You are on page 1of 18

Economics for Business Environment ECO5005 (Assignment 2)

CONTENT PAGE Title Page

(i)

Cover Page

1.0

Executive Summary

2.0

Introduction

3.0

Discussion

3.1

The Volume of FDI

3.2

Origin of the Multinational Enterprises (MNEs)

3.3

Sectors or Industries where the MNEs Invested

10

3.4

The Attractiveness of Malaysia as a Host Country

14

4.0

Conclusion

17

5.0

Recommendation

18

Economics for Business Environment ECO5005 (Assignment 2) 1.0 Executive Summary The Foreign Direct Investment (FDI) has been an important source contribution to economic growth for Malaysia mainly by increasing domestic capital formation, technology and management needed. Thus, this economic report aims to concentrate on the Foreign Direct Investment (FDI) Flows into Malaysia between the periods of 1999 to 2008. The contents of this report include: Flow in volumes of FDI in Malaysia Origin of the Multinational Enterprises (MNEs) Sectors or Industries where the Multination Enterprises invested The Attractiveness of Malaysia as a host country

Economics for Business Environment ECO5005 (Assignment 2) 2.0 Introduction According to the Economic Watch, Foreign Direct Investment (FDI) is referred to as an inward investment whereby investments of foreign capitals are injected in local resources. The International Monetary Fund (IMF) also defines FDI as an international investment that mirrors the intention of the direct investor of an economy to attain a lasting interest in the direct investment enterprise in another economy. When a direct investor has acquired at minimum 10 percent or more of the ordinary capital or voting powers of an enterprise, this in return establishes a direct investment. In Malaysia, FDI has undoubtedly benefited the countrys economic growth in various ways; the most apparent would be to fuel our export growth. This is beneficial due to the fact that most often than not, investing firms would most likely already have in place the international markets for their products and this helps to circumvent our domestic resources and time the hassles of acquiring foreign markets. Apart from augmenting our capital formation, other benefits are to create additional employment opportunities to the citizens and in addition the technology transfer from foreign countries to us, the host country. When new foreign factories are setup in Malaysia, we will be introduced and exposed to new technologies to further improve production as well as management efficiency. This will further narrow the technology gaps which in return enable Malaysians to absorb the knowledge, increase productivity and produce competitive local goods and services. Therefore, with massive influx of foreign investments, this will definitely transform Malaysia from an agricultural economy to an industrialized economy.

Economics for Business Environment ECO5005 (Assignment 2) 3.0 3.1 Discussion The Volume of FDI Figure 3.1.1 represents the trend of FDI inflow to Malaysia during 1999 to 2008. Since the early 2000s, the volume of FDI was inconsistent and fluctuated randomly until 2004 onwards where the flow began to increase steadily. Although the random fluctuations occurred from 1999 to 2004, in the six years, the FDI flows in Malaysia still managed to achieve an average of 15.2 billion RM per year. From year 2005 onwards, the volume went up from 17.9 to a staggering 46.1 billion RM by 2008.

Tham (2009) stated the one of the basis of the economic instability and sluggish flow of the Malaysian FDI in the early 2000s was due to the recovery of the Asian Financial Crisis back in 1997 whereby the Malaysian government imposed a peg of the Malaysian ringgit at RM3.80 to one US dollar as well refusing economic assistance from the IMF. Although this measure was not primarily targeted towards the FDI, it was still not an easy task to exert the confidence amongst the foreign investors due to the capital control measures (Arif and Abu Bakar 1999).
4

Economics for Business Environment ECO5005 (Assignment 2) Subsequently, after the peg was lifted in July 2005, a positive impact followed with the foreign investments embarking to empower more reserves (Ministry of Finance 2005). The volume went up to 4 billion RM from 2004 to 2005 and another 2.6 billion the following year. Also due to the augmented acquisition activities by foreign investors together with the existing multinational corporations, the gross FDI into Malaysia contributed to a 7.1% of the Gross National Product (GNP). Malaysia then witnessed a huge jump in FDI volume in 2007 as global FDI grew to an estimated USD1.5 trillion, surpassing all the track records of previous years by chalking up to 33.4 billion RM (Rajoo 2008). The works of Masud, Mohd Yusoff and Abd Hamid (2008) too claimed that the mergers and acquisitions of MNEs, joint ventures and new investments helped boost the total FDI stock showing that Malaysia is indeed a profitable centre for global multi-corporations. Malaysia has steadily recorded a steady inflow of net FDI over 10 year period with a peak of 4.5% and 5.5% GDP both 2007 and 2008 respectively. However, similar to the global trend in 2009, again it collapsed of the economic bubble coupled with the recent global financial crisis. In terms of volume, Malaysia recorded a net increase of 13.4% of FDI inflows between 2000 2009 as opposed to the previous decade. Nevertheless, as a share of GDP, the net inflows of FDI amounted to a lower percentage over both decades (6.3% GDP from 1990 1999 and 3% GDP from 2000 2009). The reason is due to the rising competition Malaysia faced with the emergence of new market economics and investment centres such as Singapore, China, India as well as Vietnam (Bank Negara Malaysia 2009).

