MALAYSIA must rise on the agenda of investors to attract quality foreign direct investment (FDI) in a highly competitive and uncertain global investment landscape, while placing equal emphasis on sustaining domestic direct investment (DDI).
These two forms of private investments can be strong complements amid competition.
FDI is infusing capital in the domestic economy, providing access to overseas markets, technology, and expertise.
DDI largely comprises SMEs (2021: SMEs accounted for 97.4% of total business establishments; contributed 37.4% of total gross domestic product (GDP); 9.4% of total exports of goods and services; and 47.8% of total employment).
Domestic firms and industries have been able to harness FDI to build their industrial base and have been integrating as part of the global supply chains.
While Malaysia’s private investment has rebounded to grow by 4.9% per year in 2021-2022, the growth has been stagnating, uneven and lacklustre compared to an average growth of 4.8% per year in 2015-2019.
Private investment share to GDP at an average of 15.5% in 2020-2022 is versus an average of 17% per year of GDP in 2015-2019.
FDI inflows into Malaysia averaged RM44.9bil per year in 2020-2022 versus RM38bil per year in 2015-2019.
We are encouraged by a slew of recent announcements showing substantial foreign investment commitments such as Tesla, AMD Global Services and Amazon Web Services (the United States); SKC, Posco Holdings, Coway and Lotte Fine Chemical (potential investments in electric vehicle or EV, carbon capture, chemicals from South Korea) and MYFARM Inc (Japan’s agritech company).
This goes to show that Malaysia still has what it takes to remain an attractive destination to foreign investment in South-East Asia.
No time to rest on our laurels
That said, we must not rest on our laurels. Countries around the world are competing for a finite pool of foreign investment. In recent years, our competitors in Asean like Indonesia, Vietnam and Philippines are stepping their efforts embarking on investment drive to boost FDI growth.
Malaysia has been consistently ranked higher than her regional peers (Thailand, Vietnam and Indonesia) in all the world’s benchmarking measurements such as ease of doing business, competitiveness, global opportunity index, digitalisation, etc.
Nevertheless, when comparing with some Asean peers, FDI inflows into Malaysia in (2017-2021), which recorded an average of US$7.9bil (RM35bil) per year was significantly lagging behind Singapore (US$87.5bil or RM386.1bil per year), Indonesia (US$20.7bil or RM91.3bil per year), Vietnam (US$15.4bil or RM68bil per year) and the Philippines (US$9.2bil or RM41bil per year).
However, Malaysia was moderately higher than Thailand (US$6.6bil or RM29.1bil per year).
Countries like Indonesia, Vietnam and the Philippines have been upping their ante through making numerous adjustments to their investment laws and regulations to attract more inbound investment.
They not only have abundant natural resources, but also have a young working population offering with competitive wages.
A notable mention is Indonesia, the world’s fourth-largest population and the biggest economy in South-East Asia, is becoming the darling of investors because of its business-friendly policies.
Indonesia is blessed with untapped natural resources, enjoys a demographic bonus, and has a strong domestic market, with a growing middle and upper-income class.
In recent years, Vietnam has emerged as a promising destination for many regional and international investors, thanks to the transition of the economy following the “Doi Moi” economic and political reforms that have fuelled impressive economic growth with rising spending power.
Foreign ownership limitations
In the Philippines, progress has been made in addressing foreign ownership limitations that have constrained investment in many sectors, through legislation such as the amendments to the Public Services Act, the Retail Trade Liberalisation Act, and Foreign Investment Act, that were signed into law in 2022.
What’s next for Malaysia to stand above the crowded space to boost FDI growth?
Malaysia’s investment environment needs a transformational shift in approach as it seeks to improve the country’s attractiveness to foreign investors.
Our macro-economic environment remains conducive for investing and doing business though there is room to make it more conducive.
The formation of a unity government post 15th-General Election (GE15) has eased considerably the lingering years of political uncertainty post-GE14.
The challenge ahead is to ensure that the unity government can work together to provide durable political stability and implement credible macro-economic and financial management, the key to macroeconomic stability and growth.
Good sense and strong political will must prevail to reset our national development agenda.
A good governance ecosystem (institutional reforms) as well as radical economic reforms must be pursued to provide policy certainty and clarity in restoring both public and investors’ confidence and trust.
