This article first appeared in Forum, The Edge Malaysia Weekly on February 28, 2022 - March 6, 2022

As a small, open and trading economy, Malaysia’s economic growth in the past four decades has been led by its vibrant export activities that have been supported by a strong foreign direct investment (FDI) presence. According to the Department of Statistics, FDI flows into Malaysia increased to RM9.1 billion in 1Q2021 from RM6.8 billion in 4Q2020. This observed increase is linked to the higher contribution of equity and investment funds into the services and manufacturing sectors in particular (DOSM, 2021). This positive growth signals the beginning of a steady recovery pathway for the Malaysian economy, supported by positive investor sentiment in a post-Covid era.

Mirroring the construct of our economy and its sectoral GDP contribution, the top destination for FDI inflow into Malaysia remains the services sector, accounting for almost 43% of total FDI inflow. The second most popular sector is the manufacturing sector, which makes up less than 43% of total FDI inflow. The third most popular sector for FDI inflow is the mining and quarrying sector. The top three major contributors of FDI flows in 2021 were Singapore, the UK and the Netherlands. This sharp increase in FDI inflow can be attributed to the relaxation of lockdown measures in the beginning of 2021. It was observed that there was a negative correlation between the introduction of lockdowns and quarterly GDP growth in Malaysia in 2020. When different types of lockdowns were implemented in different countries all around the world, activities related to global value chains (GVCs), trade and investments were impacted negatively, for both property, plant and equipment (PPE) and non-PPE products.

During the height of the pandemic and lockdowns, in 2Q2020, FDI inflows into Malaysia were focused on the mining and quarrying sector, with an aggregated investment of RM2 billion. Secondly, the FDI inflow was channelled into the services sector, mainly into the financial services sub-sector, amounting to RM0.8 billion. Unlike in the previous year, the manufacturing sector observed a significantly lower number of investments. In terms of FDI position, Singapore remains the largest investor into Malaysia, followed by Hong Kong and Japan. In aggregate, these countries make up about 45% of total FDIs in Malaysia (DOSM, 2020).

In terms of attractiveness, in the past five years at least, there was the sentiment that Malaysia’s competitive edge to attract FDIs had weakened. With the Covid-19 pandemic impacting businesses, workers and households in different degrees since its spread in 2020, the fear of losing foreign direct investors has resonated in many developing countries like Malaysia.

Overall FDI into Asean countries fell drastically in 2020. In Thailand, FDI contracted to –US$6 billion, driven by the divestment of Tesco (UK) to a Thai investor group for US$10 billion. In Myanmar, FDI dropped 34% to US$1.8 billion. Additionally, FDI in Cambodia stagnated at US$3.6 billion, with inflows in finance — which rose by 13% to US$1.4 billion — compensating for a 7% fall in manufacturing, primarily in the garment industry (traditionally the largest recipient in manufacturing) and investment declines in industries such as hospitality and real estate. In contrast, in the Lao People’s Democratic Republic, FDI rose to US$968 million, driven by investments in hydropower. International project finance deals in that country nearly quadrupled in 2020. However, in Malaysia, FDI fell by 55% to US$3 billion, making the country the region’s worst performer. This news caused fresh concerns over Malaysia’s ability to remain attractive to foreign investors (UNCTAD, 2021).

There are several determinants that influence Malaysia’s attractiveness as a destination country for investors in the medium to long term. The first factor to consider is market size. Malaysia is a relatively small market compared with our neighbouring countries like Indonesia or Thailand, or Vietnam. For an investor, the bigger the market, the more attractive the country is. This is why the original Trans-Pacific Partnership and Regional Comprehensive Economic Partnership countries, like the US and India, were particularly attractive for other member countries.

The second factor to examine is stability. Stability here encompasses social, political, economic and environmental factors. There is strong evidence that suggest when the country is politically stable, FDIs will increase. Political stability is an important determinant of high FDI inflows. FDI is a long-term investment activity and every type of threat discourages FDI inflows. Multinational corporations avoid FDI in cases of political instability due to high risk, and switch to risk-free countries. For any developing country, FDI inflow is an integral part of development and growth. Without FDIs, transfer of technology and know-how will not be able to happen organically between international and local firms.

The third factor to consider is the ease of doing business index. Although Malaysia’s ranking has improved in terms of policies introduced, there are still reports of unclear guidelines, lack of one-stop centres for investors, overcrowding of different sectors by state-owned enterprises and difficulties in hiring workers by both local and international firms.

The fourth factor to pay attention to is externalities. Given the onset of the pandemic coupled with the weakening of global trade and rising trade tensions in the past few years, FDI inflows into many countries have weakened considerably. To manage externalities, clear policies that are highlighted and communicated well by the government may provide a certain degree of clarity and stability to investors and industries. This factor is closely linked to the stability factor.

To make sure that Malaysia is ready to attract the best partners into the country as investors, we need to enhance and build timely connectivity and non-connectivity infrastructures, and ensure that skilled workers are in abundance in the country. Apart from examining the best practices from the region and the world, we will definitely need to upgrade and strengthen our one-stop centres to eliminate red tape in various business and investment processes.

Dr Juita Mohamad is director of the economics and business unit and acting director of research at the Institute for Democracy and Economic Affairs (IDEAS)

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