PETALING JAYA: The share divergence in Malaysia’s net foreign direct investment (FDI) for 2025 between the manufacturing and services sectors warrants closer scrutiny, as prolonged weakness in industrial investments may lead to premature industrialisation.
Malaysia attracted RM65.9bil in net FDI last year, a 41.2% surge compared to 2024 but according to the Statistics Department, manufacturing attracted just RM2.6bil in FDI inflows in 2025, while services drew RM59.5bil, despite manufacturing generating the highest FDI income at RM55.5bil.
The latest data showed a more than 70% decline in FDI for the manufacturing sector on a year-on-year (y-o-y) basis. Sunway University economics professor Yeah Kim Leng noted that compared to the nearly RM60bil in FDI recorded for the services sector, “is a concern given the higher productivity and income generated by manufacturing investments”.
“The high income generated by manufacturing is evidenced by the large FDI income generated at RM55.5bil, reflecting the sector’s high value and productivity increases.
“The decline in manufacturing investment may reignite the pre-mature deindustrialisation debate on the country’s development path, bolstering the need for deeper analysis on the causes, consequences and policy implications should the investment deceleration continue,” he told StarBiz.
Within the services sector, investments were primarily concentrated in the information and communication sub-sector as well as financial and insurance/takaful activities. Meanwhile, the manufacturing sector was mainly driven by electrical and electronic (E&E) products and non-metallic mineral products, basic metal and fabricated metal products sub-sectors.
Yeah said given that fixed investment exhibits strong cycles and capital investments are lumpy, the decline seen in manufacturing investment could be a cyclical dip. He added that it is also preceded by strong manufacturing investment in previous years.
“The shift to services continues to be strong, consistent with the country’s rising income and domestic demand for services particularly in information and telecommunications and financial and insurance services,” he said, adding that this shift is a global trend whereby the rising services share to gross domestic product (GDP) is positively related to increases in national income levels.
“There is also the uptrend in global services trade that is giving a boost to FDI flows into Malaysia’s services sector,” Yeah said.
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan views the divergence between manufacturing FDI inflows and manufacturing FDI income as suggesting multinational corporations prioritising value extraction and asset optimisation over large-scale capacity expansion.
Mohd Sedek said this could be more of a value-chain migration story versus a manufacturing retrenchment story. Capital has increasingly been deployed into higher value-added segments such as data centres (DCs), digital infrastructure, engineering services, design capabilities and regional headquarters, many of which are classified under services rather than manufacturing.
“While manufacturing attracted only RM2.6bil in FDI inflows in 2025, the sector generated RM55.5bil in FDI income, underscoring the strong earnings power of Malaysia’s established E&E and semiconductor ecosystem.
“More importantly, the subdued FDI figure comes at a time when export performance remains exceptionally strong.
“Malaysia’s exports surged 45.3% y-o-y in May, indicating that existing manufacturing assets continue to operate at a high level of utilisation and remain well positioned within global supply chains,” he said.
Nonetheless, Mohd Sedek also cautioned that weak manufacturing FDI “should not be dismissed entirely” as it may “signal a more cautious capital allocation environment” as firms await greater clarity on tariffs, supply-chain reconfiguration and the sustainability of the AI investment cycle before entering the next capex phase.
Socio-Economic Research Centre executive director Lee Heng Guie concurred that the lower FDI flows into manufacturing were consistent with a broader shift towards services, particularly investments linked to the digital economy.
He noted that the services sector’s share of approved foreign investments had risen from 30.8% in 2023 to 47.2% in 2024 and 50.2% in 2025, driven largely by investments in DCs, cloud infrastructure and digital ecosystems.
“This shift in FDI flow is in line with the global shift in FDI, which has transitioned heavily from traditional manufacturing into the services sector,” he said.
Lee said the outlook for manufacturing FDI should remain strong, supported by the country’s sizeable accumulated foreign investment stock of RM419.3bil as at end-2025 and a healthy pipeline of approved investments, with manufacturing accounting for an average of 56.2% of total approved investments between 2023 and 2025.
“Foreign investments are predominantly concentrated in the E&E and semiconductor industry, as well as basic metal and non-metallic mineral products. Other subsectors that show substantial promises of growth moving forward are chemicals and chemicals products, pharmaceuticals, and aerospace.
“The implementation of New Industrial Master Plan 2030 and the National Semiconductor Strategy will attract FDI into higher-value activities like wafer fabrication and IC design, aiming to capture a larger share of the global semiconductor industry,” Lee said.
Meanwhile, Rakuten Trade head of equity sales Vincent Lau said the weak manufacturing FDI figure should not be interpreted as a sign that investments are shifting away from Malaysia.
“Our E&E sector is still fairly strong and we continue to see investments by multinational corporations. We have a very strong ecosystem and Malaysia remains an attractive destination amid ongoing supply-chain diversification,” he said.
Lau said part of the FDI divergence reflects the country’s shift towards higher-value activities, noting the country can no longer compete solely as a low-cost manufacturing base and is increasingly attracting investments in areas such as DCs and digital infrastructure.
Lau also expects manufacturing FDI inflows to recover, particularly as AI-related demand continues to support semiconductor-related investments.
To this end, Yeah said FDI inflows to the manufacturing sector are projected to rise from its low level of RM2.6bil last year and fluctuate around the estimated long trend level of RM12bil annually, as the country continues to position itself as one of the world’s key players in global semiconductor production and supply chain.
Mohd Sedek said manufacturing FDI inflows are expected to trend higher over the medium term as the AI investment cycle broadens beyond chip design into advanced packaging, semiconductor materials, AI servers and supporting infrastructure.
“Malaysia is strategically positioned within the global semiconductor ecosystem, particularly in assembly, testing and packaging, which are becoming increasingly critical as AI-driven demand accelerates.
“The stronger signal is not current FDI flows but the pipeline of approved investments and the growing number of multinational firms expanding their regional footprint in Malaysia,” he said.
