PETALING JAYA: While Malaysia’s investment momentum in the current upcycle may have peaked, foreign direct investment (FDI) into the country is far from losing steam, supported still by the China+1 diversification strategy amid firms’ ongoing push to de-risk and diversify supply chains and Malaysia’s economic policies and agenda.
In a recent report, AmBank Research said the latest data suggest that real gross fixed capital formation (GFCF) growth in the current third investment upcycle may have peaked, having slowed from 12.1% in the second quarter of 2025 (2Q25) to 7.4% in 3Q25.
One of the key indicators of the pace of overall investment activity in the economy, GCFC reflects how much businesses and the government are investing in fixed assets like factories, infrastructure and machinery.
Overall, Malaysia recorded total net FDI inflows of RM25.6bil in the first nine months of 2025, compared to RM32.8bil in the same period last year.
AmBank economist Lee Si Xin said despite the moderation seen in net FDI inflows, this level of investment “reflects resilience amid heightened global trade policy uncertainties”.
“We believe China’s plans to establish car manufacturing plants and industrial parks, among other initiatives, in Malaysia will help support investment growth moving forward,” he told StarBiz.
Notably, Malaysia has benefited from the China+1 strategy, which has been a major driver of FDI in recent years, as firms seek to diversify production and reduce over-reliance on China amid rising geopolitical and supply-chain risks.
Despite signs of easing FDI inflows, economists are of the view that the China+1 strategy has not run its course, as the wisdom of supply chain diversification has been reinforced on various occasions in the past, including geopolitical disruptions and the Covid-19 pandemic.
OCBC senior Asean economist Lavanya Venkateswaran said the strategy “still has legs to run” and views the trend becoming “more entrenched” over the medium term. Lavanya opined that Chinese firms are increasingly choosing to set up production plants in Asean and engage in economic activities on the ground.
“This works well for the Asean economies as it raises the domestic value-added component of production,” she said.
Sunway University economics professor Dr Yeah Kim Leng said the China+1 diversification is likely to be enduring, given that it is driven by a combination of geopolitical, security and economic considerations.
He noted that Malaysia and other Asean economies, especially Vietnam, have benefited from the Trump 1.0 tariff war against China as global enterprises diversified production risks away from China.
“In the latest round, China is pivoting away from the United States and directing trade and investment to Asean, BRICs and other regions, including Africa, the Middle East and Latin America.
“As China’s trade and investment with the US decline, Malaysia’s exports to the United States have risen over the past several years,” Yeah said.
Yeah added that even if a reciprocal tariff agreement is reached between China and the United States, US President Donald Trump’s well-documented unpredictability and frequent policy reversals will continue to undermine investor confidence over the long term.
This continues to underscore the need for diversification, sustaining the relevance of the China+1 strategy.
“The China+1 strategy is being reinforced not only by geopolitical caution, but also by the practical need to shorten supply chains, mitigate rising transportation costs, and locate production closer to end markets,” he said.
Beyond the China+1 strategy, domestic economic policies and reforms, spanning industrial masterplans, energy transition roadmaps and cross-border economic zones, are also key pull factors in attracting FDI into the country.
UOB senior economist Julia Goh expects FDI trends to remain positive amid the broader vision of Asean integration and collaboration.
“Domestic growth drivers – strategic plans under the 13th Malaysia Plan (13MP) and Budget 2026, low inflation, credible monetary policy, ongoing fiscal reforms, and cross-border initiatives such as the Johor-Singapore Special Economic Zone (JS-SEZ) – are also expected to position Malaysia as an attractive destination for capital inflows,” she said.
Besides geo-political forces, Yeah said economic forces are also driving up foreign investments in Malaysia’s tech sector ranging from front-end chip manufacturing, advanced packaging and testing to data centres that leveraged on the country’s well-established supply chains, cost competitiveness and availability of land, water and energy.
“Additionally, the attractive investment incentives package and strong government support add to the country’s investment attractiveness,” he said.
The fact of the matter is, regardless of the geopolitical ebb and flow between the United States and China, investors will not be able to ignore the Asean region and there is an organic, underlying need for firms or governments to have FDI in the region, given the region’s continued growth.
Lavanya said the Asean economies, albeit to varying degrees, are poised to remain key engines of global growth.
“Economic fundamentals such as young working age populations in Indonesia and the Philippines are complemented by ongoing reforms in Vietnam and Malaysia to keep the region attractive for foreign investment flows,” she said.
Economist Geoffrey Williams concurred, saying there is too much talk of China and the US in trade and FDI when in fact Asean is the biggest source for both.
"The geopolitical tensions are always with us and are not affecting FDI which is at record levels," he said.
Recent skirmishes and conflicts in Cambodia, Thailand and Myanmar have raised questions over whether geopolitical instability in these countries is redirecting FDI flows toward relatively stable markets such as Malaysia, or pushing investors away from the region altogether.
In this regard, Lee said regional conflicts are highly localised and unlikely to have a material impact on overall investment decisions.
In his view, broader macroeconomic factors such as operating costs, interest rates and policy frameworks play a far more significant role in shaping investor strategies.
Nonetheless, Yeah said the decline in the attractiveness of the other Asean countries adds to the attractiveness of Malaysia as an investment destination, especially to global firms seeking market access or production foothold in the Asean economic community.
Lavanya, meanwhile, observed that FDI inflows into the Asean region had become more differentiated in 2025.
"We saw strong inflows into Malaysia, Vietnam and Thailand while inflows into Indonesia and the Philippines eased, based on the available data for 2025.
The inflows into Malaysia were more broad-based across sectors, regions within the country, and sources of FDI," she said, noting also that this suggests there is greater durability for these inflows into 2026.
In the report, AmBank Research said it believes that investment activities will continue to sustain strong momentum, given the massive amount of approved private sector investments, which totalled almost RM1 trillion between 2023 and the nine-month period of 2025 (9M25).
However, it also cautioned that maintaining this trajectory will require continued policy clarity, efficient implementation of national strategies and a supportive macroeconomic environment, especially as global competition for investments intensifies amid heightened global trade policy uncertainties.
"Approved foreign private investment totalled RM510.4bil in 2023 to 9M25, while net FDI inflows amounted to only RM115.8bil over the same period.
This gap suggests that investment realisation is typically staggered over multiple years and may be subject to shifts in global economic sentiment," it said.
The outlook for Malaysia’s domestic direct investment (DDI) appears more uneven.
Approved private domestic investments slowed to RM134.4bil from January to September 2025 compared to RM149.7bil during the same period in 2024.
Williams said private DDI is weak because of restricted local market conditions and low return of investments.
"Returns overseas are very much more attractive and so domestic DDI is dependent on government-linked investment companies, government-linked companies and the GEAR-up programme which will drive DDI next year," he said.
Yeah said local DDI may be slowing but it appears to be transitioning from a broad-based, recovery-driven surge to a more sector-selective and policy-driven phase.
He maintained that the "slowdown from peak levels is expected", but underlying momentum remains, anchored by "pull effect" of the New Industrial Master Plan (NIMP) 2030 in targeted tech and green sectors and "supply chain spillover" from incoming FDI due to geopolitical shifts.
"The key risk is a delay or lack of clarity in executing the industrial policy frameworks such as the NIMP and National Energy Transition Roadmap or a sharper-than-expected global downturn," he said.
Looking ahead, DDI is expected to remain healthy in 2026, albeit at a more measured pace compared with 2025.
