Bucking the trend: Foreign direct investment is on the up once again

After dropping 83% between 2007 and 2009, foreign direct investment (FDI) into Malaysia staged an impressive comeback. By 2010 the 2007 mark was broken. The next year, FDI was up another 12.2%. What transpired has no single explanation. In part, the remarkable rebound was just a recognition that the pullback was an overreaction – to a great extent it was a straightforward return to the trend. But what happened was more than a just case of money rushing back. The rapid rise in FDI since the 2008 low was the result of efforts made on the ground. Since FDI peaked in 2007, the country has undertaken liberalisations, and has been working and investing to encourage economic growth and international interest. These measures are making a difference. While foreign investment in Malaysia is reaching new heights, global FDI inflows are still not back where they were in 2007. Simply put, while Malaysia is attracting more capital than ever, the rest of the world on average is drawing less than it once did.

PROGRAMMES: A number of policies, programmes and initiatives championed by Prime Minister Najib Razak seem to have made a big difference. The campaigns put into effect by the government include the New Economic Model (NEM), replacing the 40-year-old New Economic Policy and designed to double per capita income by 2020; the Economic Transformation Programme (ETP), which identifies 12 National Key Economic Areas (NKEA) and a range of economic entry projects needed to make the NEM a reality; and the Government Transformation Programme. Together, they work to capitalise on successes so far and build on the foundation set down since the 1997-98 crisis. Transparency and accountability are emphasised, efficiency is promoted and the private sector is encouraged. Liberalisation, particularly in the financial sector, has been pushed and expensive and unproductive subsidies have been cut under the prime minister’s leadership.

The net effect has been a noticeable improvement in competitiveness. In 2010 Malaysia climbed the IMD World Competitiveness rankings to 10th place, up from 18th. There has also been a gradual but material change in the nature of investments being made in the country, a sign that Malaysia did not just recover from the 2008 crisis, but took the opportunity to reinvent itself.

One area of improvement is the services sector. In 2010 services contributed 58% to GDP, compared to the 70-80% norm in developed countries. The government, under the 10th Malaysia Plan, wants that to hit 65% by 2020, and is seeking to promote this growth through incentives and liberalisation. In tourism, the country is offering tax abatements for five years or investment tax allowances for capital expenditures, and 100% exemptions for projects in Sabah and Sarawak.

Medical tourism investments will also receive the higher exemption rate, as well as automatic approval passes for foreign medical specialists. Double deductions are allowed for overseas tourism promotion, while special tax exemptions are offered for health care services provided to foreign clients. Areas attracting similar incentives include environmental management, energy conservation, research and development, medical devices testing, film and logistics.

DOWN TO BUSINESS: The country is also working to enhance its attractiveness as a business and corporate centre. Operational headquarters (OHQ), international procurement centres and regional distribution centres all receive tax breaks as well as incentives related to foreign exchange, structuring and employment.

Malaysia is now one of the top three locations for services companies, according to AT Kearney, and has attracted such names as BASF, Bayer, DuPont, GE, IBM, Intel, Novartis, Sharp Electronics, Siemens and Tetra Pak.

New OHQs include Japanese travel firm H.I.S., while Nestlé has established a regional engineering centre.

In 2011 approval was granted for a total of 211 new regional establishments in Malaysia.

As a result of the economic recovery and the incentives offered, the services industry has flourished.

Approved investments in the sector rose 76% in 2011, and foreign investment from $1.3bn in 2010 to $5.2bn.

The manufacturing sector is the second-largest recipient of investment, with $18bn approved in 2011. Of that, $10.5bn was from foreign sources. Manufacturing investment has not been growing as fast as services, however, and nor has it yet recovered from the 2008/09 slump; it peaked in 2008 at $20.3bn and fell to $10.5bn in 2009. In 2011 34% of new investment in the sector was in electronics and electrical goods (E&E), up from 14% a year earlier, while 38% of reinvestment went towards E&E, up from 28%. Japan was the biggest foreign investor, at $3.3bn, the Republic of Korea was second, at $1.7bn, and the US was third, at $807m.

VALUE ADDED: Malaysia is currently seeking to move away from low-cost manufacturing towards value-added endeavours. The country is looking to promote activity in emerging technologies and research and development, and is pushing to create more capital-intensive industries. Capital invested per employee was $180,000 in 2011, up from $156,000 in 2010, indicating Malaysia is working its way up the value ladder.

E&E is an NKEA, and the country is now focusing on support to solar, LEDs, wireless communications and the local semiconductor industry. It is also seeking to push green and smart technologies and high-end products. To maintain sufficient human resources for the development of the manufacturing sector, the Ministry of Higher Education and the Ministry of Human Resources are cooperating to ensure courses are offered at universities that will prepare future workers for high-tech manufacturing. The E&E sector receives considerable foreign investment. In industrial electronics, 97% of approved investment in 2011 was from overseas, as was 91% of that in the electrical sub-sector.

Automotives, on the other hand, has been receiving relatively little foreign money. In 2011 Malaysia produced over 535,000 passenger cars, but of the $1.1bn invested only $253m was from overseas. However, following the disaster at Fukushima and floods in Thailand, more vehicle and component manufacturing could move to Malaysia. Implementation of the National Automotive Policy, which will promote production of hybrid cars and lower taxes, could also result in increased investment.

PRIVATE SECTOR: The states with the most manufacturing investment are Penang, Selangor and Sarawak. Combined, they received 65% of new projects in 2011. The high investment in these areas has been attributed to large existing industrial bases, reinvestment in capacity and good infrastructure that is attractive to corporations seeking to set up manufacturing.

The key to the ETP is private participation. The government will certainly commit funds, but the aim is not so much to finance the development directly, but to stimulate support from the private markets, at home and abroad. Tax incentives and direct spending will be designed to encourage growth in targeted areas. Some of the efforts are in fact cash flow- and balance sheet-neutral for the government. For example, DanaInfra Nasional will issue retail bonds for the building of the Mass Rapid Transit project, raising funds, increasing public participation, spreading risk and encouraging savings all at the same time, without taxing the treasury.