The competitiveness of Malaysia in attracting Foreign Direct Investment

1.1 Abstraction

This study investigates the fight of Malaysia in pulling Foreign Direct Investment ( FDI ) . More specifically the survey investigates the relationship of FDI with Malaysia ‘s economic system, analyzes the grounds that affected the FDI into Malaysia, and evaluates each possible ground with relevant supportive informations. The survey will further measure the effectivity of authorities policies in pulling FDI into Malaysia.

1.2 Malaysia and the FDI

Malaysia has a policy of assorted economic system whereby the states attract FDI into the state to drive its economic system and to guarantee growing. Most of the empirical surveies on the map of FDI in states suggest that FDI is an of import beginning of capital, complements domestic private investing, sweetening of engineering transportation, and increase overall economic growing in states where higher economic growing will making sound investing environment which attracts investing from market-seeking houses ( Karimi et al. , 2009 ) . Harmonizing to Krugman and Obstfeld ( 1994 ) FDI maps as one manner to bridge an inter-temporal spread of capital demand and supply, and like other capital influxs, increase the production frontier of developing states, which usually suffer a deficit of capital. FDI besides lead to increase the employment rate through the enlargement of the economic system and occupation creative activity. Insufficient financess for investing are the chief ground to seek FDI and usually, less-developed states deficiency of fund for investing ( Har, Teo, & A ; Yee, 2008 ) . Therefore by holding the FDI, it can assist them to develop their states and better their criterion of life by making more domestic employment and increase the economic system.

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Besides FDI making more occupation chances, influx of FDI has been an of import beginning of cognition transportation in engineering, direction accomplishments and international linkages for Indonesia, Malaysia, and Philippines and Thailand ( Yussof & A ; Ismail, 2002 ) . FDI is considered to be an of import vehicle for transportation of new engineering which contributes to growing more than domestic investing ( Borensztein et al. , 1998 ) . FDI provides the fastest and most effectual manner to deploy new engineerings in developing host states, through the procedure of engineering transportation, the foreign multinationals besides contributed to the development of the proficient capablenesss of the locals ( UNCTAD, 2000 ) . Furthermore, through preparation of employees and hands-on acquisition, FDI can raise the accomplishments of local work force and as a consequence, increasing their productiveness degree ( Marial & A ; Ngie, 2009 ) . Furthermore, FDI ‘s function is to fuel exports growing whereby the production of merchandises and services are to provide both domestic and international markets.

The authorities ‘s attempt by presenting more broad inducements including leting a larger per centum of foreign equity ownership in endeavor under the Promotion of Investment Act ( PIA ) 1986 and followed by the constitution of Free Trade Zones ( FTZs ) during the Second Malaysia Plan ( 1971-1975 ) in order to pull a larger influx of FDI. Since so, Malaysia has attracted a big part of the investing dollar that flowed into Asia. Between 1986 and 1996, it resulted to a big influx of FDI at an one-year mean rate of 38.7 % after 1987. In 1995 for case, Malaysia was the 2nd largest FDI receiver among Asiatic economic systems with US $ 5.8 billion ( UNCTAD, 1996 ) .

