Putrajaya eyes high-quality investors as it seeks to reverse impact from global FDI drop

Foreign direct investment (FDI) has entered uncharted waters thanks to the impact of the Covid-19 pandemic on global capital flows.

With only a certain number of opportunities accessible and obtainable, and with risks attached, investors have become much more demanding.

A recent report by the United Nations Conference on Trade and Development (UNCTAD) has been frequently cited. It states that global FDI flows may fall by 40% in 2020-2021, the lowest in over 20 years.

The report notes that international investment agreements (IIA) would also be impacted. These involve travel and face-to-face meetings between top government officials, the organisation of domestic consultation meetings as well as several other procedural steps, many of which have been cancelled or delayed due to the outbreak.

For decades, Malaysia has been attracting a big chunk of global FDI, and as such is among countries which have taken the brunt of the drop in investments following the Covid-19 outbreak.

But the FDI landscape is challenging and highly competitive, prompting the government to take measures to accelerate investments on the road to recovery.

The Malaysian Investment Development Authority (Mida), the main agency tasked with facilitating FDI, has identified 240 high-profile foreign investment projects in the service and manufacturing sector, with a potential investment value of RM81.9 billion.

About half – RM47.7 billion – has thus far been received and evaluated. Once approved, the projects expected to be implemented between 2021 and 2022.

Long-standing problems compounded over the years have branded Malaysia as unfavourable to foreign investments among Asean countries, and government initiatives are showing signs that the administration is serious about wanting to reverse that trend.

But it will not be easy. Decades of administrative weaknesses mean a huge task lies ahead, including reducing bureaucratic obstacles and red tape, costs, and time constraints, as well as streamlining investment approvals.

MalaysiaNow understands that a national investment strategy is being drawn up by Mida, with the chief aim of attracting high-quality investments that can enhance productivity, create high-skilled jobs, promote technology transfer and foster domestic linkages.

The initiatives include the setting up of the Project Acceleration and Coordination Unit (Pacu) and online platforms such as i-Incentive to expedite the realisation of investments.

One example is German luxury carmaker Porsche which is building an assembly plant under a partnership with Sime Darby Bhd’s automotive business, Inokom Corporation.

Other big players that have invested in Malaysia as their regional hub of operation include the UK’s Smith and Nephew; US’ Dexcom, LAM Research, MusicTribe and Western Digital; Germany’s B.Braun, Eppondort, Bosch; and Japan’s Nippon Electric Glass.

Those involved in attracting investments are aware that offering fiscal incentives and utilities at a discounted rate may no longer be an exclusive selling point to foreign investors.

Under the government’s National Economic Recovery Plan, or Penjana, several tax incentives to spur investment activity have been offered, including a 10-15 year tax exemption for new FDI in the manufacturing sector with a capital investment of RM300 million or more.

Quality investors

Economist Lee Hwok Aun said there are root challenges to attracting quality investors which would require long-term planning.

They include skills training and improving the country’s education system to prepare the future workforce.

“In the short term, there can be a focus on potential sectors for growth or export and technology transfers, such as green and solar energy,” he said.

One such investor is SK Nexilis, the world’s leading producer of copper foil for electric vehicle battery cells.

It plans to invest up to RM2.3 billion over the next two years in Sabah, where its plant will use 100% renewable electricity, and incorporate the robotic technologies it has adopted in its home state South Korea.

Ease of business

Although the UNCTAD report shows a drop in the inflow of FDI into Malaysia, Malaysia was ranked second in terms of ease of doing business in Asean (12th globally) as well as for investor protection, according to the World Bank Doing Business Report 2020.

Malaysia was also ranked fourth among 17 economies in a recent joint US study on cost of manufacturing operations around the world by KPMG and the Manufacturing Institute.

The study validates Malaysia’s goal of becoming a global supply chain hub in the region.

Multinational corporations are also using Malaysia as a hub for treasury management services as well as a myriad of activities of related services.

Economist Jomo Kwame Sundaram, who advises the Khazanah Research Institute, a research house under the government’s sovereign fund Khazanah Nasional which is tasked with recommending policies, is among experts who have argued against making FDI a barometer.

As far back as 2019 when he was the government’s economic adviser, Jomo had called for a focus on domestic investors as most investments are by this sector.

“It’s more than 90%. To think about foreign investors as if they are our saviours and salvation and so on… no,” he was quoted by the Malay Mail as telling the press.