Malaysia staying ahead of the competition

Malaysia needs to rise higher on investors' agendas to attract quality foreign direct investment (FDI) in an increasingly competitive and uncertain global landscape — while equally sustaining domestic direct investment (DDI), since the two forms of private investment can strongly complement each other. FDI brings capital, access to overseas markets, technology and expertise; DDI is largely made up of SMEs, which in 2021 accounted for 97.4% of business establishments, 37.4% of GDP, 9.4% of goods and services exports, and 47.8% of total employment.

Malaysia's recent investment performance

Malaysia's private investment rebounded to grow 4.9% a year in 2021-2022, but that growth has been uneven and lacklustre compared to the 4.8% average seen in 2015-2019. Private investment's share of GDP averaged 15.5% in 2020-2022, down from 17% in 2015-2019, though FDI inflows actually rose to average RM44.9 billion a year in 2020-2022, up from RM38 billion a year in 2015-2019 — helped by recent high-profile commitments from Tesla, AMD Global Services and Amazon Web Services (US), SKC, Posco Holdings, Coway and Lotte Fine Chemical (South Korea, spanning EVs, carbon capture and chemicals), and MYFARM Inc (Japan's agritech sector).

No time to rest on our laurels

Malaysia consistently outranks regional peers Thailand, Vietnam and Indonesia on measures like ease of doing business, competitiveness, and digitalisation. But comparing actual FDI inflows for 2017-2021 tells a different story: Malaysia averaged US$7.9 billion (RM35 billion) a year, versus Singapore's US$87.5 billion (RM386.1 billion), Indonesia's US$20.7 billion (RM91.3 billion), Vietnam's US$15.4 billion (RM68 billion), and the Philippines' US$9.2 billion (RM41 billion) — with only Thailand, at US$6.6 billion (RM29.1 billion), trailing Malaysia.

Indonesia, Vietnam and the Philippines have all been actively reforming investment laws to draw more capital, backed by abundant natural resources and young, competitively-waged workforces. Indonesia — Southeast Asia's largest economy and the world's fourth most populous country — has become an investor favourite on the back of business-friendly policies, untapped resources, and a growing middle class. Vietnam has similarly emerged as a strong destination since its "Doi Moi" reforms fuelled rapid growth and rising spending power.

Foreign ownership limitations easing elsewhere

The Philippines has made progress easing foreign ownership limits that previously constrained investment in many sectors, through 2022 amendments to its Public Services Act, Retail Trade Liberalisation Act, and Foreign Investment Act.

What Malaysia needs to do next

Malaysia's investment environment needs a transformational shift. The formation of a unity government after GE15 has eased years of political uncertainty following GE14, but sustaining that stability — alongside credible macroeconomic and financial management — remains the real challenge. Institutional reform and genuine economic reform are needed to restore public and investor confidence.

The National Investment Aspirations (NIA) framework aims to build a unified investment strategy aligned with ESG priorities, backed by agile, targeted incentive packages. Planned actions include giving Investment Promotion Agencies (IPAs) clearer roles to smooth the investor journey, prioritising high-impact, high-tech investment that creates skilled jobs, and building a talent pipeline to match labour market demand. Malaysia's membership in the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) also gives both local and foreign businesses wider market access and supply chain integration.

Where policymakers should focus

Bank Negara Malaysia's 2017 Annual Report flagged structural concerns with Malaysia's traditional approach to FDI — unclear policy effectiveness, broad-based incentives amounting to as much as 9% of tax revenue, a mismatch between actual investment inflows and targeted growth industries, and diminishing net economic benefit from FDI, reflected in slower growth of domestic export content and lower R&D spending by foreign firms. A World Bank survey of 2,400 executives across 10 major emerging markets found political and economic stability, and predictable legal and regulatory environments, matter more to investment decisions than low taxes, cheap labour, or access to natural resources.

Three priorities stand out: macroeconomic and political stability, with transparent, predictable policy and strong contract enforcement and property rights; modernising public service delivery, since slow or outdated processes and inconsistent enforcement at the front line remain a real drag on the investment experience; and fostering business competitiveness through consistent, efficient regulation, a competitive corporate tax regime, and reducing overlapping or conflicting rules across federal, state and local agencies — which practitioners say remains a significant source of confusion for investors today.

Source: The Star