FDI Inflows to Malaysia, ( in million dollars ) 1990-2009

The figure above shows the tendency of FDI influx to Malaysia. Malaysia has received a batch of FDI since the 1990s and FDI has become an of import subscriber to the growing and the transmutation of Malaysia ‘s economic system whereby FDI could make occupation chances for the states ‘ citizens. The FDI flow in Malaysia is inconsistent and fluctuates indiscriminately. For the record, Malaysia has recorded RM 152 billion in net FDI influxs during the period 2000-2009 higher than RM 134 billion from 1990-1999. But really Malaysia ‘s public presentation starts to turn up imposingly by 1990s compared with the old ages before 1990s and it show that may be the investor assurance had improved. However, the lowest figures of FDI influxs recorded in 2001 were due to the planetary tendency and followed by the prostration of engineering bubble ( The star newspaper, 25 March 2010 ) . As for 2009, the FDI influx into the Malaysia had drastically dropped 81 % to US $ 1.4bil from US $ 7.3bil in 2008, which reported by the World Investment Report ( WIR ) . Harmonizing to the main economic expert of RAM Holdings Bhd Dr Yeah Kim Leng, the ground why the FDI have contracted aggressively due to miss of assurance as the consequence of the planetary fiscal crisis in 2008 and 2009 ( The star newspaper, 13 March 2010 ) . InA 2007, FDI inflows peaked, when it making US $ 1.8 trillion, up 30 % from 2006, conveying the world-wide stock of FDI to US $ 15 trillion.

FDI is an of import subscriber to the growing and the transmutation of Malaysia ‘s economic system, peculiarly in set uping new industries, heightening production capacity, employment, trade and technological capableness. Malaysia has attracted a steady influx of net FDI in the recent decennary, averaging 3 % of GDP per annum with a extremum of 4.5 % of GDP in 2007 ( Har, et. al. , 2008 ) . However, comparatively lower FDI influxs were recorded in 2001 and 2009, similar to the planetary tendency, following the prostration of the engineering bubble and the planetary fiscal crisis severally.

Harmonizing to the World Investment Report 2010, Malaysia ‘s FDI was dropped more than 81 per centum in 2009 on Year-on-Year basic, from US $ 7.32 billion in 2008 to US $ 1.38 billion in 2009. The FDI influx into Malaysia of the full twelvemonth of 2009 was even less than half of the one-year mean entire FDI influx between the old ages of 1995 to 2005, which included the long recovery period after the 1997 Asia Economic Crisis. Besides, Malaysia ‘s FDI influx in 2009 was besides lower than Singapore, Thailand, Indonesia, Vietnam, and the Philippines. This is the really first clip in the history where the Philippines ‘s FDI sum is more than Malaysia ‘s FDI.

Foreign Direct Investment ( FDI ) flow in RM billion

( Beginning: World Investment Report 2010 United Nations )


( one-year norm )





















Dutch east indies









South East Asia


















1.3 Malaysia Economy Background

Malaysia was a strong performing artist in economic growing within the South-East Asia part in the early and mid-1990s. However, the state ‘s economic system was hit hard during Asia Economic Crisis, which began in July 1997 started from Thailand. The crisis caused Malaysia economic system contracted by 7.4 per centum, and the Ringgit slipped by more than 40 per centum until the state decided to implement currency and capital control, every bit good as pegged it currency- RM3.80 to USD1. However, the economic system was able to retrieve strongly, peculiarly in 1999 and 2000, as the consequence of increased authorities disbursement and extremely increased export sector. Malaysia had successfully to register averaged one-year GDP growing rate at 5.9 per centum since 2001. The state economic growing are transforming from depending on authorities disbursement and exports to go more goaded by private ingestion and investing, peculiarly in the services sector.

Malaysia had taken the enterprises to retrace it economic system, particularly fiscal sector since 1997 Asia Financial Crisis. This enabled Malaysia ‘s economic system did non hurt severely by the planetary fiscal crisis which began on November 2008 in US. However, the state ‘s economic system is confronting several jobs internally and externally. These include of possible diminishing exports demand, higher trade good monetary values ( due to Quantitative Easing ( QE ) Policy- worldwide, and Quantitative Easing 2 ( QE2 ) – United states ) , lower fight in pulling FDI influxs, and challenges in deriving the high income state position.

Malaysia ‘s authorities had introduced 5 economic parts within the state ( Iskandar Malaysia ( Iskandar ) , North Corridor Economic Region ( NCER ) , East Coast Economic Region ( ECER ) , Sabah Development Corridor ( SDC ) , and Sarawak Corridor of Renewal Energy ( SCORE ) ) within the twelvemonth of 2008. Besides, the Malaysian ‘s authorities has promised to perpetrate to an unfastened economic system, increase the state ‘s fight and advance more freedom for foreign investors to the state. However, the introduced of 5 economic parts and the promises given by the Malaysian ‘s authorities did non responded positively by foreign investors, as the FDI influx into Malaysia was dropped shapely in the twelvemonth of 2009.

