Time to focus on investment

 

Overall investment in Malaysia, measured by gross fixed capital formation, has been falling as a percentage of gross domestic product (GDP) since around 2013.

Private investment has stagnated at around 15% to 16% of GDP and public investment has fallen from around 10% to below 5% of GDP. Investment as a percentage of GDP is around 20% now compared to between 30% and 40% or higher before the Asian financial crisis (AFC) of 1997-1998.

In 1997, there was a big drop in domestic direct investment (DDI), down to around 20% to 25% of GDP.

There was another downtrend more recently, after Najib won his first election — the GE13 — in 2013 and the protests that followed. There was a general deterioration in the political and investment atmosphere under Barisan Nasional (BN) and Najib after that time.

Often, DDI and foreign direct investment (FDI) go hand-in-hand but not always. Higher DDI can create growth that attracts FDI or can be a catalyst for joint ventures with foreign investors.

Net FDI has been falling since 2016 apart from a spike in 2021 due to the delayed entry of FDI during the pandemic. Nonetheless the trend is down.

On the other hand, Malaysian direct investments abroad have been rising since around 2016 to 2017.

The simple reason is that there are better investment opportunities elsewhere, for both foreign investors and domestic investors. Even government-linked investment companies (GLICs) have increased overseas investments in order to get high enough returns to provide dividends for their members.

Malaysia is a small country, Indonesia is nine times larger and Vietnam is three times larger for example.

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Malaysian growth has also slowed as the economy has matured. There are fewer development opportunities here and the returns are lower. There are also restrictions on foreign investment and requirements to partner with local firms for large scale investments.

Whereas in the past Malaysia was a gateway to Asia, now other Asian markets have opened up and so companies make direct investments there rather than through a Malaysian hub.

The environment for domestic investment has deteriorated for similar reasons, mainly small market and slower growth. Large projects tend to be dominated by government-linked companies (GLCs) which crowd out private companies. There is also a governance and corruption issue of course.

Investments in consumer projects are held back by low incomes and income inequality. Investments in manufacturing are not as attractive here as elsewhere in Asean where productivity and quality are very competitive. So some Malaysian manufacturers relocate.

Profitability in Malaysia is also a problem so companies often do not generate sufficient surpluses to reinvest and this holds back growth.

There is a general lack of investment in creative, innovative and R&D-dependent businesses while the focus is on low value-adding activities, commodity-based industry and low-paid jobs.

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This is a failure of business and management but has been made worse by government policy over decades especially in the Malaysian five-year plans which have been confusing and lacked competitive focus. In general the development model is too driven by government and has too little market-oriented focus.

The performance of micro, small and medium enterprises (MSMEs) for example is held back by government policy and they contribute less than 40% of GDP and less than 18% of exports. Their productivity is low and their profit margins do not provide capital for growth. So they are not an engine of investment as in other countries.

MSMEs need to be developed but decades of government policies have failed to do it because the policies are too interventionist, they focus on specific sectors or community groups and they provide too many bureaucratic small-scale offers.

There is no effective start-up and scale-up ecosystem, so this would be a prime place to start. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.