AS ANOTHER conditional movement control order grips the key economic zones of KL and Selangor, now more than ever, Malaysia must work to counter the grave economic impact of Covid-19 with a bold, holistic and far-sighted policy.
One critical area for Malaysia to enhance is its attractiveness as a destination for foreign direct investment (FDI), particularly as several significant opportunities have emerged.
These include the US-China trade tensions and the trend towards bifurcation of global and regional supply chains between American and Chinese companies, the tightening of foreign investment rules and restrictions by the US, European and certain Asia-Pacific countries (notably India and Australia).
There’s also the impact of the National Security Law in Hong Kong on its status as a regional hub for multinational companies and the need, in the aftermath of the Covid-19 pandemic, for multinational corporations (MNCs) to have more resilient supply chains hedged against an over-dependence on a single or limited production and distribution locations.
While Malaysia has a number of attractive characteristics as an investment destination and regional hub, there remain a number of challenges and weaknesses that threaten to make us a laggard in our own region.
Many investors perceive that there is a lack of strategic direction and consistency among multiple government agencies and departments, resulting in policy uncertainty and opacity. The incentives we offer to attract and retain investors are considered by many to be somewhat outdated and do not necessarily address the needs of investors.
Unnecessary bureaucracy and a lack of streamlined and prompt decision-making, coupled with weaknesses in human capital development, undermine Malaysia’s competitiveness relative to her neighbours in South-East Asia. Investors sometimes find investing in Malaysia a cumbersome process. Something which only requires dealing with one agency for a period of three months in a neighbouring country could involve multiple agencies and a far longer time frame in Malaysia.
The government has done an admirable job handling the dissemination of fiscal stimuli to combat the adverse impact of the Covid-19 pandemic through the establishment of its inter-agency Laksana unit because it knows that far too often, shortcomings in execution have impaired the best-laid plans. We need something similar for foreign investors.
A structural review of incentives followed up by timely concrete action is acutely needed. Like the stimulus packages and direct assistance to address the pandemic, incentives should be targeted and draw the investors to our shores. This includes tangible incentives for companies to invest in research and development to help build an innovation economy.
The billions poured into various industrialisation initiatives over several decades still leaves us overly dependent on foreign labour producing insufficiently distinctive output with low entry barriers, exposing us to competition from cheaper producers in Vietnam and Cambodia. We pride ourselves in being the world’s leading producer of medical gloves but are the brands sold widely known or perceived as Malaysian brands?
One major opportunity in the current unprecedented geo-political turbulence is in attracting senior regional management of MNCs to establish regional headquarters or management hubs in Malaysia. Yet Alibaba, Tencent and Bytedance are establishing significant regional hubs in Singapore even though it involves costs that are at par with or exceed those of their home countries.
Living in Malaysia offers an enviable quality of life and access to amenities such as high quality healthcare and international schools. But we do ourselves a disservice when we make it difficult for qualified expatriates to obtain work permits, impose an uncompetitive top rate income tax of 30% on them and a corporate tax of 24% on profits derived in Malaysia and subject regional headquarter entities to onerous or ambiguous transfer pricing requirements on services they provide.
Another major reason foreign investors are attracted to our southern neighbour is the abundance of high quality talent. Yet we find that many of our best and brightest are part of our neighbour’s workforce. There is no reason why we cannot compete against any country for talent provided we have the right policies to produce and retain world-class talent and eschew nationalistic or political rhetoric in nurturing and developing our young.
The government must also be aware that investments in Malaysia do not only occur via greenfield investments. Mergers and acquisitions are a widely accepted mode of inorganic growth practiced globally by almost all large corporations.
Petronas, for example, would not be a global Fortune 500 company if it had not undertaken a number of major M&A transactions.
Foreign investors struggle to understand why it is possible to establish a wholly-owned subsidiary to engage in a greenfield manufacturing operation (and often receive tax benefits to do so) but not to acquire an existing company owned by Malaysian interests where the target entity remains subject to legacy equity conditions.
We must encourage not only FDIs (in the traditional greenfield sense) but also acquisitions of, and joint ventures with, Malaysian companies by foreign investors.
This, of course, cannot happen unless we have clear and stable rules regarding acquisitions of interests in Malaysian companies by foreign investors. Some of these rules are not even published or available to the public because they exist in internal guidelines known only to bureaucrats.
There remain guidelines which are administered on a “case-by-case” basis. The interpretation and operation of some rules can change when there are changes in personnel or administration.
Malaysia is not China, India or Indonesia – nations with large domestic markets that are able to dictate the terms of FDI. We have to be transparent and operate within rules-based norms if we are to attract FDI. Approval processes must be clear and subject to objective criteria, not bureaucratic or political discretion unless the acquisition occurs in sectors that are clearly of national or strategic importance.
Target companies that are put up for sale by government-linked investment companies should go to the bidder offering not only the best price but also the best home for them – to embed them in the global supply chain and to facilitate long-term substantial investment capital and R&D input.
There is no point in Malaysian investors continuing to own assets that fail to achieve their goal of furthering the country’s innovation and knowledge economy agenda.
Reform and liberalisation
The government has a critical opportunity to address these weaknesses via the upcoming Budget and follow-on measures to reform and restructure the economy and administrative processes in a time of crisis. There must be a coherent long-term strategic vision for the development of the country’s key comparative advantages.
Malaysia needs a properly-thought-through policy framework and clear, actionable, measurable and time-bound policies regarding education and training, foreign labour, structured and targeted tax incentives for FDI, rationalisation of its national tax structure and identification and support for key economic sectors that will enhance the ability of Malaysian companies and Malaysia-based MNCs to compete regionally and globally.
These challenges and weaknesses are not new or unknown. They have been around for years and there have been countless plans to address them, many conceived at great cost and effort. There is no better time to meaningfully and expeditiously address them than during the deepest economic crisis that the nation has ever faced.
Munir Abdul Aziz is managing partner of Wong & Partners, a member firm of Baker McKenzie International. Views expressed here are the writer’s own.
Did you find this article insightful?
83% readers found this article insightful