Yesterday was the 1st instalment of my little piece with regards to foreign direct investment (FDI) in Malaysia. The statistics cited were both damning and alarming, and its no surprise that the issue was pretty much ignored in the local media. However, foreign investments aren't the only ones which are falling in recent years. Private investments as well as reinvestments by foreign multinational corporations have been on significant decline as well.
Declining Private Investment
UBS was equally severe in a November report. It estimated that private investment as a function of gross domestic product (GDP) in Malaysia dropped to a 25-year low last year. Local and foreign private investment in the 1990s was routinely above 32 per cent of GDP. Today however, it is around 7-8% which is regression of a particularly brutal kind.
“Unless it tackles the many issues head on, the Malaysian economy could slip into a period of low-quality growth,” notes senior economist Sanjay Mathur of UBS Investment Research.
As highlighted by Parliamentary Opposition Leader, Lim Kit Siang in Dewan Rakyat, “Intel announced plans to boost its investment in Vietnam to USD$1 billion from USD$300 million a mere nine months earlier. The reason provided by Intel was Vietnam had “a very vibrant population, an increasingly strengthened education system, a strong workforce and a very forward-looking government.”
While Intel have not “moved” from Penang, it has shredded its workforce in the country and has not increased its level of investment significantly in Malaysia relative to our neighbours in the past 5 years. This is despite Intel being one of the earliest hi-tech investors in Malaysia which led the process of industrialisation in our northern state.
According to The Edge published on the November 14th, Malaysia has also been “passed over in recent years by electronics firm Solectron Corp, Dutch energy company SHV Holdings and semiconductor firm Advanced Interconnect Technologies.”
It appears that these foreign investors' lack of interest has more to do with a litany of more esoteric issues such as mountains of red tape, opaque decision-making, affirmative-action policies, a lack of skilled workers and hints of religious tension.
When interviewed by The Edge for the issue dated November 14th, Thierry Rommel, the ambassador of the EU Commission to Malaysia himself highlighted that "[t]here is really an increasingly widespread perception that conditions of doing business here in Malaysia are not that attractive anymore.”
CLSA Deputy Chief Economist Eric Fishwick said in the same issue that “[t]he relatively small amount of FDI reflects the broader growth environment which is still over-protectionist, uncompetitive... Going forward, Malaysia is going to under-perform its potential. It needs to allow competition in its economy and part of competition is that non-viable businesses be allowed to go out of business.”
An example of the red tape, foreign investors claim that it can take half a year to get a work permit, compared with less than a week in Singapore. As put forward by Vince Leusner, the president of the American Malaysian Chamber of Commerce, "the Malaysian government can do a better job in making regulations less imposing to businesses.”
In the past last eight weeks, the Government has unveiled the South Johor Economic Region (SJER) mega-development project. This project aims to boost trade, industrialisation, employment and ultimately the economy in Peninsula Malaysia's souther corridor.
Dr Boo Cheng Hao, the state chairman of the Democratic Action Party (DAP) believes that “the concept of the SJER as a economic free-trade zone is very good.” However, given the size of the mega-project, it will not succeed without a major injection of foreign investment. Dr Boo added that “government policies -- especially the 30 pct bumiputera ownership requirement -- must be dropped if we really want to attract
S Jayasankaran of the Singapore Business Times also rightly argued that “harping on protectionist policies is a turnoff for investors spoilt for global choices. Xenophobic statements about rejecting, say, Singapore's participation in the South Johor Economic Region is the economic equivalent of cutting off one's nose to spite one's face.”
Given the litany of issues, backed by numerical evidence of weakness and failure, what has been the Government response to date? This, in addition to what we should do to revive our economy, will be covered in Part III of this series.