Malaysia’s drive to attract FDI shows no signs of slowing and the government remains determined to meet the challenges posed by the country’s strong regional competitors. The Malaysian Industrial Development Authority (MIDA) has taken on board the need

to stay ahead of the pack, particularly with regard to once comparatively sleepy FDI destinations like Indonesia, Thailand and Vietnam.

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“From a country dependent on agriculture and primary commodities in the 1960s, Malaysia has today become an export-driven economy spurred on by high technology, knowledge-based and capital-intensive industries,” says MIDA director-general Datuk R Karunakaran.

“FDI remains crucial for Malaysia’s industrial development in view of its contributions, in terms of technology transfer, capital inflow, access to international markets and the spin-off effects it generates. Globally and regionally, competition for FDI is becoming increasingly intense. When we first commenced our industrialisation drive in the early 1970s, Malaysia did not face severe competition from countries such as China, India or even ASEAN [Association of South-east Asian Nations] members,” he says.

“At present, Malaysia has to contend with competition from these countries as well as the CIS [Commonwealth of Independent States] countries and the newer members of the EU, such as Poland and Hungary, which have large and rapidly growing domestic markets, as well as large pools of skilled and unskilled manpower. In view of the importance of investment and increasing competition for global FDI, Malaysia has to rethink and re-engineer its strategy to address these challenges to continue to attract FDI.”

Across-the-board promotion

MIDA’s promotional efforts are aimed at attracting new investments as well as investments in expansion and diversification activities, particularly in high-tech, high value-added, capital and skill-intensive, and knowledge-based industries in which Malaysia has comparative advantages, according to Mr Karunakaran. These efforts have continued to bring benefits in new capital inflows and expansion of existing projects.

Last year, FDI soared to RM33.4bn ($10.3bn), an increase of more than 30% compared with 2006. This year has started off with equal promise, with FDI flows at RM15.9bn in the first quarter, nearly half the total for 2007. Foreign investors spent RM28.8bn in expansion or diversification of their existing projects in 2007, up from RM16.6bn in the previous year, with an additional RM6.8bn in the January-March 2008 period.

Strong fundamentals

From a standpoint of fundamentals alone, Malaysia is set to remain a strong and stable destination for investment. Real gross domestic product is forecast to grow by 5% to 6% in 2008, amid the expected slower global growth of 3.7% on the back of the anticipated slowdown in the developed economies and in particular in the US.

Bank Negara Malaysia’s governor, Dr Zeti Akhtar Aziz, says that the Malaysian economy, which has strengthened over the years, will remain resilient, driven by the continued robust domestic demand and supported by the country’s increasingly diversified export markets. The country is also expected to benefit from high commodity prices for its palm oil and rubber production. The strong domestic demand is attributed to progressive growth in income coupled with a strong labour market environment.

On the external front, Malaysia had increasingly diversified its export markets. Asia (excluding Japan) accounted for 54% of the country’s total exports in 2007, and exports to the US had dropped to 15.6% in 2007. The Asian economies, which are expected to perform well this year, are expected to further support Malaysia’s exports.

Investment inflows

Regional investors continued to account for a major segment of FDI in 2007, with Japan leading the pack at RM6.5bn. However, the lion’s share came from the US and western Europe, with Germany in first place with RM3.7bn, followed by RM3.01bn from the US. By sectors, FDI was concentrated primarily in electronics and electrical products (RM13.7bn), petroleum products (RM5.3bn), basic metals (RM4.9bn) and chemicals and chemical products, food manufacturing and transport equipment.

Mr Karunakaran says that Malaysia will remain a competitive location for investment in terms of the cost of doing business, human resources development, availability of infrastructure facilities, improving the government’s delivery system and offering favourable tax incentives.

“Malaysia will need to strengthen its position as the preferred location for high technology, capital-intensive and knowledge-intensive projects, and to undertake R&D, design, marketing and distribution activities,” he says.

“Besides manufacturing investments, Malaysia is also placing increasing emphasis on the promotion of the services sector. In 2007, a total of 2439 projects with investments of RM65.4bn were approved compared with RM55.5bn in 2006. Investments in 2007 surpassed the IMP3 [Third Industrial Master Plan] annual target of RM45.9bn per year by RM19.5bn.”

Aggressive strategy

The new strategy is being drawn up under the auspices of the Ministry of International Trade and Industry (Miti), whose objective is to boost Malaysia’s already dominant share of FDI in the region. MiTi minister Muhyiddin Yassin says that it will be an aggressive strategy focusing on attracting foreign companies to invest in strategic sectors. “We believe Malaysia is still a choice destination for investors,” he says.

“Though other countries may be able to offer cheaper labour, the feedback we have received indicates that investors often encounter many hidden costs that arise later on. The countries we are targeting to draw investments from are mainly Japan, Middle East nations, the US and Europe.”

