Things we need to get right to woo back foreign investors
02 Jun 2021
With the Covid-19 pandemic impacting businesses, workers and households in different degrees since its onset, the fear of losing foreign direct investors resonates in many developing countries like Malaysia.
Looking at the last two years, from the first quarter (Q1) of 2018 to the fourth quarter of last year, it was observed that the highest foreign direct investment (FDI) inflow was recorded at RM19.4 billion in Q1 2019, a year before the pandemic.
In 2020, as we entered the year of the pandemic, the FDI inflow for Q1 and Q2 was valued at RM6.4 billion and RM2.2 billion. An FDI outflow of RM800 million was recorded in the third quarter of last year. In the last quarter, FDI inflow was recorded at RM6.1 billion.
With this said, the stock of FDIs was at an all-time high last year compared with 2018. This means that even though new FDIs decreased, the total stock of direct investment (or FDIs still in the country) was still the highest recorded in two years.
In terms of attractiveness, in the past five years at least, there is the sentiment that Malaysia’s competitiveness edge to attract FDIs has weakened. There are several factors that influence Malaysia’s attractiveness as a destination country for investors.
The first is market size. Malaysia is a relatively small market compared with our neighbouring countries like Indonesia or Thailand, or Vietnam.
As an investor, the bigger the market, the more attractive the country is. This is why the original Trans-Pacific Partnership and Regional Comprehensive Economic Partnership countries, like the United States and India, were particularly attractive for other member countries.
The second is stability. Stability here encompasses social, political, economic and also environmental factors.
There is strong evidence that suggest when the country is politically stable, FDIs will increase. Political stability is an important determinant for high FDI inflows. FDI is a long-term investment activity and every type of threat discourages FDI inflows.
Multinational corporations avoid FDI in cases of political instability due to high risk and switch to risk-free countries. For any developing country, FDI inflow is an integral part of development and growth. Without FDIs, transfer of technology and know-how will not be able to happen organically between international and local firms.
The third factor is the ease of doing business in Malaysia. Although Malaysia’s ranking has improved in terms of policies, there are still reports of unclear guidelines, lack of one-stop centres for investors, overcrowding of different sectors by state-owned enterprises and difficulties hiring workers by both local and international firms.
The fourth factor is externalities. Given the impact of the pandemic and the weakening of global trade and rising trade tensions in the past year, FDI inflows in general are affected worldwide. To manage externalities, clear policies that are communicated well can provide stability to investors and industries. This ties back to the second factor on stability.
In a nutshell, attracting the “right type” of investors will not ensure the attractiveness of Malaysia as an investors’ destination in the long run. Policymakers need to look at improving market size through free-trade agreements, providing stability through clear policies and regulations, improving on ease of doing business and managing other externalities.
When the foundation is laid out well, Malaysia can be attractive again for all types of investors.
The writer is a fellow in the Economics, Trade and Regional Integration programme, Institute of Strategic and International Studies (ISIS) Malaysia