The State of the Nation: Malaysia will need to raise its FDI game

MALAYSIA will have to work hard — very hard — to attract foreign direct investments (FDIs) this year, given projections that it will only land half of last year’s approved amount of RM82.38 billion because of the economic fallout from the Covid-19 pandemic.

At the same time, competition for capital is expected to intensify in emerging economies amid the escalating US-China trade war and countries adopting more inward-looking business strategies as the pandemic dampens cross-border transactions.

This is why it is crucial for Malaysia to up its FDI game, says Sunway University Business School economics professor Dr Yeah Kim Leng.

“The simultaneous Covid-19-induced recession, technological shifts and continuing US-China trade war have complicated the FDI trends and patterns in the region.

“While the supply chain reconfiguration to reduce the US-China trade war fallout may lead to increased FDI into the region, some countries such as Vietnam could receive more inflows. Malaysia will have to up its game to lure the multinational corporations,” he tells The Edge.

Already, the government has got the ball rolling with measures under the Short-Term Economic Recovery Plan (Penjana) to encourage foreign companies to relocate their operations to Malaysia.

The measures include a zero percent tax rate for a period of 10 years for capital investments of RM300 million to RM500 million, and a zero percent tax rate for a period of 15 years for capital investments that exceed RM500 million.

Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre executive director Lee Heng Guie says these measures would place Malaysia in a competitive position to attract the relocation of production bases here.

He adds that the establishment of the Project Acceleration and Coordination Unit at the Malaysian Investment Development Authority to simplify and coordinate application processes across the federal, state and local authorities is a welcome investment facilitation, provided it is well executed. Others include enhancement of the Domestic Investment Strategic Fund and the fast-tracking of approval of manufacturing licences within two working days for non-sensitive industries, he says.

“These investment initiatives are expected to help revitalise subdued private investment growth, which had pulled back sharply to an average growth of 5.1% per annum over 2015 to 2019 from 14.6% per annum over 2010 to 2014.

“Private investment declined by an annual rate of 2.3% in 1Q2020 and is expected to decline 11.4% in 2020 due to the Covid-19-induced economic downturn amid weak business sentiment and lingering political uncertainty,” he says.

Penang, Selangor to see lower  level of FDI this year

Penang and Selangor topped the list for FDI in the manufacturing sector last year, with the former charting a record high of RM16.9 billion in approved manufacturing investments, out of which RM15 billion was FDI.

Invest Penang CEO Datuk Loo Lee Lian says the state is unlikely to repeat the feat this year.

“2020 will be a consolidation year and it is an important year for us to materialise the 2019 approved investments. Some notable new investments in Penang include that from Lam Research, Micron Technology, Smith+Nephew and Advanced Energy, among others. Meanwhile, existing companies that are doing sizeable expansions include Intel, Plexus Manufacturing and Jabil Circuit,” she says.

The state, however, will be not be making any downward revision to its FDI target of RM5 billion this year.

“Earlier this month, German-headquartered Robert Bosch, a Global Fortune 500 company, announced its strategic investment at Batu Kawan Industrial Park. We are working hard to conclude a few other high-quality and strategic investments this year.

“Enquiries [from potential investors] declined in the first quarter of 2020, but we are now seeing some comeback on investment enquiries. [Sector-wise], we are seeing interest from a huge variety of sub-segments within the manufacturing industry, but strong interest is [mainly] coming from electrical and electronics-related, equipment manufacturers and medical device players,” she says.

Although companies that are key FDI contributors for Penang traditionally hail from the US, Europe, Japan and Singapore, interest has emerged from East Asia as well.

“We are also seeing more investment enquires from companies in East Asia, such as China, Hong Kong and Taiwan, since the trade war commenced in 2018.

“We expect the traditional FDI contributors to continue to dominate Penang’s FDI over the next two years, [and at the same time to see] the weightage from other countries increase,” says Loo.

Selangor, which saw a slight decline in total approved FDI to RM10.42 billion last year from RM10.84 billion in 2018, expects to be negatively impacted as well.

Selangor state executive councillor Datuk Teng Chang Khim says the state hopes to see investments materialise this year from those who have expressed an intention or submitted an application to invest last year.

“If everything progresses as scheduled, we expect to have about RM3 billion of FDI and RM3 billion of domestic direct investment (DDI) from the pending projects,” says Teng, who is the state’s chairman of standing committees for investment, industry and commerce and small and medium enterprises.

“With the current situation, it is only practical for Selangor to review the target of prospective investments for both FDI and DDI of RM12 billion in 2020 but we are still studying the situation,” he says.

Teng expects to see a sizeable number of electronics plants shifting to Malaysia, especially from China and Taiwan.

“There is a large number of Taiwanese electronics companies moving out from China and heading towards Southeast Asia under Taiwan’s New Southbound policy, mainly for two reasons — economic and political.

“The mainland and even its foreign electronics companies, including US companies in China, are also speculated to be moving out to Southeast Asia to seek shelter as a consequence of the US-China trade war. [This is] also one of the reasons for Taiwanese investors in the electronics sector to move out of China and aim for Asean countries. More interestingly, the exodus is not limited to the electronics sector,” he says.

Traditionally, the US, Japan and Singapore have been the main FDI contributors to Selangor, but in recent years, the state has seen growing interest from China and Taiwan. China was the largest FDI contributor to Selangor in 2018, while Taiwan took over the top spot the following year.

On the Penjana initiatives, Teng says it may not be able to attract FDI in the short term as the world is still struggling with Covid-19 and national borders have yet to be opened.

“For the longer term, the plan is certainly attractive to foreign investors. Nevertheless, Malaysia needs to speed up [in] automation, digitalisation, upskilling and reskilling of workers, in order to appeal to foreign investors. IR 4.0 [fourth industrial revolution] should not remain as [empty] rhetoric any longer.”

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