Retain industrial clusters to attract more foreign investments
08 Feb 2021
Domestic investments alone will not be enough to maximise the country’s growth.
That is why today foreign direct investments (FDIs) comprise 40 per cent of total investments in the country. Covid-19 has battered FDIs worldwide. The United Nations reports that global FDIs slumped by 42 per cent last year.
Malaysia was not spared from this collapse. We suffered a two-thirds drop in FDI flows. Nevertheless, the Malaysian Investment Development Authority is confident that it will pull in about RM48 billion in FDIs this year and next.
As the world turns a corner in combating the pandemic, and green shoots of economic recovery sprout, there will be a hunger for FDIs. To gain an edge over the competition and to attract high-quality investments, the government intends to develop a new investment strategy.
Already measures are in place for greater investor experience. Investors now enjoy seamless facilitation. A project acceleration and coordination unit, and other platforms such as i-Incentives, have been established to realise planned investments.
The late Carl Sagan, a planetary scientist, once said: “You have to know the past to understand the present.” George Santayana, an American philosopher, extended this sage advice: “To know your future you must know your past.”
Let us then revisit the industrial strategies of the past to decide what should be our future initiatives.
We have had three industrial master plans. The first, spanning from 1986 to 1995, advocated the development of free-trade zones and industrial parks to attract FDIs, with generous tax breaks to key multinational companies (MNCs). This was to forge linkages between foreign and domestic firms.
The Industrial Master Plan Two from 1996 to 2005 adopted a strategy of developing clusters of competing firms that were backed by supporting activities such as research and development.
The Third Industrial Master Plan (2006-2020) continued this cluster policy. It focused on the development of high-value added industries which already had a constellation of related and supporting industries. The targeted clusters were resource- and non-resource-based.
These past plans served us well. FDIs had increased from RM2 billion to RM35 billion over the period of the three plans. Our strategies for the future must, therefore, reflect the successful initiatives of the past.
First, the government should continue with promoting clusters. Here, competitors co-locate with their supporting industries in a particular geographical region.
Such agglomeration will reduce transaction costs as they make available a ready access to information, talent, supplies, and research and promotional support. All these will ensure the competitiveness of the firms in the cluster.
This is how we started the electrical and electronics cluster in Penang in the early 1970s. Incentives should therefore be offered to attract top-notch MNCs with cutting-edge technologies and their related industries to locate together.
Second, the emphasis on manufacturing should be retained. Although it contributes only a quarter of the total output compared with about two-thirds by the services sector, manufacturing creates more jobs. It also has the potential for economies of scale and continuous technology upgrade.
Third, a greater liberalisation of the services sector could be considered in the push for more foreign investments. For example, in the telecommunications sector, only 70 per cent of foreign participation is allowed for network-service-provider licences.
Similarly, there is a 70 per cent limit on foreign ownership in insurance companies. There are also restrictions on the opening of branches by foreign banks. In the oil and gas sector, foreign firms are restricted to a 49 per cent equity stake.
FDI promotion should be balanced by national interest. The manufacturing sector has already been opened up for full foreign ownership. Opening up strategic services sectors to full foreign ownership might not allow strategic partnership between local and foreign firms and the consequent transfer of technology.
The writer is the Institute of Medicine, Science and Technology (AIMST) University Vice-Chancellor