Economics for Business Environment ECO5005 (Assignment 2)

3.2

The Origin of the Multinational Enterprises (MNEs) In correspondence to Australias EFIC website (2010), Malaysia is currently a

hub for Multinational Enterprises, high-tech exports and a major exporter of liquefied natural gas as well as palm oil. Over the last 15 years, the average growth per year is about 5.6%. Poverty has also decreased by 5% in 2002 as opposed to 60% back in the 60s (refer to the Chart 3.2.1).

Graph 3.2.2 contains the list of Malaysias trading partners and the MNEs that have invested in the country. The top 5 source of MNEs consist of United States, Japan, Germany, Singapore and Australia is illustrated in graph 3.2.3. Malaysia has commenced several initiatives with its list of trading partners. Of these initiatives, the Free Trade Agreements (FTAs) with both United States and Japan are considered most crucial considering US is a former main export market while Japan plays the role as Malaysias main source of industrial technology.

Economics for Business Environment ECO5005 (Assignment 2) Malaysias FTA with Australia on the other hand reflects a long term trading partner relationship.

Economics for Business Environment ECO5005 (Assignment 2)

While US accounts as Malaysia's largest trading partner, on the other hand Malaysia ranks as US's 10th largest trading partner. In year 1999, the share of the US investment in Malaysia amounted to 42%, in 2000 37.7% while in year 2005 it was about 28.8% in the overall FDI. Although there is a decline in the percentage over the years, US still remains as a crucial source in the manufacturing sector in Malaysia as the overall total FDI over the decade from 1999 to 2008, it held to about 19.8%. The main sources of FDI in Malaysia have changed over time. From 1999 to 2001, both US and Japan were consistently the main sources of total FDI, In 2002, Germany overtook both US and Japan with a whopping 43.7% while US held 23% of the overall FDI. The following year, Germany's investment declined tremendously to only 1.1% but the volume ran up again to 35.9% in 2004. The inconsistency in these few years resulted in the then Malaysian Prime Minister Abdullah Badawi traveling to Germany on two trips to meet up both Federal Chancellor Schroder and Angela Merkel for mutual talks of politics and economics similar to Tun Mahathirs visit back in 2002. These visits gave new momentums to Germanys investments in Malaysia. (Germany Federal Foreign Office 2009) Japan on the other hand has well maintained a consistent FDI in Malaysia with 20.5% in 2005, 21.8% in 2006 and subsequently 19.5% in 2007. A FTA was signed between Japan and Malaysia with an agreement for the two countries to eradicate tariffs on most industrial, agricultural, forestry as well as fishery products for a period of time (FTA Malaysia 2006). For both Malaysia and Singapore, the two neighboring countries have always maintained a commendable business relationship especially industry associations like Singapore Manufacturers Federation (SMa) and Federation of Malaysian Manufacturers (FMM). According to Singstat (2007), Singapores direct investment in China, Malaysia, Indonesia, Hong Kong and Thailand totals up to about 82% within Asia. Saw and Kesavapany (2006) stated that the bilateral relationship underwent a more positive result after the Mahathir era which ends at 2004 onwards. The works of Institute of Southeast Asian Studies (2005) listed the few examples of investments of Singapore from 2004 onwards which included TemasekTelekom Malaysia, TemasekMplant, Parkway HlgsPantai Holdings and Singtel JVTime Dotcom.
8

Economics for Business Environment ECO5005 (Assignment 2) 3.3 Sectors or Industries where the MNEs Invested Malaysias electronics industry has certainly remarkably matured over the last 30 years. Way back in the 1970s, from a handful of enterprises with less than 600 workers , today more than 60 countries have invested in over 3000 multinational enterprises in Malaysia's manufacturing and service operations due to its competitiveness, attractive and favorable business environment (TradeChakra 2009). According to Mida (2005) the value of exports in 2003 amounted to RM183.2 billion (US$48.2 billion).

Figure 3.3.1 depicts the distribution sectors of FDI inows being dominated by the manufacturing along with the oil and gas sector. The period 2000-2009 saw the rising importance of FDI into the services sector, with the share of FDI in this sector increased by two folds of the total FDI ows in the earlier years.

