Time is running out for Malaysia's economy

Dr Lim Teck Ghee, CPI

More evidence has just come in that time is running out for the country to get its basics right if the Malaysian economy is to grow at a respectable pace.

According to the United Nations’ World Investment Report 2010, foreign direct investment (FDI) for Malaysia has plunged 81 percent from US$7.32 billion (RM23.47 billion) in 2008 to just US$1.38 billion (RM4.43 billion) last year.

This is further confirmation that despite the many efforts to court foreign investors to invest here, the foreign and local business community is not buying what is being sold to them in terms of the attractiveness of Malaysia as a place to do business.

The latest data must be especially a letdown for Prime Minister Najib Razak who has been active on the international front, attending investor meetings and courting foreign fund managers and foreign business leaders to persuade them to put their money in Malaysia.

There are various important points that we can deduce from the data in the table, and other tables in the report comparing the Malaysia inflows with other countries in the SE Asian region.

o The downturn in FDI is not a one or two year phenomenon but a long term trend. The previous attraction that we had for foreign investors is no longer there, and this is likely to continue in the foreseeable future.

o The trend is not only of diminishing FDIs into Malaysia but for us to do worse than the rest of our neighbors in the region. In 2008 we accounted for 15.5% of FDI flows into SE Asia; in 2009 it was down to 3.7%.

o Short of a complete breakdown in the governments in neighboring countries such as Singapore, Thailand, Indonesia and Vietnam, we are looking at foreign investors preferring to invest in these countries rather than Malaysia.

o Even if political turmoil and social instability appears to be more pronounced in countries such as Thailand, we are no longer able to compete with them for FDI.

o The outflow of domestic investments is a new trend. This suggests that the country is unable to develop new industries or sustain existing industries to prevent local funds from leaving the country. It also indicates loss of confidence by local business in the country’s economy and politics.


What are some of the implications of this trend of diminished FDI flows?

Obviously, if it is not reversed, it will result in less high quality employment generated. The chain effect is more than just jobs lost for Malaysians. It also means that local suppliers will lose out; services such as catering, transport, etc will have a smaller clientele; and the government will collect less in terms of business and income tax and other taxes. In other words, the country may well end up poorer; much poorer.

Even if local businesses step in to fill some of the gap, they will not be able to make up for the loss. Unlike other countries such as Taiwan or South Korea, few import-substituting domestic industries in Malaysia have become world-class export industries. The undeniable fact is that most world-class exporting firms in Malaysia are foreign-owned or joint-venture ones with foreigners providing the crucial technological and market know-how and cutting edge.

Back to the drawing board on FDIs

What this means is that the country needs to go back to the drawing board if it wants to compete for FDI or even to ensure that domestic investors do not flee the country (as they are already doing in droves).

In the past, we have relied on a range of perks to attract foreign investors including tax-free pioneer status; investment tax allowances; reinvestment allowances, etc. We had also in the 1980s and 90s a head start over countries in attracting FDI due to our superior infrastructure and – at that time – our more competitive labour force.

All this has now been eroded. There is similar tax concessions found all over the world.

Furthermore, our electricity and water utility costs are beginning to soar, and our worker productivity has stagnated in comparison with other countries whilst wages have gone up.

It does not require rocket science to recognize what is holding back investors – whether foreign or local. They include

• NEP requirements and barriers

• Rising costs of production leading to lower profits

• Low levels of efficiency arising from lack of worker skills, poor R&D and low technological capacity


Most damaging of all to business and investor confidence (although not easily quantifiable) is the rising racial and religious ranting from Malay extremists. Although mainly conducted in the Malay media and targeted at Malay audiences, the new wave of emotive breast-thumping (and occasional posturing with the keris) in the name of Malay dominance and Malay unity surely has not gone unnoticed.

Besides reading the internet news portals for a more accurate gauge of what is taking place in the politics and economics of the country, many savvy business leaders keep close tabs on what is put out in theUtusan Malaysia and Berita Harian, as well as over the government Malay language electronic media.

Government dithering on NEM

Foreign investors may initially have been encouraged by the launching of the NEM and would have harboured hopes that this would mean a new economic era of liberalization and higher competitiveness for Malaysia.

The NEM has been silent on any mention of the NEP and has called instead for “market friendly”, “merit-based”, “transparent” and “needs-based” policies. Investors would have inferred from the lack of mention of the NEP in the NEM that this 40-year-old socioeconomic policy would finally be laid to rest.

However, like others, they are now nonplussed by the government’s dithering on whether or not to finally abandon this anachronistic policy. They would undoubtedly be especially troubled by the remarkable ability of the Prime Minister to sing a different tune on the subject depending on his audience.

Adding to their worry would be the Prime Minister’s speech at the closing ceremony of the first Malay Consultative Council (MPM) congress held at the PWTC on May 30 where Najib stated that the NEM is a “trial balloon” and the policy has yet to be finalized.

Attaining Vision 2020

In another recent speech, the PM has also begun to back off from his earlier confident claim that the country would be able to achieve Vision 2020 by clarifying that the external economic environment may well derail the achievement of key targets such as per capita income and others.

Of course, foreign investors understand that the external environment, external factors and foreign investors can help the country in its realization of Vision 2020 and the NEM’s goals.

However, I am sure they will beg to differ with the Prime Minister’s assessment of the critical importance of the external environment. Many amongst them will emphasize that it is the internal environment and internal factors – in particular the politicking (and associated rent-seeking) by Umno – that holds the key to the economic fortunes of Malaysia.