The launching of National Investment Aspirations (NIA) is aimed to formulate a unified investment strategy aligning with the ESG agenda as well as emphasis to be given to agile and forward-looking incentive packages targeted directly to match the needs and demands of investors.
Amongst the strategic actions plan is Investment Promotion Agencies (IPA) will also be charged with clearer and more defined roles and responsibilities to ensure seamless and smooth investor journey; prioritise the nurturing of innovative, high impact and high-tech investments which would be conducive to the creation of high-skilled jobs; the supply of a vibrant talent pool to meet the needs and demands of the labour market and capture high-value job opportunities.
Malaysia’s membership in the Regional Comprehensive Economic Partnership or RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP open the gateway for both domestic businesses and foreign investors to take advantage of the opportunities to gain wider market access, tap into diverse base of resources, suppliers and raw materials, as they integrate into the regional and global supply chains.
What should policy makers do more?
Much remains to be done to improve Malaysia’s investment climate and sustainably to attract productivity and digitalised- technology enhancing investments as well as ESG and Green industries.
Malaysia’s regional peers are fast catching up the ladder of competition for FDIs.
Bank Negara Malaysia’s 2017 Annual Report has outlined several fundamental concerns surrounding the country’s traditional approach to FDI, indicating that the effectiveness of Malaysia’s policies to attract foreign investment is unclear.
Broad- based investment incentives represent up to 9% of total tax revenue, and there appear a mismatch between the investments the country is receiving and the industries it has targeted for growth.
Net economic benefits of FDI in Malaysia appears to be diminishing in terms of slower growth of domestic content in exports and lower R&D spending by foreign companies in the country.
Rethinking of FDI strategy and priority sectors in charting a deliberate path for long- term benefits.
Focus on sectors and new growth clusters that deepen linkages in the domestic supply chains; create high-skilled jobs, exploit Malaysia’s natural strengths, expand knowledge transfer, develop product sophistication and technological adoption.
Focus on bold reforms to enhance Malaysia’s competitive strength relative to its regional peers in the supply of skilled and creative workforce, adapting to a rapid shift in technological advancement, state-of-the-art infrastructure, industrial development, maintain good governance and embrace best business regulatory practices.
A World Bank report, which has surveyed 2,400 business executives in 10 major emerging market countries reported that low taxes, low labour costs, and access to natural resources matter less to their investment decisions than political and economic stability as well as predictable legal and regulatory environment.
(1) Ensuring macro-economic and political stability. The Government must commit to create a transparent, stable and predictable investment climate,
with proper contract enforcement and safeguard property rights, embedded in sound macroeconomic policies and institutions, transparent and stable rules as well as free and fair competition.
(2) Government’s policies and regulations play a decisive role in stimulating business activity. The rate and nature of private investment is affected by many factors, including macro-economic and political stability, physicalinfrastructure, the availability of capital, and human resources. Institutional, public policies, and regulatory factors also play an important role. They are often grouped together under the rubric of “investment climate”.
(3) Transforming Public Delivery Services. Renewed focus to re-energizing the public delivery service. Despite various efforts have been made to improvethe quality of public service delivery, there is a perception that the quality of the public service has remained mediocre – slow, lumbering and outdated for some Standard of Procedure (SOP) and work processes.
The general public and businesses generally want public service to be delivered effectively and efficiently, understand public needs better and achieve better outcomes. Policy decisions with a view to improving the delivery system to the public are being frustrated by civil servant front liners who deal with the public. Little napoleons are still a hindrance at time.
(4) Fostering business competitiveness. Private sector-led growth and investment is highly contingent on our ability to implement transparent and stable, inclusive and efficient policies as well as regulatory practices that enable local and foreign firms to invest, form and grow both domestically and internationally.
Minimising the day-to-day uncertainties as well as unclear guidelines and rules matter to businesses, which in turn incentivise firms to invest, compete and grow. Last but not least, a competitive corporate tax rate regime and forward-looking incentives for policy certainty.
Overlapping rules and regulations between intra-government agencies have proven to cause great confusions in practice. Practitioners are keen to see changes brought ba more integrated system of regulations from various Ministries and agencies at the Federal, state and local authorities.
Lee Heng Guie is is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.