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Digital economy agreements can boost FDI

Digital economy agreements can boost FDI

19 Aug 2022

Global foreign direct investments (FDI) recovered to pre-pandemic levels in 2021, reaching nearly US$1.6 trillion, according to the World Investment Report 2022 by the United Nations Conference on Trade and Development (Unctad). The report indicated that developing Asia, which receives 40% of global FDI, saw flows rise in 2021 for the third straight year to an “all-time high” of US$619 billion, growing 21% in China and 44% in Southeast Asia respectively.

These findings corroborate the strong investment flows witnessed in Malaysia in 2021. The country’s economy, despite being affected by a pandemic-induced recession, benefitted tremendously from a record level of approved investments totalling RM306.5 billion, of which 68.1% was from FDI in the manufacturing, electrical and electronics (E&E), services and primary sectors, particularly mining.

In April 2021, recognising the importance of maintaining a robust investment landscape, the Malaysian government approved the National Investment Aspirations (NIAs), a set of five national goals to leverage megatrends and boost long-term competitiveness.

These NIAs are focused on increasing economic complexity and diversity through the development of sophisticated products and services, with high local R&D and innovation; creating high-value jobs to provide better income for the rakyat, extending domestic linkages to regional and global supply chains; increasing domestic input; developing new and existing clusters focused on high productivity sectors, including local products and services; and improving inclusivity to contribute towards the socioeconomic development agenda.

Malaysia’s FDI landscape performing well, with room to be best in class

Despite the upward trajectory, renewed geopolitical, financial, economic and socioeconomic uncertainties in 2022 caused by the Ukraine-Russia war — with damaging repercussions on global food security, oil and fuel prices, and tighter financing — threaten to adversely impact the business and investment climate worldwide. Rising interest rates and a looming global recession are exacerbating an overall negative financial market sentiment.

Developing economies like Malaysia must therefore create strong buffers to protect the headway made by strengthening its resilience against external shocks, boosting an attractive investment climate and creating continuous opportunities to drive FDI.

The 2021 FDI health check by BCG indicates that while Malaysia is performing well, ranking No 2 among its Asean peers, there is still much room for improvement, especially in terms of ease of doing business, high corporate taxes and high long-term labour costs. The country also has a relatively smaller domestic market size and lower access to foreign markets.

Despite these challenges, the country does have strong points that work in its favour. Malaysia is relatively strong in terms of talent and innovation. Its ICT adoption and infrastructure is among the strongest in Southeast Asia, and the country’s stability and security conditions are second only to Singapore.

Malaysia’s digital economy has the potential to transform the country’s FDI landscape to be best in class. Malaysia Digital, the national strategic initiative by the Malaysian government, is expected to contribute 22.6% to gross domestic product (GDP) and create more than 500,000 jobs by 2025. Malaysia Digital Economy Corporation (MDEC) is implementing catalytic initiatives under its Malaysia Digital belt — Malaysia Digital Trade and DE Rantau digital nomad hub programme — to encourage and attract companies, talents and investments while enabling local businesses and the rakyat to play a leading part in the global digital revolution and digital economy.

Digital economy agreements (DEAs) can catalyse Malaysia’s digital economy goals and boost attractiveness as an investment destination of the future

The Malaysian economy clearly has the bones to transform itself into one of the top Asian investment hubs. The country aims to attract high-quality investments to establish itself as a regional market producer of digital products and digital solutions, to drive growth beyond the domestic market serving regional or global markets, while enabling the development of local market potential across key sectors such as healthcare, manufacturing and agriculture.

Investments in essential enablers to propel the development of digital capabilities across key sectors are also a priority. These include infrastructure for data centre, cloud and edge computing. All of these will require significant investment in highly skilled talent, creating a new market for high-value jobs locally and greater inclusivity by bridging the digital divide.

DEAs or digital economy partnership agreements (DEPA), which are the latest form of international economic and trade agreements, offer a pathway for the country to fully realise its digital economy ambitions and NIA goals, which in turn will strengthen its attractiveness as an investment destination.

Unlike conventional trade agreements such as free trade agreements (FTAs), DEAs are plurilateral agreements, which involve fewer countries, aimed at developing international frameworks to standardise digital trade rules, enhance trade cooperation and facilitation based on international standards, and create interoperable systems to reduce barriers to digital trade.

The first-ever DEPA, signed between Singapore, Chile and New Zealand in 2020, marked a turning point for countries to embrace digital trade more effectively. Its framework included the treatment of digital tools and products, data security and protection, new technologies, digital inclusion, and small and medium enterprise (SME) integration. It has been a game-changer for trade relations, especially for SMEs engaging in digital trade and electronic commerce.

DEAs enable interoperability of payment systems and promote acceptance of e-payment solutions provided by non-bank players. They allow businesses to benefit from the increased ease and acceptance of e-signatures and digital payments across sourcing to invoicing and payments, resulting in faster payments and reduced transaction costs. They also make way for parties to be more directly involved in the end-to-end drafting and negotiation of provisions, leading to enhanced trade.

The Malaysia Digital Trade programme will greatly benefit from DEAs, but the country must first look at creating the necessary digital frameworks to allow for e-signatures, digital payments and other prerequisites for digital trade integration. It can then look to engage and sign DEAs with other nations as extensions of digital chapters of existing FTAs, which will greatly enhance the facilitation of end-to-end digital trade, enable trusted data flow and build trust in digital systems while facilitating opportunities for Malaysian enterprises, including SMEs.

DEAs will also enable Malaysia to overcome many of the challenges it faces in terms of technology, legal and policy coordination across the entire digital value chain. They offer viable solutions to the country’s interconnectivity challenges, enabling greater new-market access by facilitating cross-border trade via digital means. They would also streamline the business environment for improved ease of doing business in Malaysia, creating new opportunities and demand for capital, skills, innovation and digital infrastructure.

The end result is a stronger economic climate that is more resilient to external shocks, and one that will attract the next generation of talent, make it a haven for digital businesses to set up shop in the country, drive greater domestic investments and attract high-quality FDI, including greenfield investments, into the country.

by Ching-Fong Ong and Nurlin Mohd Salleh
Ching-Fong Ong is managing director and senior partner, and Nurlin Mohd Salleh is managing director and partner at Boston Consulting Group

Source: The Edge Markets