The Malaysian Industrial Development Authority (MIDA) says that the authority is clear that it wants to draw in investment in sectors such as electrical and electronic goods and biotechnology – aware that competing with China, India and other more populous regional players for investment in more labour-intensive industries is problematic. But the attractions for foreign investors largely speak for themselves, MIDA says.

According to MIDA, the influx of investment that we are seeing has been maintained by the country's stability, the smooth transition of power that was evident in the succession of prime minister Abdullah [Bin Haji Ahmad Badawi] from Dr Mahathir [Bin Mohamad], the resilience of the economy, and the strength of the legal and constitutional framework.

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MIDA was established in 1965 by the federal and state governments to advise them on industrial development policies, help local and foreign enterprises seeking to operate in the country and co-ordinate industrial development. The authority is under no illusions about the competitiveness of the market, but MIDA officials say that its approach is not always to compete but sometimes to complement other players in the market. MIDA says it will not encourage investment prospects we think are unsuitable.

MIDA was established in 1965 by the federal and state governments to advise them on industrial development policies, help local and foreign enterprises seeking to operate in the country and co-ordinate industrial development.

The authority is under no illusions about the competitiveness of the market, but says that its approach is “not always to compete but sometimes to complement” other players in the market. “We will not encourage investment prospects we think are unsuitable,” he says.

The shift towards the high-tech industries is not new: the thrust behind the previous Industrial Malaysia Plan was to shift the whole value chain to a higher level through productivity-driven growth and the utilisation of high technology, with the government setting itself a target to attract approved investments of RM250bn ($72bn) over the period 1996-2005. In the event, that target was exceeded by about RM20bn.

Under the third plan, targeted areas for growth are non-resource-based industries, such as pharmaceuticals, electrical goods and electronics, medical devices, textiles and apparels, machinery and equipment, metals industry and transport, and resource-based industries, such as petrochemicals, wood-based products, rubber and rubber products, oil palm-based industries and food processing.

Record of growth

Malaysia has an impressive track record of growth on which to build. Despite some fears of a slowdown in some quarters, in 2006 the country had the highest volume of investment in approved projects it has ever had and 2007 promises to be a bumper year. About 1077 investment projects were approved in 2006 with a total value of RM46bn, up from RM31bn-worth of investments and 1027 individual projects in 2005.

Foreign investments in Malaysia amounted to about RM20.2bn in 2006, the highest level ever recorded. Malaysia can certainly demonstrate an impressive record in terms of levels of foreign inward investment. In 2006, there was the highest volume of investment in approved projects ever in the country, compared with RM17.9bn the previous year and RM13.1bn in 2004.

Although new investments are always to be welcomed, MIDA says that it is particularly encouraged by the number of investor companies that have expanded and diversified their operations. About 36% of investment in 2006 was comprised of 424 expansion and diversification projects, with a total value of RM16.6bn.

The trend is definitely upward, although there were a number of significant changes between 2005 and 2006 in terms of who was investing, and how much they were investing. In 2006, Japan, the Netherlands and Australia were the top three investor countries, investing RM4.4bn, RM3.3bn and RM2.6bn respectively. Investments from Singapore and the US decreased considerably by comparison, from RM5.2bn in 2005 to RM2.5bn in the case of the US, and from RM2.9bn to RM1.9bn in the case of Singapore. However, MIDA insists that this is not representative of a trend, but highlights a number of atypically large investments made in the earlier year: in the case of the US figures, three large expansion projects in the electrical and electronic sector (E&E) with a combined value of RM2.7bn; and in the case of Singapore, another large expansion project in 2005 bucking the trend.

By sector, E&E attracted about RM8.6bn (42%) of total investments in 2006, with Malaysia keen to participate in a buoyant global market. Global sales of semiconductors, for example, grew by 9.4% in 2006 to an all-time high of $248.8bn.

ICT kick start

Recognition of the importance of high-tech goods and services was the driver behind the establishment of the Multimedia Super Corridor, which kick-started the information and communication technology (ICT) sector, and ensured that the country remained on the map in a notoriously fast-moving industry.

The Multimedia Super Corridor (MSC Malaysia) first sprang from the drawing board just over a decade ago as a means of attracting multinationals into the country and fostering the growth of indigenous companies. Now the MSC hosts about 1200 domestic and foreign companies creating ICT products and services, and undertaking R&D.

Once awarded MSC Malaysia status, the Malaysian government offers companies a bill of guarantees, and a package of incentives that includes unrestricted employment of foreign workers in the knowledge industries, freedom of ownership, freedom to source for borrowings and capital globally, and a number of financial incentives, including no income tax for up to 10 years or an investment tax allowance for five years.

Government role

Applications for MSC status, and general running of the Super Corridor, are the remit of the (government-owned) Multimedia Development Corporation (MDEC), which alongside advising the government on the formation of ICT policy and regulations, strives to ensure that the physical infrastructure requirements of ICT companies and investors are met or exceeded.

Already, Malaysia is home to about 161 manufacturers of industrial electronic products, among them an impressive spread of household name multinationals, including Intel, Western Digital, Fujitsu, Sony and Panasonic. NEC and Dell are an extremely important part of the mix. Dell’s Asia Pacific Customer Centre manufactures desktops, workstations, notebooks, servers and storage products for customers throughout the Asia-Pacific region, and supplies 95% of Dell’s notebook computers for sale in the US.

Indicative major 2006 investments in the sector include a RM1.3bn expansion project by Fuji Electric to produce thin-film magnetic disks and polished substrates for hard disk drives, a RM1bn project by Flextronics Technologies, which is expected to create 4730 jobs, and a new project by Dutch company Sensata Technologies to produce micro-fused strain gauges, occupant weight sensors, common rail technology sensors and other sophisticated parts for use in the automotive industry. The company plans to supply products to Toyota, Siemens, Honda, General Motors and others.

Outside of the all-important E&E sector, chemicals and chemical products, metal products and non-metallic minerals figure as the main investment lures; but other sectors, including the manufacture of transport equipment, the aerospace industry and palm oil derivatives are also drawing interest.

This spread of industries is represented by the core activities of the companies that have chosen to establish regional headquarters in Malaysia in 2006, including General Electric, Eppendorf AG (a German company manufacturing scientific instruments), the Aker Kvaerner Group from Norway, Nippon Electric Glass and Bridgestone Group from Japan, and Volvo. In addition, about 17 oil service companies, including Baker Hughes, Hess Oil & Gas, Paradigm Geophysical, Technip, and GE O&G Pipeline Solutions, have chosen to make Malaysia the centre of their regional operations.

Tailored incentives

MIDA believes that it offers a full package of incentives, specifically tailored to encourage the kinds of investment it regards as aligned with progressing toward Wawasan 2020 (Vision 2020). These operate on a sector-by-sector basis and, within each sector, by sub-sector or activity. They include, for example, incentives for small and medium-sized enterprises, incentives ‘to strengthen industrial linkages’, incentives for the production of specialised machinery and equipment, incentives for the biotechnology industry, for forest management companies, and for the modernisation of duck and chicken rearing.

Illustrative of how these incentive schemes work, those for strategic projects (projects that involve products or activities of national importance) include a tax exemption of 100% of the statutory income of the project for a period of 10 years, or an investment tax allowance of 100% on the qualifying capital incurred within five years from the date on which the first qualifying capital expenditure is incurred.

Arguably though, it is not the strict letter of the law that has provided the draw for foreign investment to Malaysia. It is an intelligent, well-trained workforce, a strategic location in the south-east Asian region, linguistic and cultural skills, a structured approach to managing the future, and a coherent, progressive vision of its own future.