According to the United Nations Conference on Trade and Development’s latest world investment report, the global economic downturn had curtailed funding for FDI leading to less merger and acquistion activities which accounted for most of the decline in world FDI numbers in 2009.
During the year, global FDI inflows fell 37.3% to US$1.11 trillion (RM3.52 trillion) from US$1.77 trillion in the previous year while outflows declined 43% to US$1.1 trillion from US$1.93 trillion.
Malaysia was not spared. In 2009, FDI inflows in Malaysia fell 81.1% to US$1.38 billion from US$7.32 billion in 2008 while outflows fell 46.4% to US$8.04 billion from US$14.99 billion.
Updates by the International Trade and Industry Ministry show that FDI inflows amounted to RM5.06 billion in the first quarter of 2010.
Economists said the lower FDI for Malaysia in 2009 stemmed from external and domestic factors. Malaysia has to compete with major regional emerging economies such as China and India for overseas funds, and at the same time, contend with domestic constraints and structural weaknesses.
These weaknesses include a scarcity of skilled workers, inadequate public delivery system and high cost of doing business. There is also a perceived policy risk and low competitiveness relative to other countries.
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A higher outflow of capital makes Malaysia a net exporter of capital. It is worth noting that although FDI also fell in other regional countries, the decline rate was not as steep as Malaysia’s, stirring concern over loss of competitive edge in wooing foreign investors.
Against that backdrop, one may ask what are the pros and cons of being a net exporter of capital?
“Malaysia’s change in status as a net exporter of capital is not necessarily a bad thing. The net outflow of capital from Malaysia is the counterpart of the current account surplus which went to finance deficits in the rest of the world.
“But it is worth noting that there is no one-to-one relationship between the size of the current account surplus and capital outflows,” Lee said.
The trend of capital flows in Malaysia has generated several concerns. Lee said these included the view that capital outflow from Malaysia indicated a loss in domestic investors’ confidence in the country.
Other concerns include the possibility that less FDI would dampen the country’s potential output given falling private investment.
According to Lee, the rise in direct investment abroad by Malaysian firms reflected these companies’ ability to achieve greater economies of scale by entering into new and larger markets.
He said benefits from Malaysian companies’ investments abroad were not limited to their growth performance alone because the capital outlay also transalated into repatriation of profits and dividends for stakeholders, more job opportunities, higher wages and knowledge transfer in the country.
On the contention that outward investments by Malaysian companies drained capital which would otherwise be invested at home, Lee believed this was overstated as the research house saw complementary rather than zero-sum dynamics in multinational companies’ strategy.
Lee’s point is based on the fact that outward investments form an integral part of multinational companies’ strategy to maximise competitiveness of the whole company, a goal for which the headquarters would raise the needed amount of capital from sources around the globe.
Nonetheless, he said: “Malaysia must act now to address the shrinking inflow of FDI before its position as an investment destination deteriorates further.
“The government must remove all costly barriers including the perceived policy risk to give foreign investors compelling reasons to put their money into the country and create high-value-added production and high-wage jobs.
“Malaysia still lags behind in ‘ease of doing business’, which has the unintended effect of favouring existing businesses and hampering competition,” Lee said.
FDI crucial to drive private investment
According to RHB Research Institute economist Peck Boon Soon, although the share of FDI in private investment is usually smaller than the local portion, foreign money is deemed crucial in driving Malaysia’s private investment.
Besides new technology, ideas and innovative processes of doing business, he believed FDI also served as a catalyst to spur investment activities due to its spin-off effect.
This is by virtue of capital outlay by domestic private investors in supporting activities catering to the needs of foreign investors in areas like electronic packaging and testing, transportation, banking, telecommunications and utilities.
“It could also result in outsourcing activities and flourishing of outsourcing industries. All these will lead to creation of jobs and increase in income levels and encourage consumer spending.
Malaysia needs FDI to drive private investment,” Peck said.
CIMB’s Lee said the changing investment trend by global multinational firms would add a new dimension to Malaysia’s capital flows, both as a recipient of FDI and as a net capital exporter. However, he said it was not easy to predict capital flows given the dynamic macro and micro factors at play.
“We remain cautious about the investment prospects for this year given the still uneven global recovery and the continued deleveraging in major developed economies,” Lee said.
CIMB’s estimates indicate that Malaysia’s FDI would more than double to between RM12 billion and RM14 billion this year, compared with RM5 billion in 2009. Private investment is expected to grow 6% this year after tumbling 17.2% in 2009, according to CIMB.
Going forward, the spotlight will fall on Malaysian policymakers as global investors assess the attractiveness of the country as a destination for foreign capital.
Economists believe further investment liberalisation, facilitation and promotion are crucial factors to help Malaysia regain its competitive edge in attracting domestic and foreign investments.
Will lawmakers be prepared for a paradigm shift?
by Chong Jin Hun
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