MALAYSIA needs to review its existing investment policies amid a rapidly-evolving environment to attract quality investments if it wants to successfully transition itself into a high-income nation.
Noting that recent investment trends are not aligned with the country’s growth aspirations, Bank Negara cautions this “poses a risk to Malaysia’s future growth potential, with an adverse impact on technological progress and productivity growth”.
The central bank says the country’s economic transformation in the past was supported by effective policies that focused on export-orientation, liberalising trade and investment as well as economic diversification.
This transformed the economy from being predominantly agricultural-based to an open and industrialised economy with multiple sources of growth.
This commendable rate of investment growth, however, has slowed markedly in the past decade, the central bank points out in a box article “Securing Future Growth through Quality Investments”, which appeared in Economic and Monetary Review (EMR).
The central bank warns that “without swift and effective reforms, the lack of quality investments will impede the transition towards a high-income, innovation-driven, and inclusive economy”.
The EMR was released together with Bank Negara’s 2019 annual report yesterday.
Notably in 2019, private investment expanded by only 1.5% – the lowest growth recorded since the 2008 global financial crisis.Investment trends
The study notes that compared to the strong average growth of 14.4% between 2011 and 2013, realised foreign investment growth has declined to an average of 1.2% between 2014 and 2018. This resulted in a smaller share of foreign affiliates’ investment to nominal private investment of 27% in 2018 versus 2011’s 41%.
The sharp moderation was due to slower growth mainly in the mining and manufacturing sectors. But more worrying is the relatively weak contribution of services investment by foreign affiliates.
“This is of concern as FDI in the services sector is widely acknowledged to bring a wider range of technological transfers than manufacturing FDI, says Bank Negara.
To be sure, the recent slowdown in capital expenditure is not unique to Malaysia as the growth in global FDI has been lacklustre since 2008
UNCTAD data showed that the average net FDI growth globally dropped from 8% (2000-2007) to only 1% in the recent decade. In Malaysia, net FDI declined by an average of 11% a year between 2016 and 2019.
Noteworthy is countries with higher capital stock per capita tend to have higher income.
In the case of Malaysia, its overall capital stock is slightly lower than the average of countries at a similar stage of development.
In addition, the capital stock per capita of countries that achieved high-income status over the last two decades was markedly higher than that of Malaysia when these countries were at Malaysia’s current stage of development.
Furthermore, the growth of capital stock per capita at Malaysia’s current stage of development has been slower than that of the selected countries that have successfully transitioned into high-income economies: Australia, Canada, France, Germany, Japan, South Korea and Singapore.
The compounded annual growth rate (CAGR) of capital stock per capita in these benchmark economies was on average 4.7% compared to Malaysia’s 4.0% over the last nine years, says the report.
In Malaysia too, the share of investment to GDP fell sharply during the Asian Financial Crisis – from a peak of 49% in 1997 to 25% in 2000. The level never recovered to above 30%.
“The decline is mainly attributable to the sharp decline in private investment, from 36% to 13% of GDP in the same period, ” the reports add.
Even when it comes to investments in machinery and equipment (M&E), Malaysia’s average share of capital stock is lower than that of the benchmark economies.
Even when compared to other emerging markets such as Thailand and Brazil, Malaysia’s lower share of M&E is apparent, despite these countries having a lower overall capital stock per capita, states the report.
One of the reasons for this is the availability of cheap foreign labour in Malaysia. This has resulted in firms employing more labour instead of investing in new technology to expand production.
Besides this, the higher share of investments concentrated in broad property, according to the report, suggests that investment in Malaysia has not transitioned towards more productive assets like research and development, ICT equipment and computer software, which are crucial in improving labour productivity.
Three key policy reforms
To improve the overall investment ecosystem in the country, Bank Negara outlines three key areas of reform.
Firstly, it says investment policies should be focused on clearly-defined developmental goals, which are encapsulated by the five National Investment Aspirations (NIAs). These five NIAs would ensure that prospective investments in the country are focused on increasing economic complexity, creating high-value jobs, extending domestic linkages, developing new and existing clusters, and improving economic inclusivity.
The central bank says one important aspect in operationalising the NIAs is that investment incentives policy should shift away from predominantly targeting specific sectors, towards encouraging high-value activities such as advanced research and development.
Secondly, a cohesive and well-coordinated institutional framework to attract investment, which enhances the provision of investor services and ensures smooth facilitation of quality investments is essential.
Last but not least, is a need for a clear, transparent and predictable tax incentives administration. This would ensure better transparency to investors, expedite incentive approvals and allow for better monitoring of investment outcomes.
These reforms, Bank Negara says would “strategically position Malaysia towards becoming a high-income, inclusive and future-ready economy”.
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