REVIVING private investment is crucial to sustain economic recovery for Malaysia. Both domestic direct investment (DDI) and foreign direct investment (FDI) are needed to spur economic growth, create jobs and expand exports.
It’s time to rebuild investor confidence in times of uncertainty as our economy emerges from the Covid-19 pandemic and enters the recovery stage.
Indeed, Malaysia’s DDI and FDI flows were slowing before the Covid-19 outbreak in the face of rising trade protectionism, political and policy transition since 2018 and external uncertainties.
Private investment momentum, which had moderated sharply to 4.8% pa in 2016-2019 from 12.1% per anum (pa) in 2011-2015, continued to decline sharply by 15.2% in 2H 2020.
Gross FDI inflows fell from RM56bil in 2016 to RM37.5bil in 2019, and slumped by 78.7% to RM5.3bil in the first half of 2020 from RM25bil in the first half of 2019.
Total approved investment projects in services, manufacturing and primary sectors had declined by 2.8% pa in 2015-2019 from a strong increase of 10.1% pa in 2007-2014. It slumped further by 34.8% yoy to RM37.4bil in 1Q 2020.
The DDI approvals have been on a declining trend. Approved DDI fell by 6.4% pa from RM175.1bil in 2014 to RM125.5bil in 2019. In 1Q 2020, approved DDI declined by 4.5% yoy to RM26.3bil.
Although approved FDI increased by 5% pa from RM36.1bill in 2015 to RM82.4bil in 2019, it contracted at a sharper rate of 62.9% to RM11.1bil in 1Q 2020.
One key challenge to recovery is to restore confidence of investors, which is not an impossible task. Our policymakers must not miss out the chance to do whatever they need to reduce investor risk, foster investment expansion, and attract new investment with predictable trade and investment policy and regulatory certainty.
A World Bank report, which has surveyed 2,400 business executives in 10 major emerging market countries reported that low taxes, low labour cost, and access to natural resources matter less to their investment decisions than political and economic stability and a predictable legal and regulatory environment.
Government policies and regulations play a decisive role in fostering business competitiveness.
Although lowering effective tax rates help boost FDI, the effect is stronger if augmented with good investment climate – highly contingent on the government’s commitment to improve transparency, reduce bureaucratic as well as create stable investment climate.
Not to be neglected are proper contract enforcement and safeguarding of property rights, embedded in sound macroeconomic policies.The supply of knowledge and skilled workforce is also crucial to support industries.
Maintaining good governance, clear rules and regulations as well as reducing regulation risks can facilitate business to make better informed investment decision.
All these call for the need of regulatory reforms at the Federal Government level, states and local authorities to streamline regulations on businesses.
The World Bank’s estimations model suggests that regulatory risk can deter multinational enterprises from entering or expanding operations in a country.
A one percentage-point reduction in regulatory risk tends to boost the likelihood of an investor entering or expanding in a country by as much as two percentage-points.
By contrast, a one percentage-point increase in the host country’s trade-to-GDP ratio boosts the likelihood by no more than 0.6 percentage-point.
What is crucial is that we must set a clear and right policy direction and continue to ensure that the underlying economic fundamentals are resilient and investment climate is conducive.
While waiting for the domestic economic recovery to be firmly in place, local companies and foreign investors would have to start focusing on domestic growth and investment prospects in the medium-and long-term to commit investment.
It was reported that the Japan External Trade Organisation (JETRO) has indicated 15 out of more than 80 Japanese enterprises have received support from the government to move factories to Vietnam, a move aims to improve the gap in the Japanese supply chain since the Covid-19 pandemic erupted and derailed the global supply chains.
It was also reported that the Japanese government would start paying some companies to move factories out of China back to their home country or to South-East Asia.
Looking ahead, global and regional competition for FDI will step up amid the expected sharp fall in global FDI flows by a whopping 40%, according to the most recent estimate of the UNCTAD.
Recovery in global FDI flows is expected in 2021 but it will be slow in the range of 5% to 10%.
It is inevitable that Malaysia will continue to face stiff competition from our peers in Asean to attract global FDI.
According to the Malaysian Investment Authority Development (Mida), to date, Mida has facilitated 85 companies from China as well as from different parts of the world for relocation or redeployment of activities to Malaysia due to the US-China trade war.
Of the total, Mida has captured 32 projects with investments amounting to RM14bil. Seven projects are currently under evaluation with investments totalling RM6.22bil.
Mida is currently pursuing a total of 109 project leads from Japanese companies.
There is clearly room for Malaysia to improve the World Bank’s ease of doing business ranking (12th in 2020).
Malaysia needs to remove the impediments to investment in some areas. These include:
> In starting a business, cumbersome procedures to start a business must be eliminated. Malaysia ranks 126th on this indicator, taking 8.5 procedures and 17.5 days to start and operate a business;
> Paying taxes: Malaysia ranks 80th on this indicator as domestic companies spend an average of 174 hours annually to comply with fiscal obligations, more than the OECD high-income average of 159 hours; and
> Legal rights and enforcing contracts.
There have been no reforms in these areas over the last five years and hence, it is crucial to enhance regulations to protect the rights of lenders and borrowers, and improve the efficiency of the judicial system.
For instance, the time needed to enforce a contract in Malaysia has taken 425 days compared to Thailand’s 420 days and Indonesia’s 403 days.
Recently, our government announced several heartening measures to entice new investments. These include: zero tax rate for 10 years to 15 years for the re-shoring of capital investment from abroad to Malaysia; a 100% investment tax allowance and special reinvestment allowance; and a two-day manufacturing license for non-sensitive industry.
These initiatives must be well executed without any delay as our competitors in this region have also stepped up to their plates.
Lee Heng Guie, (pic below) a former chief economist at CIMB, is executive director of private think tank Socio-Economic Research Centre, ACCCIM. The views expressed here are the writer’s own.
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