Malaya aims to go a developed state in 2020, yet the state need to turn at least 7 per centum yearly for the 10 old ages to come. Malaysia have been focused in several sectors in 9th Malaysia Plan and 3rd Industrial Master Plan, which includes of Islamic Finance, IT & A ; ICT, Education, Tourism, Biotechnology, and Multimedia. However, the tenth Malaysia Plan and the Malaysia Budget 2011 are both focused on the design on turn toing income distribution, retaining affirmatory action policies for native Malays, while developing and bettering the agribusiness and societal services sectors.

1.4 Malaysia Country ‘s Facilities

Harmonizing to World Investment Report 2008, MNCs frequently invest in states with good established web of transit and communicating installations. Malaysia is ready to carry through the demands of logistic and communicating within the state ‘s boundary, particularly in the Peninsular of Malaysia. PLUS-highways and KTM railroads are both associating the major towns in peninsular. Malaysia is celebrated with cheaper ports services than Singapore provided in southern Johor, every bit good as in Klang. Besides, the taking budget airlines- Air Asia, which selected Malaysia as the hub of it networks besides increased the fight of Malaysia in term of transit. As for communicating, Malaysia is traveling toward to implement National Broadband Initiative ( NBI ) , other than the MSC undertakings. Harmonizing to SKMM ( Malaysia Multimedia and Communication Commission ) , 95 % of peninsular lands and 55 % of East Malaysia countries are covered by fixed line broadband. Besides, there are with 29.6 Million cellular subscription ( Q3,2009 ) , with 95 % of country coverage in Peninsular and 77 % of country coverage in East Malaysia.

1.5 FDI. Why and How?

FDI in general can assist to make occupations chance and cut down the poorness rate in a underdeveloped state. There are many ways in which FDI can assist to heighten a state ‘s fabrication and export fight. In order to pull export oriented FDI and to guarantee that such investing translates into development additions, a state needs to happen the most effectual ways to do the pick of locations every bit good as the mark sections, conducive to the sort of export activities the MNCs purpose to further.

One of the biggest tools for economic integrating is FDI. FDI moves towards low engineering production and labour intensifier in developing states, but they flows in high engineering production towards developed provinces. FDI normally depend on different positions of investings such as the sector of investing whether it ‘s fabrication or services, the size of transnational investor or company. When the houses, which relocate merely a portion of its production ‘s procedure, but non the whole production ‘s line, so there is with possibilities for more FDI influxs in future, as the houses might continuously to relocate other production ‘s procedure. Natural resources, specific accomplishments, cheap labor and substructure will normally be the incentive to the foreign investors to relocate their production ‘s line. On the other manus, the investors will put to a great extent in an advantaged location to increase their competitory advantages.

In today ‘s quickly globalizing universe, successful exporting needs non merely competitory merchandises, but besides selling expertness and entree to international markets. Giving greater entree to FDI can supply major benefit in this regard particularly in markets in which established trade name names and big distribution webs are of import assets. FDI can besides be effectual agencies of supplying resources, such as accomplishments, preparation, engineering, capital goods and intermediate input needed to work a state ‘s bing comparative advantages.

As for developing states, FDI play a major function in the fabrication sector for exports. This contributes to direct and indirect impacts to the domestic companies, in which direct impacts occur when FDI set up backward linkages with domestic companies. The indirect impacts occur when the domestic companies are able to copy the operations and the direction ‘s manners from the foreign companies, chance to enroll skilled employees of foreign companies, and taking advantages from decreases in trade barriers, every bit good as the betterments in local substructure.

