1.1 Abstract

This report investigates the competitiveness of Malaysia in attracting Foreign Direct Investment (FDI). More specifically the study investigates the relationship of FDI with Malaysia’s economy, analyzes the reasons that affected the FDI into Malaysia, and evaluates each possible reason with relevant supportive data. The study will further evaluate the effectiveness of government policies in attracting FDI into Malaysia.

1.2 Malaysia and the FDI

Malaysia has a policy of mixed economy whereby the countries attract FDI into the country to drive its economy and to ensure growth. Most of the empirical studies on the function of FDI in countries suggest that FDI is an important source of capital, complements domestic private investment, enhancement of technology transfer, and increase overall economic growth in countries where higher economic growth will creating sound investment environment which attracts investment from market-seeking firms (Karimi et al., 2009). According to Krugman and Obstfeld (1994) FDI functions as one way to bridge an inter-temporal gap of capital demand and supply, and like other capital inflows, increase the production frontier of developing countries, which normally suffer a shortage of capital. FDI also lead to increase the employment rate through the expansion of the economy and job creation. Insufficient funds for investment are the main reason to seek FDI and normally, less-developed countries lack of fund for investment (Har, Teo, & Yee, 2008). Therefore by having the FDI, it can help them to develop their countries and improve their standard of living by creating more domestic employment and increase the economy.

Besides FDI creating more job opportunities, inflow of FDI has been an important source of knowledge transfer in technology, management skills and international linkages for Indonesia, Malaysia, and Philippines and Thailand (Yussof & Ismail, 2002). FDI is considered to be an important vehicle for transfer of new technology which contributes to growth more than domestic investment (Borensztein et al., 1998). FDI provides the fastest and most effective way to deploy new technologies in developing host countries, through the process of technology transfer, the foreign multinationals also contributed to the development of the technical capabilities of the locals (UNCTAD, 2000). Moreover, through training of employees and hands-on learning, FDI can raise the skills of local manpower and as a result, increasing their productivity level ( Marial & Ngie, 2009). Furthermore, FDI’s role is to fuel exports growth whereby the production of products and services are to cater both domestic and international markets.

The government’s effort by introducing more liberal incentives including allowing a larger percentage of foreign equity ownership in enterprise under the Promotion of Investment Act (PIA)1986 and followed by the establishment of Free Trade Zones (FTZs) during the Second Malaysia Plan ( 1971-1975) in order to attract a larger inflow of FDI. Since then, Malaysia has attracted a large portion of the investment dollar that flowed into Asia. Between 1986 and 1996, it resulted to a large inflow of FDI at an annual average rate of 38.7% after 1987. In 1995 for instance, Malaysia was the second largest FDI recipient among Asian economies with US$ 5.8 billion (UNCTAD, 1996).

FDI Inflows to Malaysia, (in million dollars) 1990-2009

The figure above shows the trend of FDI inflow to Malaysia. Malaysia has received a lot of FDI since the 1990s and FDI has become an important contributor to the growth and the transformation of Malaysia’s economy whereby FDI could create job opportunities for the countries’ citizens. The FDI flow in Malaysia is inconsistent and fluctuates randomly. For the record, Malaysia has recorded RM 152 billion in net FDI inflows during the period 2000-2009 higher than RM 134 billion from 1990-1999. But actually Malaysia’s performance starts to grow up impressively by 1990s compared with the years before 1990s and it show that may be the investor confidence had improved. However, the lowest figures of FDI inflows recorded in 2001 were due to the global trend and followed by the collapse of technology bubble (The star newspaper, 25 March 2010). As for 2009, the FDI inflow into the Malaysia had drastically dropped 81% to US$1.4bil from US$7.3bil in 2008, which reported by the World Investment Report (WIR). According to the chief economist of RAM Holdings Bhd Dr Yeah Kim Leng, the reason why the FDI have contracted sharply due to lack of confidence as the result of the global financial crisis in 2008 and 2009 (The star newspaper, 13 March 2010). In 2007, FDI inflows peaked, when it reaching US$1.8 trillion, up 30% from 2006, bringing the worldwide stock of FDI to US$15 trillion.

FDI is an important contributor to the growth and the transformation of Malaysia’s economy, particularly in establishing new industries, enhancing production capacity, employment, trade and technological capability. Malaysia has attracted a steady inflow of net FDI in the recent decade, averaging 3% of GDP per annum with a peak of 4.5% of GDP in 2007 (Har, et. al., 2008). However, relatively lower FDI inflows were recorded in 2001 and 2009, similar to the global trend, following the collapse of the technology bubble and the global financial crisis respectively.