Malaysia woos FDI


  • Business
  • Saturday, 01 Feb 2003

BY DARSHINI M. NATHAN

THE weak inflow of foreign direct investment (FDI) into Malaysia has remained a key concern since the Asian financial crisis period. It has not helped any that the country's manufacturing sector's recovery is lagging owing to more current external concerns such as the threat of war and weak confidence in some of Malaysia's major trading partners.  

Recently released statistics show that while investment applications last year rose by more than 10 per cent year-on-year to RM18.8 billion, the value of approved foreign direct investments was RM11.2 billion, a sharp 41 per cent drop from RM18.9 billion in 2001. 

Although approved investments were down, International Trade and Industry Minister Datuk Seri Rafidah Aziz brushed aside concerns, pointing instead to the growth in applications that she claimed reflected that the level of interest in Malaysia was still high. 

The historical figures, on the other hand, seem to tell a different tale. According to CIMB Research, foreign applications received for manufacturing projects declined by an average rate of 8.6 per cent per annum during the period 1997 to 2001 as against a substantial increase of 20.4 per cent per annum during the period 1980 to 1996. 

Similarly, approved foreign investment also moderated sharply to 2 per cent per annum during the period 1997 to 2001 from 21.8 per cent per annum in 1980 to 1996. 

Based on balance of payment data, net inflow of private long-term capital also dwindled from RM14.5 billion in 1997 to RM4.6 billion in the first nine months of 2002. 

 

Additional measures 

If the trend persists, it runs the risk of undermining the country’s medium-term growth prospects. 

It should come as little surprise then that the government is intent on creating a more business-friendly environment as a means to woo foreign investors.  

Last week, Deputy Prime Minister Datuk Seri Abdullah Ahmad Badawi said the government was working on beefing up measures to make Malaysia a more attractive and competitive investment destination by embarking on moves along the following lines: 

  •   Speeding up the issuance of licences and land titles to foreign companies 

  •   Extending the time foreign skilled workers are allowed to stay in the country 

  •   Standardising the procedures for licences to approved foreign investors and making approval of land titles and other requirements automatic for investors whose projects have been approved  

  •   Providing longer tax breaks such as the tax-free “pioneer status” and the investment tax allowance for investors already in Malaysia. 

  •   Allowing foreign investors to take advantage of a research and development grants  

  •   Allowing companies to deduct the cost of research done overseas against taxes 

  • Providing additional grants for investment training 

     

    Some of the planned measures are expected to be included in the pump priming package Prime Minister Datuk Seri Dr Mahathir Mohamad is to announce in March. 

     

    Impact over medium, not short term 

    But even the hint of more proactive measures in the offing has stirred little interest among market observers, most of whom claim that the investment climate at the moment is just not conducive for foreign investors to go on a spree. Thus, while the measures are steps in the right direction, the timeliness of it all is certainly debatable. 

    “If the idea behind these measures is to ensure an uninterrupted flow of FDI into the country even in the face of war, then the purpose is defeated from the start. But I think the policies are more far sighted than that,” an observer claims.  

    He says these measures are likely to bear fruit only over the medium to long term and not immediate given the global uncertainties. 

    “In the short term, all eyes are still on the various uncertainties clouding the global economic landscape. It’s not surprising if no foreign firm has the mind to invest at the moment,” says the observer. 

    He says the case for FDI currently is a very shaky one: “If one talks about expansion, who in their right mind would want to add on now when there's excess capacity everywhere. As for new start-ups, the question that will definitely arise is wouldn't China – with its cheap labour force – offer a more attractive investment destination in the region?”  

    CIMB Research believes that given the increased competition for FDI, it is necessary for the government to review and re-strategise the country's foreign investment promotion policy to regain Malaysia's competitiveness as a preferred investment location. However, it reckons that the proposed measures can only be expected to further enhance the growth of foreign investment in the medium term. 

     

    Attracting the right kind of FDI 

    But as one fund manager points out, for Malaysia, it's no longer a matter of just attracting FDI as in the past, but attracting the right kind of FDI. 

    The economy is at a crossroad: having transformed itself from an agriculture-based economy to a manufacturing-based one, Malaysia is now trying to transform itself into a knowledge-based economy.  

     

    “In the process, it is now finding itself trapped between low cost countries like China and Vietnam and highly-industrialised ones like South Korea and Singapore. Its attractiveness for FDI has been marred by the fact that while its labour force is no longer cheap to compete based on cost, they are not skilled enough to move up the value chain either,” he says. 

     

    Furthermore, the fund manager points out that even with all the measures highlighted above, China still has the competitive edge of cheaper labour and a ready domes-tic market of more than one billion people.  

     

    The threat of China 

    Malaysia, like its other South-East Asian counterparts, has seen a marked decrease in the flow of FDI into the country following China's emergence as an economic power house. According to economists, the country receives about 40 per cent of the FDI destined for Asia owing to the tremendous cost advantage it offers. 

     

    Foreign firms invested a record US$52.7 billion in China last year, causing the country's actual FDI to grow an annual 12.5 per cent.  

     

    While this growth is slightly slower than the 14.9 per cent annual rise in 2001 to US$46.8 billion, economists see no letting up in the investments pouring into China this year as investors continue to be enticed by the country's cheap labour and economy that has flown in the face of a global slowdown. 

     

    Then, there is also the worry that a US-led attack on Iraq will stir anti-American sentiment in predominantly Muslim Malaysia. American Malaysian Chamber of Commerce president Timothy Garland was quoted saying by Bloomberg that fewer US companies are likely to invest in new Malaysian factories this year because of the slowing global economy and concern about anti-American sentiment here. Malaysia has traditionally counted on the US to provide the bulk of its FDI. 

     

    According to Malaysian Industrial Development Authority, applications from US companies for manufacturing investment in Malaysia halved last year to RM1.3 billion from RM2.6 billion in 2001. 

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