FDI is the vehicle by which houses achieve their strategic aims. A company must posses some plus such as merchandise and procedure engineering or direction and selling accomplishments that can be used beneficially in the foreign affiliate in order to put in production in foreign markets. Harmonizing to Kindle Berger ( 1969 ) , “ For direct investing to boom there must be some imperfectness in markets for goods or factors, including among the latter engineering. Or some intervention in competition by authorities or by houses, which separates markets ” . The industrialised states have remained the major subscriber every bit good as the major receiver of FDI though FDI flows to the developing universe have more than doubled between 1990 and 1999.


2.1 The FDI

FDI is by and large defined as ownership of a state ‘s concern or belongingss by entities non domiciled at that place ( ) . In this twentieth century, the improved engineerings and amalgamate economic systems make a greater mobility of peoples, goods, capital and thoughts from one state to another state. Such exchange of goods, services, cognition and civilizations between states brings us to a universe without boundaries and it is popularly known as globalisation ( Global Education ) . As the inclination of universe towards globalisation, FDI plays an extraordinary and turning function in planetary concern ( Graham & A ; Spaulding, 2005 ) . In footings of FDI, the host state is the state which receives the investing from the beginning state or place state, which is besides known as the foreign investor. The influxs of FDI into a host state can drive to a important development of economic system by supplying an external beginning of capital, new engineerings, direction accomplishments, and procedure.

Harmonizing to Graham & A ; Spaulding, FDI is classically defined as a company from one state doing a physical investing into constructing a mill in another state. A direct investing is about puting in edifices, machinery, and equipment while indirect investing is refer to set abouting a portfolio investing. In current twelvemonth, the definition of FDI has been expansive to include the acquisition of enduring direction involvement in a company outside the investing house ‘s place state, puting in a joint venture, or building of installation, or conference with a local house with the following input of engineering and licensing of rational belongings ( Graham & A ; Spaulding, 2005 ) . Besides, the signifier of FDI has much different from the base on balls in footings of the size, range and methods of execute due to the enlargement in engineerings, alterations in market ‘s capital construction every bit good as the bit by bit embroidering liberalisation of national investing regulative model.

The expanding of FDI in current twelvemonth proposed different position point to different people. Disciples of FDI indicate that the exchange of investing flows net incomes both the host state and the place state while oppositions hold that transnational coaction are able to exercise greater power over smaller economic systems and would take to larger local competition ( Graham & A ; Spaulding,2005 ) . Since the flows of investing in a state ‘s economic systems does brings about great impact, most authoritiess, particularly for those in industrialised and developed states truly put much attending to FDI. In the United States, the Bureau of Economic Analysis, a subdivision of the U.S. Department of Commerce, is responsible for roll uping economic informations about the economic system including information about FDI flows ( Graham & A ; Spaulding, 2005 ) . By traveling through this information, the influence of such investing on the overall economic system can be determined and the impact on industry sections will be assessable.

The FDI embodies two typical assets: foremost, capital and 2nd, engineering or a figure of intangible advantages. So, FDI is more likely to be of import in industries with important firm-specific, intangible, knowledge-based assets. FDI contributes most to the development procedure when affiliate is entirely owned and to the full integrated into the planetary operations of the parent company. Once the parent investors commit themselves to integrate the end product from host state into a larger scheme to run into planetary or regional competition-there is grounds of a dynamic “ integrating consequence ” , which creates advanced and originative engineering and techniques, every bit good as closer placement along the top of the best direction practises and highest industry standards.A

2.2 The benefits of FDI

In general, FDI will better fight and create employment, every bit good as increase the development of the host state. This is a consequence of inward investing increasing the figure of entrants in the autochthonal industry which forces all rival houses in the industry to go more competitory by cut downing costs and bettering efficiency and quality. In the analysis of Bosworth and Collins ( 1999 ) found that about half of each dollar of capital influx can change over into an addition in the domestic investing. The consequence of the analysis show that the transferring of foreign resources equal to 53-69 per centum of the influx of fiscal capital. The remainder are transferred to militias accretion or capital influxs.

