Malaysia must refresh its FDI strategy

Figures from the United Nations Conference on Trade and Development (UNCTAD) last week showed that the inflow of foreign direct investments (FDI) into Malaysia dropped by 68% from US$7.8 billion in 2019 to US$2.5 billion in 2020.

Malaysia was the worst performer in the region and commentators identified the main causes as political instability following the change of government in March, the first movement control order (MCO 1.0) just afterwards and continuing corruption issues discouraging foreign investors. However, we should be cautious about jumping to such quick and easy explanations.

First, although unexpected, the change in government was completely peaceful. It showed that Malaysia is a mature and sophisticated democracy in which the transition of power runs smoothly. The real political problems only emerged at the end of 2020 and the start of 2021, so they cannot be the main cause of the fall in FDI.

Second, political issues were quickly overshadowed by the lockdown under MCO 1.0 which was relatively short and moved quickly into less restrictive versions (CMCO and RMCO). At the time, Malaysia was hailed globally as a success story and so again the quick and easy explanation cannot be cited as the main cause in the fall of FDI.

Anyway most FDI into Malaysia comes from Asia, with China far ahead of other countries. Chinese investors are not likely to be concerned about the change in government, which they might even prefer. Nor are they likely to be concerned about the lockdown, or for that matter the state of emergency this year, because these both are normal policy responses in China.

Corruption was also targeted as a potential cause of the fall in FDI with Malaysia’s worse performance in the recent Transparency International Corruption Perceptions Index (TI-CPI) quickly cited as evidence.

However, again one needs to be wary of casual empiricism and easy connections. Despite a poorer performance, Malaysia is still ranked third best in Asia behind Singapore and Brunei in the TI-CPI with a better corruption performance than the Philippines, which saw FDI rise.

Indeed, here in Malaysia, when corruption perception was worse in the past, FDI was higher. In 2017, the year before the government changed in the general election (GE14), Malaysian FDI was US$12 billion, ahead of Indonesia at US$9 billion and Thailand US$7 billion and the second-highest after Singapore at US$35 billion. At that time the TI-CPI score for Malaysia was only 47 compared to 51 in 2020.

The recent high profile prosecutions and the conviction of a former prime minister are coincidental with falling FDI and one could argue that cracking down on corruption has harmed FDI. Intuitively, it may be easier to get an investment approval through bribery than through open, competitive tendering.

So we need to be cautious about jumping on corruption as the easy explanation for poorer FDI and look deeper at the likely causes.

Before we look at possible shortcomings here in Malaysia, we need to acknowledge that Covid-19 in source countries for FDI has hit hard and potential investors have delayed significant and long-term investment decisions across the board. This affects all host countries and Malaysia is no exception.

Another external factor is the rise in competition from other larger Asian countries. Malaysia has a domestic market of 33 million people whereas Indonesia has more than 270 million people, Philippines 109 million, Vietnam 97 million and Thailand almost 70 million.

This means they all have larger consumer markets, workforces, production capacity and increasingly greater access to finance. They are lower-cost environments with strong GDP growth as well as rising spending power among their growing, increasingly well-educated middle-class.

Malaysia’s competitors are also making things easier through market access and liberalisation. By contrast the regulatory environment in Malaysia is becoming tighter and contrary to what some eminent political-economists might say, Malaysia is not seen as a “neo-liberal” country.

It is a highly regulated and planned economy subject to a series of five-year Malaysia Plans which have an undue impact on the overall development trajectory and which direct government resources into policy-driven rather than market-driven, FDI-friendly trajectories.

Whereas in the past Malaysia has been seen as an entry-point to Asia now many companies see improved business and living conditions in large neighbouring markets and prefer to go there directly. There also appears to be a growing anti-foreigner sentiment in Malaysia which is not a good-look.

One specific issue that has made Malaysia’s FDI contraction worse than others in the region is the recent cancellation, postponement or renegotiation of mega projects such as the East Coast Rail Line (ECRL), the Trans-Sabah Gas Pipeline, the Multi-Product Pipeline and most recently the KL-Singapore HSR project.

This stops the FDI from the main contractor as well as secondary investment from sub-contractors. It also creates uncertainty and risk around contracts which might be subject to cancellation if the minister changes.

Against this background the government needs to refresh the look and feel of Malaysia as a FDI host country and promote successful examples such as the Geely-Proton joint venture which has created a revamp of a proud local marque, upgraded and up-skilled management, leadership and the workforce and transferred new designs and technologies in a proactive long-term partnership.

The Malaysian Investment Development Authority has identified 240 high-profile FDI projects with a combined potential investment value of RM81.9 billion. This is a great foundation for 2021 and beyond but to turn the potential into actual investments they must address some of the structural issues that have crept in and refresh the welcoming and open attitude that foreign investors enjoyed in the past.

Geoffrey Williams and Nur Muhammad Tajrid Zahalan are directors of Williams Business Consultancy Sdn Bhd based in Kuala Lumpur.

The views expressed in this article are those of the author(s) and do not necessarily reflect the position of MalaysiaNow.