Mr Yassin wants MIDA to deploy a ‘moving target’ strategy with regard to investment from abroad. “With the rapidly challenging environment, we want to go beyond the target set under the Third Industrial Master Plan,” he says. “We should not be complacent to just meet the target. As much as we are visionary in our planning, plans done three to five years ago may not be seen happening today. There must be constant adjustments, and to achieve that, we need to keep on track to be ahead of time.”

Leading sector

The electrical and electronics industry remains Malaysia’s leading industrial sector, contributing significantly to the country’s manufacturing output, exports and employment. In 2007, exports of electrical and electronics products amounted to RM266.3bn – 58.9% of Malaysia’s manufactured exports and 44% of exports.

Electronic development

The electronics industry has developed significant capacities and skills in the manufacture of a wide range of semiconductor devices, high-end consumer electronic goods and information and communication technology (ICT) products. Electrical and electronics continuously moved up the value chain last year to produce higher value-added products to remain competitive. These included intensification of R&D efforts and insourcing activities for their related companies worldwide.

Last year, Fuji Electric, Osram, STMicroelectronics, Samsung, Seagate and Qimonda were among the international electronics firms that expanded and diversified their activities in Malaysia. Among the major investments was a new project by Osram Wafer Technologies to produce four-inch fabricated wafers for light-emitting diodes, which would also involve R&D. Seagate International plans to invest about RM892m to produce substrates for data storage devices.

World congress venue

As a testimonial to Malaysia’s pre-eminent position in the electronics industry, the country was selected to host May’s World Congress on Information Technology (WCIT 2008), considered the Olympics of the ICT world. Collectively, WCIT 2008 and its related events attracted upwards of 50,000 visitors to Kuala Lumpur, including 6000 delegates and 44,000 expo visitors from more than 80 countries, as well as more than 100 eminent speakers.

Transport equipment, which comprises the automotive, aerospace and shipbuilding sectors, accounted for more than RM7.7bn in exports last year. Foreign investors focused largely on regional export markets such as Singapore, Indonesia, Thailand and Taiwan, which accounted for nearly half the total. The rest went primarily to the UK and the US.

The automotive sub-sector is the largest part of this industry: there are currently four manufacturers and nine assembly plants in the motor vehicle sector. Most of the top names are already operating in the country, including Toyota, Ford, Mazda, Volvo, Mercedes Benz, Hyundai and BMW. The government is likely to place more emphasis on promoting this sector, after a decline last year in automotive industry investment to RM342.6m from RM536.3m in 2006.

Aerospace, on the other hand, continues on a strong upward track, with the government boosting the Malaysia International Aerospace Centre (MIAC) in Subang as the country’s aerospace hub, in line with its vision to enhance Malaysia’s standing in the global aerospace industry. Projects approved last year totalled RM299.7m, up from RM113.2m in 2006.

Shipbuilding and repair remains one of the core sectors in the marine transport sector. The industry has developed world-class skills in engineering design, metallurgy, corrosion control, machining and welding.

Positive petroleum potential

There was vibrant growth last year in petroleum products, including petrochemicals, with the US and Japan providing 37.4% of the total RM56.9bn investment in the sector. Foreign companies are generally positive about Malaysia’s future potential as an oil and petrochemicals-producing investment base. BP Malaysia, for instance, says that it is confident of growing its capital asset base, which currently stands at $2bn.

“As far as BP is concerned, the strengths of Malaysia are based on its skilled labour force, abundant petrochemical feedstocks, sound investment and business climate, and excellent infrastructure facilities,” says Peter Wentworth, BP Malaysia’s chief executive. “A growing domestic market, together with a strong partner such as Petronas, has contributed to making Malaysia our location of choice. As the largest British investor here, we look forward to building an even bigger presence in Malaysia.”

Services sector grows

Malaysia is seeking to encourage investment in the services sector, which last year attracted RM65.4bn. The most dynamic sub-sector in services is real estate, which is nearly a third of the total. A lot of this space was taken by multinationals setting up overseas headquarters in Malaysia. IBM, Baker Hughes and Philip Morris were some of the 17 foreign companies to establish regional headquarters in Malaysia last year. International procurement centres and regional distribution centres were another growth area in 2007, with firms such as TGP Marketing, Knowles, BMW and Agfa setting up centres.

The services sector, including logistics, has been identified as an important source of growth for the Malaysian economy and it is expected to assume a greater role in broadening the economic base and in contributing towards greater export of goods and services. The non-government services sector is forecast to grow 7.5% per year under the Third Industrial Master Plan for 2006 to 2020. Investment in this sector is expected to reach RM45.8bn annually in the same period. The outlook is encouraging, in that investment last year surpassed the government’s target and inflows in the first quarter continue to show strong growth despite this year’s cautious outlook for the global economy.

 

COUNTRY PROFILE

MALAYSIA

Population:

25.3 millionPop. growth rate: 1.74%Area: 328,550 sq km

Real GDP growth: 5.7%GDP per capita: $14,400Current account: $25.9bn

Largest sector: Industry(% of GDP): 47.8%Labour force: 10.9mUnemployment rate: 3.1%

Source: CIA World Factbook 2008