ONE can’t help but shake off the notion that Malaysia, once a sweet spot for foreign direct investment (FDI), is gradually falling off the radar. Having said that, it ought to be noted that as far as FDI flows go, the country had actually fared quite well in the first decade of the 21st century.
It is the trend in recent years that appears to be triggering this concern. There has been persistent net outflows in FDI over the past years due to capital flight, which some say was reinforced by the sense of malaise arising from the country’s political as well as social sphere. Since 2006, there has been a net outflow that has likely persisted till 2009 which has halved FDI inflows, largely owing to the global economic recession.
Dr Mark Mobius ... ‘You must look at competing countries to arrive at an attractive tax structure’
But the main reason could be that increasingly, more domestic companies are investing abroad in ever larger amounts. In other words, capital outflows have been domestically driven.
That’s quite understandable. Deutsche Bank AG’s Asia chief economist Dr Michael Spencer says local corporations may have simply outgrown the market; with a population of 27 million, it may be saturated and facing lower profit margins.
“It’s not all bad,” says World Bank senior economist Philip Schellekens. “Investors – domestic and foreign – pursue the highest return adjusted for risk. If returns are higher elsewhere, domestic investors can pursue opportunities abroad and repatriate the financial benefits, and their activities together with those of foreign investors in third countries can help stimulate trade with Malaysia,” he says.
Schellekens notes that notwithstanding these caveats, the share of private investments in the country appears to be too low relative to the needs of a dynamically efficient economy, which as a result has meant a lower growth performance compared to the economies in the region.
Observers also feel that the flat FDI inflows and the rise in FDI outflows may not necessarily be due to political problems but a combination of factors including those related to the New Economic Policy and the non-consistent implementation of policies announced.
They also point to the important parts of the economy that are still heavily protected and regulated such as the automotive and power industries, the lack of human capital and the fall in productivity.
Perception is reality
Philip Schellekens ... ‘Investors – domestic and foreign – pursue the highest return adjusted for risk.’
Contrary to the popular belief that FDI inflows have been on a declining trend over the decade, there was a surge in 2006 compared to 2005 and the country did not do too badly either prior to that with net inflows from 2001 to 2005.
But there is data to show that foreigners have, from the second half of the decade, been lukewarm to ploughing their money in Malaysia and have chosen instead other more bright investment destinations.
When compared to 2007 inflows, 2008’s was flat. But as of 2006, despite the surge in FDI inflows, there has been a marked net outflow as local corporations including state investment firm Khazanah Nasional Bhd embarked on an expansion plan abroad.
Most observers expect this trend to continue given the intense competition among other countries to woo FDIs. There are other challenges as well, such as cost pressures that are keeping margins low, as well as the fact that Malaysia is relatively a small market compared to Indonesia and Vietnam and giants China and India.
Compounding this further is a fall in competitiveness brought about by a drop in productivity levels. Most also point to the lack of human capital and an undervalued currency as disincentives for the country not being able to move higher up the value chain especially in areas such as manufacturing, where competition from countries in the region as well as China and India is intense.
Japan External Trade Organisation (Jetro) Malaysia managing director Hiroki Takahashi tells StarBizweek that any drastic rise in investment in the manufacturing sector cannot be expected in the future.
He says Japanese investors (who historically together with the Americans were the largest investors in the export-oriented electrical and electronic segments) were now looking at larger markets such as China, India, Indonesia and Vietnam despite the inferior infrastructure in these countries and the unstable wage hikes.
“Malaysia should focus more on new areas of growth for investors especially in non-manufacturing areas such as banking and other financial services, distribution and retail,” Hiroki says.
But he says these areas are still protected and highly regulated. “Participation by foreign investors is not easy and while Malaysia aims to be a fully developed nation by 2020, the liberalisation and de-regularisation process looks to be slow and gradual,” Hiroki says.
Foreign investors also used to point to the New Economic Policy as an impediment but today, they are also concerned about mounting crime, corruption and transparency.
These issues are now being tackled via the Government Transformation Programme (GTP), which was launched by Prime Minister Datuk Seri Najib Tun Razak on Thursday.
Although not part of an economic model, elements of the GTP addresses the concerns not only of the Malaysian public but also of foreign investors. These include street crime and corruption, education and civil infrastructure as well as public transportation and Internet connectivity.
Templeton Asset Management Ltd executive chairman Dr Mark Mobius, in an email reply, says it is also important for the Government to institute a tax regime favourable to foreign investors.
“You must look at competing countries in the region and globally to arrive at an attractive tax structure,” he says. Currently, resident and non-resident companies in Malaysia pay a 25% tax rate.
For example, Singapore and Indonesia have slashed their corporate tax rates to 17% from 18% and 25% from 28% respectively. Mobius says the other major issues that may impede growth in FDI are education and political risk. He says there must be an expansion of education in technical skills in order for the economy to move up the value chain.
Mobius says of late, Malaysia has suffered a perception problem as foreign investors view with concern the religious problems in the country.
“It is very important for the Government to come out strongly against such actions and prosecute severely,” he adds.
American Malaysian Chamber of Commerce president Datuk Nicholas Zefferys says the country has generally been very low on the radar screen of investors.
As such, he says, the branding of Malaysia is critical to creating a positive awareness. “Some 10 years ago, I had asked a group of visiting international journalists what country they would compare Malaysia to before they came over. They said Iran or Iraq,” he says, adding that there is a general concern of extremism in the country.
Multidimensional issue
Zefferys, who is also a member of the National Economic Advisory Council, says attracting FDI is a “multidimensional issue”.
He cites several areas that are important to attract investors – rule of law, infrastructure, reliable energy sources, reform of labour laws and market liberalisation.
“Investors expect legitimate concerns brought to the courts will be heard and expeditiously resolved,” Zefferys says, adding that this was not the case in Malaysia until recently with the extraordinary efforts of Tun Zaki Azmi (Chief Justice of the Federal Court).
He says Zaki’s efforts have been fruitful with the reduction in case backlog, the introduction of a commercial court system, new standards of performance for judges and for the legal fraternity, a massive clean-up of the court administration and record-keeping system, introduction of court transcription systems and, the introduction of ICT applications.
“Investors expect a conducive infrastructure. Malaysia generally scores well in this regard but some fraying on the edges is appearing such as the lack of quality high speed broadband access as well as logistics and transport problems,” Zefferys says.
In addition, the country needs reliable energy sources and place greater emphasis on renewable energy such as making Malaysia a “solar valley”.
“Labour laws, some 20 of them going as far back as the early 1960s need to be rationalised and updated to match the needs of the modern world. Malaysia lags far behind on matters of labour compared to other countries,” Zefferys says.
Finally, like Jetro’s Hiroki, he believes that the economy is still too sheltered.
Zefferys says the Government’s sheltering of major local enterprises in the manufacturing and services sectors has resulted in the country falling behind in international standards and new technologies.
“Competition makes you stronger and forces you to raise the bar of performance. Protection does the opposite. More liberalisation is needed and when done so, the legislation need to be updated to allow it to be implemented,” he says.
Zefferys feels that the liberalisation of the 27 sub-sectors in the services sector (which was announced by Najib last year) is hampered by legislation that is required to enable it to be implemented.
He adds that the financial sector master plan has seen some liberalisation implemented but generally the intent of the plan in this direction has yet to be fully achieved.
“More efforts are required and expected as Bank Negara has been known to be one of the more effective regulators in Malaysia,” Zefferys says.
No comments:
Post a Comment