In add-on to the part of joint ventures, foreign houses can function as a accelerator for other domestic exporters.In an empirical analysis, the chance of domestic mills will be exported is considered to be actively associated with the nearby transnational companies ( Aitken et al. 1997 ) . One deduction is that the authorities may promote possible exporters to be near to each other, making export processing zones, duty-free import of inputs given as to fund substructure, particular offers or tax-free to assist cut down the cost of domestic endeavors to foreign states to interrupt the market. Export treating zone is a utile broad-based reform, but may present spacial deformations, the authorities in the incorrect topographic point to happen the country. Much FDI activity is achieved by manner of a joint venture between a foreign company and an autochthonal company and this may convey advantages such as hazard variegation, capital demand decreases and lower start-up costs.

Besides, foreign houses will convey in superior engineering and enable free spreads of engineering to the bing house for extent of benefit to the host states. FDI will attest itself in the creative activity of spill over and linkages – typically in providers and clients – whereas the dynamic impact will impact the competitory environment. In dependence, both disciples and oppositions back up their several position point sing to the deduction and consequence of turning in FDI. Disciples stand the point that exchange of investing flows benefits both the host state and the place state ( Graham & A ; Spaulding, 2005 ) . This enable the common benefit between both states where the endeavor in host state supplying the new engineerings, capital, direction accomplishments, and installations as needed by the place state while the place state investor invest money in the host state to accomplish their common end, doing net income from their coaction. In malice of the position mentioned above, some proposed that FDI helps in economic development of the peculiar state where the investing is being made and particularly applicable for the economically underdeveloped states ( EconomyWatch ) . Supporters vouching for FDI say that it is stable and is a beginning of advanced engineering and better managerial patterns, so it is good for developing economic systems ( Peter Nunnenkamp, 2002 ) . Optimism about the effects of foreign investing, coupled with heighted consciousness about the importance of new engineerings for economic growing, has contributed to wide-reaching alterations in national policies on FDI and it helps speed up the procedure of economic development in host state ( Gordan H. Hanson, 2001 ) . For most states that were developing organize the economic position, FDI is sing as one of the major foreign beginning of funding during 90s. Besides, there is an observation shows that FDI has played an of import function in assisting several states when they were confronted by economic troubles. For illustration, during the fiscal jobs of 1997-1998 that the sum of FDI made in states in East Asiatic part was reasonably steady and similar observation has been made in the 1980s and in Mexico in 1994-1995 ( Economy Watch ) .

The presence of foreign corporate in a host developing economic system produces a positive outwardness that is the transportation of engineerings. As a research for engineering transportation, there are four correlative channels which are perpendicular linkages with providers and buyers in the host states, horizontal linkages with viing or complementary companies in the same industries, migration of skilled labours, and the internationalisation of R & A ; D ( OECD, 2002 ) . With the presence of Multinational Enterprise ( MNE ) , the engineering transportations have been demonstrated that bing peculiarly through perpendicular linkages nevertheless the weighty of horizontal linkages is still the topic to argue ( OECD, 2002 ) . Furthermore, engineering transportation can merely be accomplished through FDI since trading of goods and services and investing in fiscal beginning are unable to carry through this end.

The states that get FDI from another state can develop the human capital resources by acquiring their employees to have preparation on the operations of a peculiar concern ( Economy Watch ) . Harmonizing to the overview of OECD, this human capital sweetening is non merely happening through the attempts of MNE whereas it arises from authorities policies seeking to pull FDI via sweetening of human capital ( OECD, 2002 ) . Besides the effects of MNE in human capital development, the other endeavor which has a direct concern relationship with MNE such as their provider may besides bring forth positive influences on the human resource quality. This consequence can hold a farther motion which labour move to another house or go enterprisers. In add-on, it is possible for the host state to have corporate revenue enhancements grosss when there is any net income generated by the FDI in that state.

