Are we keeping pace with FDIs?

FDI’s – Are we keeping pace?

Malaysia’s reliance on foreign direct investment (FDI) is well noted. Historically, it was FDIs that laid the backbone of the Malaysian economy – under British imperialism, plantation (rubber and palm oil) and mining (tin, petroleum) and after independence, the manufacturing sector (electrical and electronics).

FDI has played an important role in financing long-term economic growth in Malaysia. However, since the financial crisis of 1997/98, the changes in Malaysia’s FDI stock have been a cause for concern, especially when compared to its competitors.

The UN Conference on Trade and Development (Unctad) reports that global FDI stock has risen from US$551bil to US$12 trillion since 1980, with most of the FDI concentrated in developed countries. In 2006, 70% of FDI stock was located in developed countries while developing countries accounted for only 26%.

The lion’s share of the FDI stock in developing countries was in the East Asian economies. Together, they accounted for 38% of FDI to developing countries.

FDI stock in China increased from US$1.1bil in 1980 to US$293bil in 2006, with a significant jump recorded since the 1990s. If the FDI stock in Hong Kong, the gateway to China, was included, the performance would be all the more startling.

FDI stock in Hong Kong alone increased from US$21bil in 1980 to US$769bil in 2006. This is truly remarkable, as Hong Kong does not offer any incentives for FDI compared to other developing economies. India, another awakening giant, too has been recording tremendous growth in FDI stock. In 1980, FDI stock in India was only US$452mil. This grew to US$51bil in 2006.

In Asean, the star performers are Singapore and Vietnam. FDI stock in Singapore rose from US$5bil in 1980 to a staggering US$210bil in 2006. As for Vietnam, FDI stock increased from US$1bil in 1980 to US$33bil in 2006. This was remarkable considering that Vietnam was at war until 1975 and faced economic embargo from the US until 1994.

Malaysia started like Singapore with an FDI stock of US$5bil in 1980. In 2006, its FDI stock stood at only US$53bil, which paled in comparison with Singapore’s US$210bil. Furthermore, for the years 2001 to 2005, FDI stock fell lower than the US$53bil recorded in 2000. This is distressing as Malaysia has all the prerequisites as a favoured FDI destination and provides generous incentives to foreign investors.

There are several reasons why Malaysia is failing to attract and retain FDI in comparison to the frontrunners, especially Singapore and Hong Kong. The main problem has much to do with institutions.

In the World Bank’s Doing Business 2007 Report, which measured “the ease of doing business,” Singapore was at the top while Hong Kong ranked fifth. Malaysia was only ranked 25th. It takes 11 days to start a business in Singapore and Hong Kong and 30 days in Malaysia, while addressing licensing issues in Malaysia takes 281days compared to 129 in Singapore and 160 in Hong Kong.

The World Economic Forum’s Global Competitiveness Report and the IMD World Competitiveness Yearbook provide similar findings on institutional challenges in Malaysia.

Malaysia cannot emulate China, India, or Vietnam but should emulate Singapore and Hong Kong given similar socio-economic conditions. Lessons from Singapore and Hong Kong call for a return to meritocracy in the Malaysian civil service and an arm’s length relationship between politicians and civil servants.

This article was first published by the Malaysian Institute of Economic Research.