990s brought a corresponding rise in the share of manufactured exports.
In 2015, exports generated by FDI firms amounted to RM290.2bil or 35.5% of total exports of goods and services during the year.
The rise in FDI had brought about greater employment opportunities, with FDI firms hiring about 848,000 workers or 5.8% of total employment in 2015.
“Value added per worker in FDI firms is about three times higher than the national average,” it said.
In terms of intermediate input, growth of domestic value added in gross exports has stagnated relative to the regional economies.
This indicates continued heavy dependence on imported inputs and foreign services (e.g. logistics), which reflects the slow development of deeper backward linkages and value creation among domestic suppliers and service providers.
Further, the prevalence of labour-intensive production methods impedes adoption of technology, such as automation, and hence Malaysia’s progress in moving up the production value chain.
Technology transfer has plateaued, evidenced by the lower spending on R&D by the US multinational corporations in Malaysia relative to other countries in the region.
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