2.3 The Factors that impacting FDI

FDI motion is fundamentally derived from fiscal minutess and non-transaction factors such as monetary value alterations, foreign exchanges and other alterations during the mention period. In other words, the motion is derived from the differences between the shutting and opening places of the twelvemonth.

There are three factors that make Malaysia attractive to FDI, which have been identified are: ( 1 ) Malaysia ‘s undervalue currency ; ( 2 ) lower cost of labor ; and ( 3 ) reasonably low involvement rate ( Oti-Prempeh,2003 ) .

By and large, houses are ever looking that abroad enlargement as a necessary manner to make a more effectual entree in the markets which have low representation. Investings frequently lead to increased trade flows bespeaking that trade flows and investings are complementary ( Tyler and Miranda, 2007 ) . A set of part determiner is chosen from the literature on the location of US service industries to province the form of the Foreign Service houses FDI activity in the US. These determiners are the portion of metropolitan population, the agglomeration of domestic manufacturer services, the value of commercial and industrial belongings and population growing.

About their survey in the location of FDI and province features within the US, Coughlin et Al. ( 1991 ) assumed that a foreign house company will take to put in a particular province depends on the degrees of its features that influence net incomes relative to the degrees of these features in the other provinces.

Besides that, Qian Sun et Al. ( 2002 ) find cogent evidence that the value of the FDI determiners flows through the clip period. Facility and labour quality are besides of import determiners of the distribution of FDI. The good substructure and labour quality will pull the attending of the foreign investors. Besides, the political stableness and openness of that state to the foreign universe are besides as the of import dimension to pulling in the foreign capital.

Inward investing is likely to excite the production of planetary rivals in the recipient state. Market size and growing, barriers to merchandise, rewards, production, transit and other costs, political stableness, psychic distance and host authorities ‘s trade and revenue enhancement ordinances, public presentation demands, cultural distance, GDP per capita and substructure are factors impacting FDI location. While economic growing and engineering transportation to the host state are of import effects of FDI, development of technological substructure and human capital are critical requirements and so ancestors for FDI.

Furthermore, while psychic distance has been pertinent so far in FDI determinations, its importance might bit by bit cut down with increasing globalisation and development of new digital economic system. “ Institutional and strategic factors into theory. . . demand to be considered in tandem to explicate the alteration in tendency of FDI flows ” ( Sethi et al,2002 ) , .

The influx of FDI includes a rise in the production base, the debut of new accomplishments and engineerings and the creative activity of employment. Foreign investors increase productiveness in host states and FDI is frequently a accelerator for domestic investing and technological advancement. Increased competition associated with the entry of an MNE upgrades the competency and merchandise quality in national companies, and opens up possibilities for export ( Ahn and Hemmings, 2000 ) .

2.4 Globalisation and the FDI

Since the early 1960s a big figure of theories on FDI have emerged. This proliferation was to a big extent, due to Hymer 1976, and the subsequent acknowledgment that FDI is a manifestation of market imperfectness and house particular advantages. This is the inexplicit and expressed premise in most modern theories. The multiplicity of factors involved in production, combined with barriers to the free motion of goods and services, together with the differences in production environment, are besides been an increasing figure of surveies sing other manners of foreign investing ( FI ) . These new signifiers of FI activities – such as articulation venture, licensing, franchising, etc seem to hold taken on an progressively of import function in recent old ages everyplace, including developing states ( Oman, 1984 ) .

There is increasing understand that trade and FDI are the vehicle that moves globalisation. The nature and measure of determiners and factors that determine FDI inflows into a state depend mostly on the barriers-to-trade. In order to promote globalisation, all states must seek to extinguish the barriers-to-trade and supply chances for pulling FDI inflows into the state. As the race for FDI influxs among the states intensifies, the conditions for pulling FDI influxs continue to increase and multiply every bit good.


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