Economics for Business Environment ECO5005 (Assignment 2)

Figure 3.3.3 shows the FDI position by sectors between period of 2003 to 2007 and were basically dominated by 4 main sectors - manufacturing, financial intermediation, mining and service.. Manufacturing sector led ahead, accounting for more than half of the total FDI. Next was the financial intermediation. However, by year 2007 onwards, the value and shares of services and mining sectors started increasing. In terms of the agriculture, this sector amplified over the period of four years following rapid merger and acquisition activities. The value of this sector increased sharply from RM0.4 billion in 2003 to RM9.3 billion in 2007 an enormous jump of 2,225.0%. Meanwhile, both services and real estate went up 306.3% and 311.1% respectively and experienced parallel upward trend, albeit relatively smaller FDIs. Services sector on the other hand includes investment diversification into nancial services, outsourcing, communications, transportation, hotels and retail trade sub-sectors. According to Masud, Yusoff and Hamid (2008), the value of FDI in trade/commerce also doubled largely due to the influx of hypermarkets and International Procurement Centres (IPC) in Malaysia.

10

Economics for Business Environment ECO5005 (Assignment 2)

Generally, FDI in the manufacturing industry of Malaysia since 1999 was mainly in electrical and electronic, petroleum and chemical as indicated in Figure 3.3.2. The electronis and electrical industry (E&E) is the largest contributor to Malaysias manufacturing output, employment, as well as exports. Malaysia is currently hosting a commendable numbers of MNCs based corporations in the country. Among the key electronic component sub sector are derived from the semiconductor, passive components and other components like relays, PCBs, CRTs and industrial electronics like computer, computer peripherals, telecommunication equipments, automotive systems as well as medical equipments. (MIDA report 2004). One of the main reasons why Malaysia became a hub of electrical and electronic manufacturing is due to the well trained and disciplined labor force with relatively lower wages (Wong 2006). Abdul Karim and Abdullah (2009) analyzed that the E&E industry has also contributed the highest number of employments with an increase of 16.0% to 356,554 in 2004 versus 305,163 back in 2000. A research indicated evidence that the dynamic success of industrialization upgrade (electrical machinery, non-electrical machinery and transport equipments) grew vastly in Malaysia hence the increase in the manufactures shares.
11

Economics for Business Environment ECO5005 (Assignment 2) For semiconductor, top players like Intel, Motorola, Agilent, AMD,are initially invested plants in Malaysia because of the countrys inexpensive labour that was good at working on small electronic devices. Since then, the industry has progressed from labour-intensive operations to sophisticated robotics manufacturing sites that fabricates the latest generation of integrated circuits. The semiconductor sector today has a major part in Malaysias electronics industry,contributing 42.8% of the countrys total electronics exports in 2003. Moving forward to the big shots like Samsung and CPT in Malaysia running their production of CRT has enabled the country to become an amalgamated manufacturing centre for the industry of display devices. This also aids Malaysia to progress toward the production of larger colour LCD and plasma display units like mobile phones, notebook computers and flat screen televisions. Also not forgetting the computers and computer peripherals industry which has become one of the speediest growing sectors in Malaysia with the establishment of manufacturing facilities by computer giants operating as integrated manufacturing centres incorporating R&D, logistic supply chain, sales and marketing plus providing efficient technical support (Mida Report 2004).

12

Economics for Business Environment ECO5005 (Assignment 2)

3.4

The Attractiveness of Malaysia as a Host Country

Since achieving independence more than 50 years ago, Malaysia has successfully capitalized the international trade compared to the earlier days of domestic market and light manufacturing of merely tin and rubber. (Siddiquee 2006). Malaysia has been one of the most thriving Southeast Asian countries in drawing Foreign Direct Investment (FDI). It has always endeavored to sustain the aggressiveness of FDI determinants for example the legal infrastructure by setting up various instrumental policies to attract foreign markets. The Malaysian government has continuously introduced as well as improvised new strategies to attract more FDI by initiating viable business environment with opportunities of growth for both manufacturing and export base in Asia. Malaysia has been an encouraging by injecting new capitals and reinvesting economy to foreign investors in order to provide assurance and boost their confidence. The FDI movement is developed from financial institutions like foreign exchanges during the reference period. In other words, the movement is derived from the differences between the closing and opening positions of the year.

