The World Bank Organization accounted for foreign direct investment or FDI in Malaysia as the net inflows of investment, i.e., new investment inflows minus disinvestment, in Malaysia made by foreign investors. FDI has been viewedas an important factor that promotes economic growth since it is a source of financing and development, and contributes to productivity gains by creating new investment, better technology, management expertise and export markets (Roy &Mandal, 2012). In particular, empirical studies on the impact of FDI on developing countries revealed that it has favorable impact on productivity and growth (Rodan, 1961; Chenery& Stout, 1966), induces increasing returns through technology transfers (Barro and Sala-i-Martin, 1999), and contributes to economic growth through capital formation and technology transfer (Borenzstein, et al., 1995) as well as through the level of knowledge and skill acquisition (Mello, 1999).
In this paper, the inflow of this investment in Malaysia will be examined. Malaysia has had an open FDI climate (Rasiah and Govindaraju, 2011).
Evolution of FDI
Athukorala and Wagle (2011) noted that the rapid growth and structural transformation of Malaysia over the past four decades are ascribed to inflows of foreign direct investment through export-oriented industrialization. Policy emphasis on promoting FDI in Malaysia dates back to 1968 with the enactment of the Investment Incentives Act. But the significant role of FDI on the economy become more visible with the enactment of the FTC Act in 1971 and the opening of the free trade zone in Penang in 1972. The liberalization of the foreign investment regime (i.e., streamlining of investment approval procedure and relaxing or removal of restriction on foreign ownership of enterprises) that took place in response to the macroeconomic crisis in the mid-1980s coupled with the global relocation of production bases to low-cost countries by foreign Multinational Enterprises (MNEs) set the stage for the boom of FDI in Malaysia.
As shown in Figure 1, the inflow of FDI has increased steadily in mid-1980s with the adoption of the Industrial Master Plan, 1986-1995. However, negative FDI inflows transpired because of the Asian Financial Crisis in 1997-98, and subsequently recorded a very low value in 2001 because of world trade recessioni.e., terrorist attack clamor that started with the World Trade Center incidence in September 11, 2001. The inflows of FDI became volatile in 2002 until 2005. During 2006-2008, inflows were higher than in other years mainly because of the mergers and acquisitions by existing MNEs, the establishment of joint ventures, and new investment activities (Zoraini, Yusolf, and Yahya, 2008). Following a steady growth in 2002-2007, FDI fell in 2008 and 2009 because of the global economic crisis. The strong inflows resumed of which the government’s effort of continued liberalization of the manufacturing and services, the Government Transformation Programme, promoting new key economic areas, and the active role of the Ministry of International Trade and Industry (MITI) contributed to the increase in inward FDI (Rasiah and Govindaraju, 2011).
Attractiveness of Malaysia to Inward FDI
The Government of Malaysia’s principal policy was to control foreign direct investment as a part of economic development strategies in order to obtain foreign technology, capital and skills (Shaari, Hong and Shukeri, 2012). In fact, the government’s policy environment for FDI in the primary and secondary sectors has generally been liberal. MITI is the main government organization undertaking the evaluation and approval of FDI, as well as investment incentives, since the enactment of the Promotion of Investment Act of 1986, MITI’s sub-organization, the Malaysian Industrial Development Authority (MIDA) is the main promotional body that has been instrumental in attracting inward FDI flows to Malaysia. Moreover, according to Rasiah and Govindaraju (2011) the government’s efforts in the 10th Malaysian Plan, the New Economic Model, the Economic Transformation Programme, and Generalized System of Preferences in attracting FDI flows (easing the regulatory burden, reducing corporate income tax, upgrading physical infrastructure, and providing incentives), have led to better economic growth prospects and healthy resumption of capital inflows in 2010 and 2011 (Figure 1).
Lean and Tan (2011) maintained in their study that high economic growth will attract FDI inflow in Malaysia. Meanwhile, in a study made by Jajri (2009), trade activity plays a crucial role in attracting foreign capital to Malaysia. Public development expenditures also have positive influence on FDI. A 1% rise in public development expenditure (e.g., expansion of various infrastructure facilities like transportation and communication, power supply, labor skill and knowledge) is likely to increase FDI inflow by 0.07%.
Athukorala and Wagle (2011) suggested that investment policy regime could be made more even-handed through reforms aimed at opening the domestic industries hitherto dominated by government-linked companies and services sectors to greater FDI participation. Likewise, they also mentioned that Malaysia could build on human capital development to set the stage for harnessing FDI participation.
