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Choosing between Domestic and Foreign Investment

Choosing between Domestic and Foreign Investment

10 Feb 2021

By : Lee Heng Guie

Malaysia’s private investment growth rate and share of GDP has been decelerating in recent years. Weighed down by external and domestic factors, private investment momentum had moderated from 12.1% pa in 2011-2015 to 4.8% pa in 2016-2019. Among these are an uneven state of global economic conditions post 2008-09 Global Financial Crisis; weakening domestic economic growth; weak investment climate, including high regulatory and compliance costs; lingering uncertainty about policy transition as well as political instability. In the first nine months of 2020, private investment declined by 13.2% yoy as the COVID-19 pandemic-induced recession and extremely weak sentiments have caused businesses and companies to slash capital spending.

The Malaysian Investment Development Authority’s approved domestic direct investment (DDI) had declined by 6.4% pa from RM175.1 billion in 2014 to RM125.5 billion in 2019 while approved FDI increased by 5.0% pa from RM64.6 billion in 2014 to RM82.4 billion in 2019. In Jan-Sept 2020, approved DDI contracted by 21.6% to RM67.2 billion to make up 61.2% of total approvals while approved FDI went down by 34.9% to RM42.6 billion. For the period 2010-2019, DDI had accounted for a higher share of total approvals, averaging 69% amid a declining share in recent years. FDI share of total approved investment was averaging 31% pa for the same period.

Actual FDI inflows into Malaysia had declined by 5.3% pa in 2016-19 from an average growth of +6.2% pa in 2011-15. In the first nine-months of 2021, FDI inflows contracted sharply by 70.5%, which collaborated with the United Nations Conference on Trade and Development (UNCTAD) Investment Trends Monitor, which estimated Malaysia’s FDI down by 68% in 2020 and amounting to just US$2.5 billion (RM10.1 billion), compared to the ASEAN region that lost 31% on average to reach US$107 billion. Gross FDI also declined by 0.3% pa in 2016-19 compared to +1.5% pa in 2011-15.


Private investment is an important component of the overall economy. Sustaining private investment, which is made up of domestic and foreign investment, is needed to expand and diversify our industrial base; raise productive capacity and increase economic growth; accelerate technological progress; create high-income paying jobs and increase exports.

Domestic and foreign investments can have strong complementary or substitution interactions between each other. Policymakers are often being asked whether we should focus efforts on domestic investment or foreign investment. There are questions whether foreign direct investment crowd in domestic investment, or foreign direct investment crowd out domestic investment?

Substantive research studies had validated the benefits of FDI, which amongst others include employment creation, the deepening of industrial base through technology transfer and technical know-how, enhance linkages with domestic firms, embrace better business practices management, establish business network and access to international markets as well as supporting domestic financial system and capital market.

Sustaining high quality domestic investment is equally important and must continue to be facilitated in driving Malaysia’s economy and expanding industrial structure, especially the development of small-and medium-size enterprises (98.5% of total business establishments; 38.9% of GDP in 2019; 48.4% (or 7.3 million) of total employment; and 17.9% of total exports).

Granted, domestic investment size and value of capital investment in the manufacturing sector is smaller (RM48.6 million per project) relative to that of foreign investment (RM121.7 million per project) as well as less capital- and high technology-intensive investment during the period 2010-2019, the nature and type of domestic investments span a cross section of sectors and businesses and, hence, create usually many more jobs than FDI.

Backed by a pool of capable domestic businesses and SMEs in the home market, multinational corporations would be keen to expand existing operation and set up new plants in an environment where the existing ecosystem is able to support their operations, especially our domestic players are capable to integrate with high-value added global supply chains.

Indigenous industries

Domestic indigenous industries are the backbone of Malaysia’s investment and industrial development. They are deep-rooted in Malaysia and are 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 fast and quick approval of their investment applications and resolve matters, including operational issues relating to doing business.

The departments and agencies at all levels (federal, state and local authorities) play a decisive role in creating a predictable enabling business investment environment while efficiently facilitating investment at ease, regardless of domestic investors/companies (large, SMEs and small businesses) and foreign investors.

A renewed focus on improving the regulatory and investment facilitation offers a key to reducing friction costs in government-business interactions. Common government-to-business pain points are delays; lack of transparency in the approval process; paperwork burden; duplication; inconsistency and complexity. While most businesses would welcome fewer regulations, what they really want is to spend less time and effort on compliance.

There is widespread agreement that federal, state and local authorities need to refocus on removing the obstacles that businesses face in fostering an environment conducive to investing and doing business here. It’s in the government’s interest to make regulations and compliances as painless as possible. Policymakers must harness the power of investment by making both domestic and foreign investment work together to generate the maximum benefit for our economy.

Lee Heng Guie is Executive Director of the Socio-Economic Research Centre (SERC).

Source: Bernama