Lee calls for an investment facilitation mechanism whereby the relevant ministries and government agencies are coordinated.
PETALING JAYA: Over-reliance on foreign investments, especially those from footloose industries, can backfire on Malaysia as more emerging economies are joining the fray to attract multinational corporations (MNCs).
A total of 78% approved investments in the Malaysian manufacturing sector came from foreign sources last year. In 2021, the share was higher at 92%.
With Malaysia facing increased competition from countries like Indonesia and Thailand, especially terms of hosting Tesla’s first manufacturing hub in South-East Asia, the government needs to diversify its investment sources.
This includes encouraging more Malaysia-based businesses to invest domestically.
Considering that Malaysia’s direct investment abroad registered a net outflow of RM58.6bil in 2022, the domestic companies do have strong financial means to invest in the country.
However, economist Geoffrey Williams said the overall investment ecosystem in Malaysia is not positive for companies and cited government-linked companies (GLCs) as the entities crowding out private investments.
According to Williams, access to capital is still restricted in the country.
“Many are cautious even of soft loans or development finance for fear of a default or takeover,” he told StarBiz.
In recent years, MNCs have been actively repositioning their business presence in global markets in search of lower taxes, cheaper cost of production and growth opportunities.
Companies were diversifying out of China – dubbed as the world’s factory –with the “China Plus One” strategy.
Apple Inc, for example, began manufacturing iPhone in India in 2017 and is reportedly looking to expand its operations in the world’s most populous country.
With foreign investments becoming more fluid, it is necessary for Malaysia to strengthen its domestic direct investments (DDIs), especially with economic weakness over the horizon.
Domestic investments used to grow strongly in the 80s up until the 1997 Asian Financial Crisis.
Datuk Seri Anwar Ibrahim understands the situation well. After the second National Investment Council meeting recently, the Prime Minister announced that DDIs would be one of the country’s key performance indicators, moving forward. He also said that efforts to increase DDIs would be more comprehensive.
DDIs refer to investments made by Malaysian-based companies in the country.
A direct investor is an individual or company that owns at least 10% of equity capital of an enterprise in Malaysia.
Anwar said strategic DDI investments have the potential to attract more foreign direct investment (FDI), pointing out that foreign investors always consider DDIs as a benchmark of confidence towards the government’s policies.
In 2022, DDIs contributed about 38.9% or RM104.4bil of total approved investments into Malaysia. In the first quarter of 2023, the share of DDIs increased to 47.5% of total committed investments worth RM71.4bil.
Williams pointed out that the government should focus on promoting domestic investments.
He added that the government should address issues that are holding back local companies.
“Besides large local firms, it must also identify why small and medium enterprises (SMEs) do not invest and scale up,” he said.
Williams suggested that efforts to spur DDIs be driven by the development financial institutions (DFIs) and development corporations, and not only government-linked investment companies (GLICs).
Examples of the DFIs in Malaysia are SME Bank Bhd and Bank Pembangunan Malaysia Bhd.
The development corporations include Halal Development Corp Bhd, Malaysia Debt Ventures Bhd and Malaysian Technology Development Corp.
Investment, Trade and Industry minister Tengku Datuk Seri Zafrul Abdul Aziz had announced that GLICs would focus on DDIs and “institutionalise the process”.
Williams said many GLICs, apart from the Employees Provident Fund, are “too small” to change their strategies meaningfully and some are underperforming.
“So they should be combined into a Malaysian superfund to promote DDIs and use the proceeds for social protection.
“The DFIs should also be restructured as was proposed by the previous Finance Minister Lim Guan Eng. This will provide better focus for the DDI initiatives.
“DDI is a structural issue and should be placed in the Economy Ministry to allow the Investment, Trade and Industry Ministry to focus on trade and FDI,” said Williams.
Meanwhile, Socio Economic Research Centre executive director Lee Heng Guie said domestic industries are the backbone of the country’s investment and industrial development.
“They are deep-rooted in Malaysia and here to stay, and hence, should be given further investment facilitation at the federal, state and local authorities in a coordinated manner.
“Time is of the essence for investors to secure a quick approval of their investment applications and the resolve of matters, including operational issues relating to doing business,” he said.
Lee called for an investment facilitation mechanism whereby the relevant ministries and government agencies are coordinated. This will help to shorten and simplify administrative procedures, thereby removing bottlenecks faced by both the local and foreign investors in establishing and running their businesses.
“The government has to bolster the collaboration between the federal government, state government and local authorities to facilitate investment.
“We support the efforts by the Investment, Trade and Industry Ministry to streamline the 31 investment promotion agencies, with Malaysian Investment Development Authority leading the way,” he said.
Malaysia needs to diversify the sources of FDIs to minimise concentration risk, according to Lee.
It is noteworthy that in 2022, 66% of total net FDI flows into Malaysia were contributed by the United States and Singapore.
In the past 18 months, US companies have pledged to invest RM100bil in Malaysia, moving forward.
Nevertheless, Lee pointed out that domestic and foreign investments can have strong complementary or substitution interactions among them.
“Backed by a pool of capable domestic businesses and SMEs in the home market, foreign multinational corporations would be keen to expand existing operations and set up new plants.
“They would want to be in an environment that supports their operations, especially if our domestic players are capable of integrating with high-value added global supply chains,” Lee added.
Looking ahead, Williams urged the government to “free up market space” by addressing preferential treatment of GLCs that has been damaging for private companies.This has to be done if the government is serious about strengthening DDIs in Malaysia.
“The government must also push for the liberalisation of markets and access to finance.
“Too many government schemes are in place and these actually limit market drivers rather than promoting market-driven investments.
“Above all, investments must be market-driven and not driven by government planning.
“Otherwise we get ‘boys-toys, sunshine and windmills’ strategies by policy designers who have never been involved in industrial investments and are following fictional narratives rather than reality,” he said.
