Insight - Domestic or foreign investment?

The Malaysian Investment Development Authority’s approved domestic direct investment (DDI) had declined 6.0% pa from RM175.1bil in 2014 to RM128.5bil in 2019 while approved foreign direct investment (FDI) increased 5.1% pa from RM64.6bil in 2014 to RM82.9bil in 2019.

MALAYSIA’S private investment growth rate and share of gross domestic product (GDP) has been decelerating in recent years.

Weighed down by external and domestic factors, private investment’s momentum had moderated from 12.1% per annum in 2011-2015 to 4.8% pa in 2016-2019.

Amongst these include the uneven state of global economic conditions post 2008-09 Global Financial Crisis; weakening domestic economic growth; a weak investment climate, including high regulatory and compliance costs; lingering uncertainty about policy transition as well as political instability.

In the first nine months of 2020, private investment declined by 13.2% year-on-year (y-o-y) as the Covid-19 pandemic-induced recession and extremely weak sentiments have caused businesses and companies to slash capital spending.

The Malaysian Investment Development Authority’s approved domestic direct investment (DDI) had declined 6.0% pa from RM175.1bil in 2014 to RM128.5bil in 2019 while approved foreign direct investment (FDI) increased 5.1% pa from RM64.6bil in 2014 to RM82.9bil in 2019.

In January-September 2020, approved DDI contracted by 21.6% to RM67.2bil to make up 61.2% of total approvals while approved FDI went down by 34.9% to RM42.6bil.

For the period 2010-2019, DDI had accounted for a higher share of total approvals, averaging 69% amid a declining share in recent years. FDI’s share of total approved investments was averaging 31% pa for the same period.

Actual FDI inflows into Malaysia had declined by 5.3% pa in 2016-19 from an average growth of +6.2% pa in 2011-15. In 2021, net FDI inflows contracted sharply by 56.2% to RM13.9bil.

Gross FDI also declined by 0.3% pa in 2016-19 compared to +1.5% pa in 2011-15. In 2020, it contracted sharply by 54.4% to RM17.1bil.

Private investment is an important component of the overall economy.

Sustaining private investment, which makes up of domestic and foreign investment, is needed to expand and diversify our industrial base; raise productive capacity and increase economic growth; accelerate technological progress; create high-income paying jobs and increase exports.

Domestic and foreign investments can have strong complementary or substitution interactions between each other. Policymakers were often being asked should we focus on efforts on domestic investment or foreign investment. There are questions whether FDI crowds in domestic investment, or FDI crowds out domestic investment.

Substantive research studies have validated the benefits of FDI, which amongst others include employment creation, the deepening of the industrial base through technology transfer and technical know-how, enhancing linkages with domestic firms, embracing better business practice management, establishing business networks and accessing international markets as well as supporting the domestic financial system and capital market.

Sustaining high-quality domestic investment is equally important and must continue to be facilitated in driving Malaysia’s economy and expanding the industrial structure, especially the development of small-and medium-sized enterprises (98.5% of total business establishments; 38.9% of GDP in 2019; 48.4% (or 7.3 million) of total employment; and 17.9% of total exports).

Granted, domestic investment’s size and value of capital investment in the manufacturing sector is smaller (RM48.6mil per project) relative to that of foreign investment (RM121.7mil per project), as well as less capital-and high technology intensive investment during the period 2010-2019, the nature and type of domestic investments span a cross section of sectors and businesses, and hence, create jobs usually many more than FDI.

Backed by a pool of capable domestic businesses and SMEs in the home market, multinational corporations would be keen to expand existing operations and set up new plants in an environment where the existing ecosystem is able to support their operations, especially since our domestic players are capable of integrating with high-value added global supply chains.

Domestic indigenous industries are the backbone of Malaysia’s investment and industrial development. They are deep rooted in Malaysia and here to stay, and hence, should be given further investment facilitation at the federal, state and local authorities in a coordinated manner.

Time is of the essence for investors to secure a fast and quick approval of their investment applications and the resolve of matters, including operational issues relating to doing business.

The departments and agencies at all levels (federal, state and local authorities) play a decisive role in creating a predictable enabling business investment environment while efficiently facilitating investment at ease, regardless of domestic investors/companies (large, SMEs and small businesses) and foreign investors.

A renewed focus on improving the regulatory and investment facilitation offers the key to reducing friction costs in government-business interactions. Common government-to-business pain points are delays; lack of transparency in the approval process; paperwork burden; duplication; inconsistency and complexity. While most businesses would welcome fewer regulations, what they really want is to spend less time and effort on compliance.

There is widespread agreement that the federal, state and local authorities need to refocus on removing the obstacles that businesses face in fostering an environment conducive to investing and doing business here.

It’s in the government’s interest to make regulations and compliance as painless as possible. Policymakers must harness the power of investment by making both domestic and foreign investment work together to generate the maximum benefits for our economy.

Lee Heng Guie is the executive director of Socio-Economic Research Centre. The views expressed here are his own.