Elements that Prevent FDI on Malaysia
Though foreign direct investment was identified as the dominant factor that spurred the growth of the economy as supported by the government’s open policy toward investment and trade since the 1980s, UNCTAD reported, as cited by Athukorala and Wagle (2011), that FDI declined by 81% from 2008 to 2009. The decline in FDI was due to the rising competition for FDI, especially from emerging markets. Athukorala and Wagle (2011) mentioned that foreign investors found the Malaysian’s government processes as one of the main problem in doing business in the country. The highly bureaucratic nature of the government and the slow transaction processes have deterred foreign investors to invest in the country. In a study made by Athukorala and Wagle (2011), they found that the dualistic investment policy regime and limited national innovative capabilities are the major determinants of Malaysia’s relative attractiveness to FDI. They emphasized that there is room for further reforms in Malaysia to According to minimize the barriers for inward FDI. Shaari, Hong and Shukeri (2012) the unfavorable policies have contributed to the slow progress in the flow of FDI to Malaysia. They have specifically cited the high rate of tariff as the deterring factor in the FDI inflow to the country. Moreover, Malaysia’s transformation from capital-intensive to knowledge-based industry, while still facing relatively weak human capital development and technological capabilities, adds to the challenge of competing for FDI inflows in ASEAN region.
Positive Impact of Inward FDI on Malaysian Economy
Using a VAR with cointegration model, Shaari, Hong and Shukeri (2012) determined the relationship between FDI and gross domestic product of Malaysia. Their result revealed that FDI give a positive impact on economic growth. In particular, a 1% permanent increase in the level of FDI causes the level of GDP of Malaysia to increase by 49.135%; hence they concluded that FDI is an important factor that boosted the economy in the period 1970 to 2010. Also, using the granger causality model, their result indicated that FDI granger cause to GDP and GDP also granger cause FDI.
A study made by Jajri (2009) showed that in Malaysia, FDI has played an important role not only in stimulating economic growth but has also contributed significantly to the growth of the industrial sector and the transformation of the Malaysian economic structure from agricultural to a major producer and exporter of manufactured goods.
Moreover, in the study conducted by Karim and Ahmad (2009), the high incidence of poverty could be reduced by increasing FDI inflows into the Malaysian states.
Negative Impact of FDI on Malaysia
According to Nambiar (2011) Malaysia is a very open, trade-dependent economy. The country’s e economic development in the last two decades has been driven by exports; and the growth of the economy has been highly dependent on trade and the inflow of FDI (developed countries as destinations of its exports and sources of FDI). Clearly, Malaysia as a small open economy with a highly export-oriented manufacturing sector is very vulnerable to external shocks. As shown by Nambiar (2011) the global economic crisis had adversely affected the Malaysian economy: shortfall in demand in the manufacturing sector that was transmitted to other sectors in the economy that ultimately impacted aggregate demand and employment. The export and production indices fell in 2008 since Malaysia’s major trading partners were badly affected by the global crisis. Also, the crisis led to outflows of FDI (with Malaysia’s traditional sources e.g., US, Japan, Germany, Australia being hit) and also the declines in Malaysia’s foreign reserves and portfolio funds (Nambiar, 2011).
Conclusion
The inflow of foreign direct investment in Malaysia has been considered as the main factor that drove the rapid growth of the economy along with the export-oriented industrialization that led to the structural transformationof the economy. As a small open economy and heavily dependent on the export-oriented manufacturing sector, the Malaysian economy is very volatile to the inflow of foreign direct investment by developed economies. The Malaysian government’s effort in liberalizing FDI flows towards Malaysia is seen to be taking effect as large volume of FDI has been recorded since 2010 until 2012. More beneficial outcomes are to be expected if more inflows of FDI in the country are realized.
Figure 1: Inward Foreign Direct Investment Flows to Malaysia, 1986-2011
Source: World Bank Organization database available at www.worldbank.org
Figure 2: Volume of Foreign Direct Investment in Malaysia, 1985-2010
Source: Prema-chandra Athukorala and Swarnim Wagle, 2011
Figure 3: Volume of FDI Flows in ASEAN Countries, 1985-2009
Source: Prema-chandra Athukorala and Swarnim Wagle, 2011
References
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