Monday, July 26, 2010

Foreign Direct Investments: What Happened to Malaysia?

The recent release of World Investment Report (WIR) 2010 by United Nations Conference of Trade and Development (UNCTAD) provided a picture that is nothing short of grim and ugly for the Malaysian economy especially in its attractiveness as a local and foreign investment destination. While the headline 81% drop in foreign direct investment (FDI) from US$7.32 billion to US$1.38 billion can be brushed of as a 'blip' due to a global financial and economic crisis in 2008-2009, a more in-depth study reveals that it was certainly not a one-off.

Our country's leadership should instead heed the loud alarm bells the data presented to prevent our economy from drifting aimless to a point of no return. The UNCTAD WIR 2010 data revealed five firsts for Malaysia:

1. For the first time ever in history, Malaysia attracted less investment than the Philippines.


Malaysia has lost out to Thailand in FDI for the very first time in 1998 while Indonesia exceeded us recently for the first time in 2005. Vietnam on the other hand, beat us in FDI for the very first time the year before, in 2008. While we have come to accept Thailand, Vietnam and even Indonesia as having gained competitiveness against Malaysia in recent years, we are suffering ignominy of attracting lower FDI compared to the Philippines for the first time ever in history. The Philippines attracted US$1.95 billion in FDI compared to Malaysia's US$1.38 billion.

Among Southeast Asian nations, we are now only attracting more FDI than Cambodia, Myanmar, Brunei, Laos and Timor-Leste. And for the first time ever, what was previously unimaginable that we may one day be compared to countries such as Cambodia and Myanmar is now a real possibility.


2. Compared to the previous year 2008, Malaysia suffered by far the biggest decline of FDI in Southeast Asia


The global financial crisis has resulted in sharp declines in FDI for many countries in this region, especially given the region's reliance on investments from the United States and Europe. However, the Government cannot use the excuse of the crisis as the reason for the precipitous drop in FDI as we have performed the worst compared to all other countries big and small in the region.

While many of our regional competitiors suffered declines in FDI last year, none of them came close to what we experience. Thailand, Vietnam and Indonesia's FDI declined by 30.4%, 44.1% and 44.7% respectively, those figures are by far healthier when compared to Malaysia's 81.1% drop. This was despite the fact that Thailand was facing a year-long political upheaval while Vietnam was mired in a currency crisis.

On the other hand, Singapore, Brunei, Philippines and Myanmar still managed to register positive growth although for Singapore, the bulk of its decline in FDI was registered in 2008 which accentuated its improvement in FDI in 2009.


3. Malaysia was the only country in Southeast Asia to have register a net negative Foreign Direct Investment Flow


The WIR 2010 presented data for both the amount of FDI a country receives as well as the amount of FDI which originates from a country that was invested overseas. Out of all the countries in the region in 2009, Malaysia was the only country where our outflow of FDI amounting to US$8.04 billion is substantially greater than the FDI of US$1.38 billion received. All the other countries in the region had a net positive FDI flow in 2009.


4.For the first time ever, cumulative Outward FDI Stock exceeded cumulative FDI Inward Stock


For the first time ever the amount of foreign direct investment flowing out of Malaysia accumulated over time amounting to US$75.62 billion, or the “Outward FDI Stock” has exceeded our cumulative foreign direct investment coming into the country, which amounted to US$74.64 billion.


The trend of both local and foreign investors voting with their feet to seek greener pastures overseas is unmistakable when we look at the fact that Malaysia has been suffering from increased trend of FDI outflow over the past decade, as show in the chart above.

The above chart shows clearly that not only are foreign investors unwilling to invest in Malaysia, our own local investors as well as foreign investors who are already in the country have a total lack of confidence in the ability of our economy to generate an attractive return to their investments. Our net FDI flows have declined from US$2.56 billion in 2004 and US$1.09 billion (2005), to a net negative US$0.02 billion (2006), negative US$2.7 billion (2007) and negative US$7.67 billion in 2008.

The figures show clearly that there is money to be invested, they are just not investing in Malayisa. The investors now see improved and better opportunities in the region and abroad even during the times of crisis.


5. Barring a “blip” in 2001 when we attracted only US$0.55 billion in FDI, this is the first time we've attracted less than US$2 billion in FDI over the past 20 years


Looking at the FDI data over the past 20 years, Malaysia has shown an inability to grow its FDI while our neighbours are generally trending upwards in their ability to attract FDI. This is a reflection of our stagnating competitiveness while our neighbours continue to consistently increase theirs.

Finally, when we compare ourselves against our regional peers, it is a picture of increasing bleakness. Despite outperforming Thailand consistent in the 1990s and before, the last time we exceeded them in FDI was back in the year 2000, which means they have already beaten us for 9 consecutive years.

While Indonesia beat us once in 2005, they've now repeated the feat 2 years in a row in 2008 and 2009. ASEAN rising star, Vietnam has also done the same by attracting more FDI compared to Malaysia over 2008-2009. This is shown in the comparative chart below.

What New Economic Model?

While the proposed “New Economic Model” (NEM) by the Prime Minister Datuk Seri Najib Abdul Razak has correctly identified some of the fundamental problems with our economy which has led to our fall from grace, as well as proposing some key measures to restructure our economy, he has repeatedly backtracked from the NEM and shown little political appetite to implement the critical policies which will lead to improvements and greater competitiveness in our economy.

Datuk Seri Najib has since described and relegated the NEM to merely a “trial balloon” and backtracked from his commitment that affirmative action will be implemented by needs and not by race by reinstating the 30% bumiputera quota target in the 10th Malaysia Plan. The recent spate of privatisation projects have also not seen any political will on the part of the Government to implement open, transparent and competitive tenders, including the RM628 million construction of Malaysia's largest exhibition and convention centre, the development of the 3,000 acres of prime land in Sungai Buloh as well as the proposed major redevelopment of the old Sungai Besi airport into the KL Financial Centre.

Even the highly anticipated RM46 billion Mass Rapid Transit (MRT) project for the Klang Valley looks all but awarded to a Gamuda-MMC consortium without any open competitive tenders.

What is worse, despite Datuk Seri Najib's repeatedly insisted that the era where “the government knows best” is over, his administration continues to crowd out private investments by direct awarding mega-projects to government-linked entities such as the Sg Buloh land to an Employee Provident Fund joint venture with the Government or the Sg Besi airport redevelopment to the 1Malaysia Development Fund.

Without these necessary and critical changes to the Government's economic policies, the Malaysian economy will only continue to drift away from the radar of both local and foreign investors as our Ministers continue to indulge in their daydream of glory and success, while our neighbours will steadily and consistently improve their economies beyond our reach.
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