Reviving DDI And FDI Are Crucial To Economic Recovery
12 Aug 2020
It’s time to rebuild domestic and foreign investors’ confidence in times of uncertainty as our economy emerges from the COVID-19 pandemic and is currently entering the recovery stage.
Private investment, Domestic Direct Investment (DDI) and Foreign Direct Investment (FDI) flows were already slowing before the COVID-19 outbreak amid uneven state of global economic growth, rising trade protectionism, domestic political and policy transition since 2018 and other external uncertainties.
Private investment’s momentum had moderated sharply to 4.8 per cent per annum (pa) in 2016-2019 from 12.1 per cent pa in 2011-2015. Total approved investment projects in services, manufacturing and primary sectors had declined by 2.8 per cent pa in 2015-2019 compared to a strong increase of 10.1 per cent pa in 2007-2014. Approved DDI had declined by 6.4 per cent pa from RM175.1 billion in 2014 to RM125.5 billion in 2019 while approved FDI increased by 5.0 per cent pa from RM36.1 billion in 2015 to RM82.4 billion in 2019.
More Risks to Investment Flows
The unprecedented pandemic crisis has added more risks to investment flows. In 1Q 2020, private investment contracted by 2.3% year-over-year (yoy) and will likely to end an estimated annual contraction of at least 12 per cent for this year. Total approved investment in services, manufacturing and primary sectors slumped by 34.8 per cent yoy to RM37.4 billion in 1Q 2020, due to both declines in approved DDI (-4.5 per cent yoy to RM26.3 billion) and approved FDI, which contracted at a sharper rate of 62.9 per cent to RM11.1 billion.
One key challenge to recovery is to restore confidence of both domestic and foreign investors, which is not an impossible task. Our policymakers must not miss out the chances to do whatever it takes to reduce investor risk, foster investment expansion, and attract new investment through ensuring a predictable trade and investment policy, regulatory certainty, and targeted investment promotion.
A World Bank report, which has surveyed 2,400 business executives in 10 major emerging market countries, reported that low taxes, low labour costs, and access to natural resources matter less to their investment decisions than political and economic stability and a predictable legal and regulatory environment.
Government policies and regulations play a decisive role in fostering business competitiveness. Although lowering effective tax rates help boost FDI, the effect is stronger if augmented with good investment climate, one that is highly contingent on the government’s commitment to improve transparency and reduce bureaucratic as well as create stable and predictable investment climate, with proper contract enforcement and safeguarding property rights, embedded in sound macroeconomic policies and institutions as well as fair competition. The supply of knowledge and skilled workforce is also crucial to support the industrial transformation.
Maintaining good governance, a clear articulation of rules and regulations as well as reducing regulation risks can facilitate business to make better informed investment decisions. This calls for the need of regulatory reforms at the Federal Government level, states and local authorities to streamline as well as ease unnecessary regulations and compliances on businesses.
Looking ahead, global and regional competition game for FDI flows will step up post the COVID-19 pandemic amid the expected sharp fall in global FDI flows by between 5-15 per cent in 2020 as well as the anticipated gradual global recovery in 2021.
It is inevitable that Malaysia will continue to face stiff competition from our peers in ASEAN to attract global FDI flows, especially during the trade war tension and pandemic outbreak as part of foreign MNCS’ investment diversification strategy to minimise the supply chain disruptions.
There is clearly still room for Malaysia to improve the World Bank’s ease of doing business ranking (12th in 2020).
(a) Starting a business: Local entrepreneurs continue to face cumbersome procedures to start and operate a business. Malaysia ranks 126th on this indicator, taking 8.5 procedures and 17.5 days;
(b) Paying taxes: Malaysia ranks 80th on this indicator as domestic companies spend an average of 174 hours annually to comply with fiscal obligations, slightly more than the OECD high-income average of 159 hours; and
(c) Legal rights and enforcing contracts. The time needed to enforce a contract in Malaysia has taken 425 days compared to Thailand (reduced from 440 to 420 days in Thailand), and in Indonesia (from 471 days to 403 days). There have been no reforms in these areas over last five years.
Towards this end, we welcome the investment facilitation measures as announced in PENJANA, namely zero tax rate for a period of 10-15 years for reshoring of capital investment from abroad to Malaysia; 100 per cent Investment Tax Allowance (ITA) and Special Reinvestment Allowance (RA); the establishment of Project Acceleration & Coordination Unit (PACU) at MIDA to simplify and coordinate application process across the federal, state and local authorities; and a two working days fast track manufacturing license approval for non-sensitive industry.
These initiatives must be well executed without delay as our competitors also have stepped up to the plate.
– Lee Heng Guie is Executive Director of Socio-Economic Research Centre (SERC), an independent and non-profit think tank.