Policy overhaul needed to regain FDI glory

Malaysia must identify unique investment proposition to attract investors, improve reputation and become a more welcoming place for foreigners


MALAYSIA raised the eyebrows of its regional peers when American companies Tesla Inc and Amazon Web Services announced large-scale investments in the past weeks, with the country’s ability to attract mega investors when almost all Asean economies are fighting for investments.

But are the mega commitments enough to restore Malaysia’s glory, once known for its vibrant economy and friendly investment climate, but now has been taken over by Indonesia, Thailand and Vietnam?

Economists told The Malaysian Reserve (TMR) that Malaysia’s investment policies must be revamped by identifying gaps and implementing policy improvements to regain its shine as a primary foreign direct investment (FDI) destination.

Malaysia University of Science and Technology economist Dr Geoffrey Williams said the policies need a wholesome reform instead of minor tweaks.

He said it is difficult for Malaysia to regain its position as a top FDI destination due to heavy competition between Indonesia and Vietnam. They are seen as vibrant, growing economic zones.

According to Williams, Malaysia is seen as a slower and less vibrant destination with heavy government interference, which would be a drawback for domestic and foreign private investors.

What Needs to Be Done

“Malaysia must identify its unique investment propositions to attract international investors, improve its reputation and become a more welcoming place for foreigners,” he said, adding that some sectors could play crucial roles, including Islamic finance, palm oil, halal industry, and oil and gas.

“New industries that create employment must be targeted not just big brand companies with sales and service outlets,” he said.

According to him, Malaysia ranked sixth in the Asean region regarding total FDI received, behind Indonesia, Vietnam, Thailand, the Philippines and Singapore. Singapore alone received nine times more of Malaysia’s FDI on a US dollar basis.

He said Malaysia was also ranked sixth but ahead of Thailand and Indonesia in terms of FDI’s percentage of GDP. He noted that Singapore has a GDP per capita almost six times of Malaysia’s, while Indonesia and Vietnam are nine and three times larger in population, respectively.

Meanwhile, Sunway University Business School economist Dr Yeah Kim Leng said Malaysia needs to tweak its investment policies by sharpening focus, and enhancing cooperation and coordination among the federal, state and local authorities, including the various regional economic corridors.

He said a national investment agenda incorporating the promotion of domestic direct investment (DDI) and FDI would be desirable to raise the country’s private investment level from 16%-17% of GDP to 20%-25%.

He also emphasised that stakeholders must maximise benefits from the proposed agenda, including creating high-wage jobs and other spillovers to the domestic economy.

Yeah said it is unsurprising that Indonesia and Vietnam have overtaken Malaysia in receiving FDIs, given their larger population, bigger domestic market and favourable growth outlook.

“It is noted that as a share of GDP, Malaysia’s annual average of 2.3% exceeds that of Indonesia at 1.9% but significantly less than Vietnam’s 6% during the 2017 to 2021 period,” he said.

Yeah said the challenge for Malaysia is attracting sufficiently large — not necessarily bigger than the two countries — high-quality foreign investments, which could accelerate Malaysia’s structural transformation into an advanced and industrialised economy akin to South Korea, Taiwan or Singapore.

“Given its relatively well-developed infrastructures, presence of large multinational corporations and established domestic supply chains, the country is well positioned to garner a larger share of FDI,” he said.

Malaysia In Better Position Now

Nonetheless, Yeah said Malaysia is better positioned to capture more significant FDIs into the region with diminishing political instability and the ability of the new administration to focus on strengthening the country’s economic foundations, especially in improving governance and restoring trust and confidence.

He added that Malaysia must address skills shortages faced by domestic and foreign investors while improve the ease of doing business, further reducing the regulatory burden.

“Enhancing the efficiency of the operating environment through streamlining processes and digitalisation are also important measures needed to sustain investor confidence,” he said.

On the flip side, Bank Muamalat Malaysia Bhd’s head of economics, market analysis and social finance Dr Mohd Afzanizam Abdul Rashid said Malaysia has much to offer foreign investors given its peaceful, decent infrastructure and talented employees.

He said this would make the country the right place to start a business for better value for money.

“What matters now is political stability because this will ensure consistency in policy making.

“I believe that foreign investors would place a high priority in respect to their experience when they come to Malaysia,” he said, adding that the authorities should work on reducing red tape and bureaucracy.

Mohd Afzanizam said the present administration would need to look into multiple agencies tasked to handle foreign investments, both on the federal and state level.

Higher Approved Investments

Malaysia approved investments amounting to RM264.6 billion in 2022, with the largest contribution from the services sector followed by the manufacturing and primary sectors.

The services sector saw approved investments totalling RM154 billion or 58.2% of the total investments approved in 2022.

Meanwhile, approved investments in the manufacturing sector amounted to RM84.3 billion (31.9%) and primary industries RM26.3 billion (9.9%), International Trade and Industry Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said last week.

He noted that the amount of investment approved was the second largest recorded after 2021, given the two significant investments in 2021 from Intel Corp and Risen Energy Co Ltd from China.

Tengku Zafrul said FDI accounted for 61.7% or RM163.3 billion of the total approved investments, while DDI accounted for 38.3% or RM101.3 billion.

He added that the investment approved last year is expected to create 140,370 job opportunities in the country.

China was the largest source of FDI at RM55.4 billion, followed by the US (RM29.2 billion), the Netherlands (RM20.4 billion), Singapore (RM13.5 billion) and Japan (RM11.4 billion).

Most of the approved investments were in Johor (RM70.6 billion), Selangor (RM60.1 billion), Sarawak (RM28.2 billion), Kuala Lumpur (RM25 billion) and Penang (RM16.3 billion), he said.

Speaking at the Invest Malaysia conference recently, Tengku Zafrul said the government is targeting 20% growth for FDI and DDI this year. Although it’s a challenging ambition, the minister said investments are more long-term, and companies look at Malaysia for a longer term.

“To attract investments to Malaysia, what is important is to improve the ease of doing business in the country, the workforce, infrastructure and governance,” he said.

“What is important is to maintain the momentum and focus on the right sectors and industries. The result we want is not only a multiplier effect on the GDP, but also to create high-quality jobs,” he added.

In addition, Tengku Zafrul said new investments would contribute to productivity and higher wages.

He said Malaysia’s current productivity rate remains positive, but the growth is not as fast as its peers. There is a concern that Malaysia’s productivity rate is slower in growth although higher when seen in absolute terms, said the minister.

“Therefore, the gap is narrowing. We need to make sure that the ease of doing business is one of the areas we focus on,” he added.

  • This article first appeared in The Malaysian Reserve weekly print edition