13

Economics for Business Environment ECO5005 (Assignment 2)

The above graph depicts Malaysia has the 2nd largest share of FDI in-flows in ASEAN countries in 2004 behind Singapore. Malaysia has managed to utilize it natural resources to its benefits and hence attracted investments by multinational enterprises which includes pioneer status intensives, labor utilization incentives, location as well as tariffs and exemptions of duties (Ramasamy 2003). In term of infrastructure readiness, it is aimed to serve the business community. Telecommunications network has been digitized with fiber optic technology, accessibility of 5 international airports and 7 international seaports, liberalization of logistics sector together with well-sustained highway roads make Malaysia an ideal facilitator to the Asia-Pacific market (MIDA 2010). The aptitude of Malaysias KLIA airport is able to accommodate 25 million passengers and 650,000 tons of cargo per year. According to Mustapha and Abdullah (2004), Malaysia established a foundation for the knowledge-based economy back in the mid-1990s, when its then Prime Minister first launched the National IT Agenda (NITA) alongside the Multimedia Super Corridor (MSC). The objective of NITA is to strategize, utilize and develop the foundation of Information Technology (IT) which is applicable for electronic economy which includes e-business and e-commerce. The MSC on the other hand served to formulate the multimedia environment as a gateway to facilitate skilled Malaysian labors in high technology industries and technologically savvy entrepreneurs. Five cyber-cities were built consisting of a telecommunication infrastructure scalable to 10 gigabits per second was completed before year 2000 enabling data, voice and image transfer. Malaysia has so far been able to supply semi skilled and educated labor at a relatively lower cost in comparable to Singapore. This is one of the key points that attract the FDI investors. The majority of Malaysians are also able to converse well in English compared to other ASEAN countries which served as another factor (Sandhu and Fredericks 2005). On top of this, Malaysias mixed of multi-racial ethnic group is also a contributing factor. A report from AllMalaysiaInfo (2005) stated that the skilled and capable IT workforce was a key contributor to Shells achievement. Nevertheless, in terms of the services sector for example retail, there is still room for improvement.
14

Economics for Business Environment ECO5005 (Assignment 2) The Malaysian government launched the Second Industrial Master Plan (IMP2) from 1996 to 2005 by the Malaysian government to transform the manufacturing sector to be more competitive internationally as stated in MedCo (2004). This plan according to MITI (2002) emphasizes on strategies for global orientation, competitiveness enhancements, economic foundation improvements, encouragement of Malaysian local companies participation and advancements of information and knowledge driven processes. Factories in Malaysia are mainly situated in about 200 industrial estates and Free Zones extended throughout the country. These zones are grouped as export processing zones, which provide to the requirements of export-oriented industries. Investors are exempted from duty free imports of raw materials, electronic components and parts, machinery and other miscellaneous equipments which have direct relationship to the manufacturing industry. Companies in locations outside the FTZs are also given the special privileges of setting up Licensed Manufacturing Warehouses (LMWs) to enjoy the similar benefits of FTZ. Specialized parks have been developed to cater to the needs of specific industries like the Bukit Jalil Technology Park and Kulim Hi-Tech Park in Kedah. A report from KTPC indicated that the Kulim Hi-Tech Park has managed to attract investment totaling up to more than RM12 billion. Apart from the above factors, Malaysia is also the only Muslim country, besides the UAE, which consistently attracted high FDI inflows over the decades and this is due to its political stability. Studies have shown that political instability weakens the business environment that can in no way attract FDI (Rahman 2009).

15

Economics for Business Environment ECO5005 (Assignment 2)

4.0

Conclusion To wrap up this report, the foreign direct investment has played a major role in

Malaysias economic environment. Various researches have proven that there is a direct positive relationship between FDI and economic growth. In order to improve the economic development in Malaysia, more encouragement is required to attract more foreign investors which will also help greatly to create more employment opportunities for its citizens. Introduction of advanced technology also boosts the knowledge based skilled labor which in return increases production and demand of goods produced by consumers enabling products made in Malaysia to be more competitive in the global market. Therefore the government plays a vital role to come up with new ideas to ensure more investors are attracted to Malaysia as a host country. Economic and political instability will discourage and decrease the confidence of foreign investors which will result in a deceleration of the growth of the country.

16

Economics for Business Environment ECO5005 (Assignment 2) 5.0 Recommendations In order to compete and increase the FDI investments in Malaysia in comparable to other Asian countries, there are several issues that needs to be looked into.

Strengthening the human capital by improving the skilled labors and creative talents as opposed to concentration of cheap labors

Harmonization of custom procedures and custom requirements Develop a more efficient legal infrastructure to facilitate the economic integration of ASEAN

Formulate attractive models and regional production like tax, pioneer status, reducing bureaucratic red tape and regulatory transparency

Strategize merger and acquisition for local companies to be more competitive globally

17

Economics for Business Environment ECO5005 (Assignment 2)

18