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How FDI and DDI can complement each other

How FDI and DDI can complement each other

02 Oct 2023

In the current economic environment, with countries competing to attract new types of investments and retain existing investments, providing an attractive investment climate to attract foreign direct investment (FDI) and encourage domestic direct investment (DDI) is crucial.

It is also important for a country to play to its strengths and continue to develop sectors and industries which are of interest to investors, and also to consider introducing and developing specific regions to cater to niche areas.

For example, the strong results across the north of Britain – where all three regions saw double-digit growth – were underpinned by resilience in the digital sector and growth across a range of key activities, including manufacturing, sales, research and development, logistics, and headquarters projects.

Growth in transportation, manufacturing and digital tech, as well as wider logistics and manufacturing activity, boosted the East Midlands.

At a national level, according to the EY 2023 UK Attractiveness Survey, Britain’s attractiveness rests on the size of its domestic market, strength in the education sector, its regulatory landscape and diverse cultural life.

But regional investment drivers are different; access to grants and incentives, skills and infrastructure, the prominence of local networks, and support from regional development organisations were the top considerations highlighted by investors.

Malaysia needs to reclaim its position as the ideal investment destination and “darling” of Asia. The total value of investments approved for various economic sectors in the first quarter of 2023 was RM71.4bil, a 59.7% increase compared to the first quarter of 2022.

This comprised 1,265 projects that will potentially generate 24,000 jobs for Malaysians. Why are FDIs and DDIs important to the nation and what can be done to encourage these investments? Do FDIs benefit domestic companies and spur DDIs?

A good balance between DDIs and FDIs will enable Malaysia to grow and diversify its economy. These two types of investments help benefit the country in different ways, complementing each other.

For example, while representing less than 2% of all the firms in Finland in 2018, foreign-owned companies were responsible for about one quarter of the value-add generated in the Finnish economy and employed over 17% of the domestic workforce.

Benefits to the country from FDIs come in various ways:

Transfer of knowledge and technology, which can drive innovation and lead to more value-added activities being undertaken in Malaysia. This cannot be achieved solely through financial investments or from the trading of goods and services.

Training of employees and programmes to equip workers with the necessary and most current skills, which contributes to human capital development.

The flow of funds, and transfer of knowledge and technology will create multiplier effects on the country’s economy, spurring domestic activities and promoting healthy competition in the local economy.

The increased employment arising from FDIs in Malaysia will generate increased corporate and personal tax revenues.

DDIs also bring significant benefits to the country, some of which are similar to FDIs.

DDIs usually create more jobs, and this arises from the small and medium industries which provide employment for local communities. FDIs then complement this by enhancing the opportunities generated by the local industries through the introduction of leading technology and management practices.

DDIs provide continuous opportunities to local industries to expand their businesses, opening doors for new ideas and providing socio-economic stability for people through job creation.

At the end of the day, FDIs and DDIs complement each other. The transfer of knowledge from FDIs and the need for a robust domestic industry to support FDI businesses lead to innovation and the growth of domestic businesses.

In time and with the proper support, these domestic businesses can move beyond playing a supporting role to FDI and can compete internationally to building the Malaysian brand overseas.

Good policy is important to enable FDIs and DDIs to complement each other and ultimately, for FDIs to result in the advancement of domestic businesses. Policies that foster collaboration between the two, such as vendor development, can increase the multiplier effects in the economy.

Policies to establish connections between FDIs and DDIs in terms of jobs should be enacted. Synergies in the training of employees will positively impact the skill levels of workers, especially in the fields in which domestic industries are lacking.

FDIs possess the expertise in advanced technologies, leading business strategies and practices, and product innovation, which can be adopted and harnessed by Malaysian business and entrepreneurs, through partnerships.

Tax incentives are a powerful tool to attract FDIs and DDIs. The requirements and conditions of tax incentives should be transparent and easily understood.

Tax incentives should be relevant to the industry sectors being promoted, in terms of technological capabilities, innovation and talent requirements, to support domestic industries and ensure the nation’s competitiveness regionally and globally.

The tax incentives granted should be linked to quality investments that are in line with the country’s aspirations. Further, tax incentives given to inbound investors should be linked to commitments to develop local business and to offer high-value jobs and transfer knowledge.

Tax incentives must also be relevant and tailored to the needs and circumstances of the individual investor, especially in light of international developments such as the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting 2.0 Project.

The question here is not whether FDIs are better than or DDIs, or vice versa.

Instead, we should ponder how the country can optimise synergies between both to help create jobs, improve labour skills, increase productivity, raise tax revenue collections, accelerate digital transformation and create a multiplier effect on the economy at large, all with the goal of growing the economy, making Malaysian businesses more successful and providing quality employment for Malaysians.

Successful and complementary FDI and DDI policies will result in a positive impact on the national economy and the rakyat.

Farah Rosley is Malaysia Tax Leader at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.

Source: The Star