UNIVERSITI MALAYSIA PERLIS

BFT 204 INTERNATIONAL FINANCE
INDIVIDUAL RESEARCH PAPER FOREIGN DIRECT INVESTMENT in MALAYSIA

PREPARED BY,
NOR AINNA AFIQAH BT MOHAMMAD ROSMAN KRISHNAN 091240960

1

Other examples of mode of entry to foreign country are like exporting.EXECUTIVE SUMMARY Foreign Direct Investment is one of the entry modes for investors to the foreign country. Some of them are as follows:         An individual A group of related individuals An incorporated or unincorporated entity A public company or private company A group of related enterprises A government body An estate (law). Those mode mentioned have their own advantages and also the disadvantages for the investors. the investors will make some researches on which mode of entry they should choose based on which want will benefits them the most. franchising or joint venture. trust or other societal organization Any combination of the above. 2 . Normally. Anyone can be a foreign direct investor and they could be from various sectors in economy.

transfer of technology and expertise.INTRODUCTION Foreign Direct Investment or also known as the foreign investment refers to long term participation by country A into country B. They are going to need some capital.  Outward foreign direct investment on the other hand is the capital that provided by the investor residing in a country to any other country which results in a net FDI inflow (positive or negative) and stock of foreign direct investment. That capital is inward FDI for Malaysia. there are two types of FDI:  Inward foreign direct investment is defined as the capital provided from a foreign direct investor residing in a country. As for example. which is residing in another country. jointventure. Foreign Direct Investment (FDI) in Malaysia is sometimes also defined as the holding of at least 10% of the total equity in a resident company by a non-resident investor. which is the cumulative number for a given period. Some other definitions of FDI in Malaysia is consequent transactions in financial assets and liabilities between resident companies and non-resident direct investors linked by a foreign direct investment relationship (FDIR) The transactions could be between Malaysian companies and with its immediate or ultimate parent or fellow companies. Based on some researches done. to that economy. 3 .  Direct investment excludes investment through purchase of shares. General Motors decides to open a factory in Malaysia. It usually involves participation in management.

It is different from the notes that we were taught in class as the definitions is quite general.  To gain knowledge on how is FDI doing in Malaysia. I get to know more on what does it mean by FDI in Malaysia. 4 . Some of the students are still not clear enough on what is FDI.  To understand the actual definition of foreign direct investment. how to get involved in FDI and the risk that arise when someone get involve into FDI.OBJECTIVES  To know more on what does it mean by foreign direct investment in Malaysia? By doing this research.

Next. are based on the newspapers’ archives. Firstly. This helps me in finding some old data and graphs to help me in completing this research paper.DATA & METHODOLOGY There are various methods used in completing this research paper. These journals mainly talks about how FDI could affect the Malaysia economy and the factors that will boost up FDI in Malaysia. Some of them are written by some foreign professionals. Some of the methods are like Internet websites. There are about two or more journals related to the topics. By searching those related websites. I tend to get some useful information that I need. is by analyzing the journals. 5 . research journals and also from the newspapers’ archives. Last but not least. The Internet websites also do provide some research journals or and some paperwork by some lecturers in local universities. starts with the main method used which is the Internet websites. I do make some readings on those old newspapers cut or their archives.

FDI statistics are used by policy makers as a tool to devise foreign investment policy. Malaysia has been an encouraging economy to foreign investors. and a resourceful legal infrastructure) to bring in FDI. “ Manoj Yadav.g : natural resources. and skills. A joint survey between Department of Statistics.g : trade status under Generalized System of Preferences (GSP).com 6 . The Government of Malaysia’s (GOM) main policy is to bind FDI as a part of the economic development strategy to acquire foreign technology. abundant labour) and also the intangible assets (e. Malaysia has taken advantage of tangible assets ( e. and cooperatives. The reinvestment and the new capital injection among the present foreign companies specified their assurance in Malaysian investment. capital.suite101. The Malaysian government has improved the value of the present determinants and is considering new strategies to attract FDI. and other changes during the reference period.    Reinvested earnings Dividends are distributed earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises. The FDI movement is actually derived from financial institutions and non transaction factors like foreign exchanges. International trade is rising with a growing manufacturing and petroleum industry. Since 1957. “The growing Malaysian economy is open for foreign direct investments. price changes. Malaysia and Bank Negara Malaysia is performed to further improve the capability in giving detailed analysis. www. liberal trade regime. Interests are income on loans and debt securities. public corporations. macroeconomic stability.FINDINGS Malaysia has been one of the most successful Southeast Asian countries in attracting Foreign Direct Investment (FDI). Investment income of FDI has three parts.

The major industries in Malaysia are rubber and palm oil processing.3% to the total GDP of Malaysia. The total value of international trade in Malaysia is $275. palm oil. Malaysia has changed from a raw material exporter to a more open emerging multi-sector economy. The major agricultural products are rubber.9 billion. In 2007. listed below are some of the export and import details in Malaysia. Malaysia and Indonesia) that control the Strait of Malacca – one of the most important shipping lanes in the world. The major commodities exported from Malaysia are electronic equipments. petroleum and liquefied natural gas. international trade plays a large role in the Malaysian economy. The most important factors that will affect FDI are as follows:        Stability of government Investment guarantee agreement with the country Freedom to remit earning. The manufacturing industry contributes 42. Since 1970. Agriculture contributes 10.1% to the total GDP. The petroleum company of Malaysia. Malaysia is one of the world’s largest exporters of semiconductor devices. there are various factors that will affect the foreign direct investment. Based on some readings done. timber and cocoa. rubber.Malaysia is one of the three countries (Singapore. palm oil. For some additional information. The share of exports in the total international trade is $156. PETRONAS supplies 40% of government revenues. Thus. logging and petroleum production.1 billion and it ranks 30th in the world. water and gas Prevalence of peaceful industrial relations Transportation cost and facilities Support of banking and insurance services 7 . electronics. This shows that Malaysia are now involve largely either investing on other countries or being a country that have a stable economic condition which can easily attract investors.4 billion. textiles and chemicals. light manufacturing. The total GDP of Malaysia is $381. interest royalties and repatriate capital Availability of skilled labour force and supply of power. Malaysia was the 3rd largest economy in Southeast Asia. rice. wood and wood products.

Now it has to compete with the latter for the FDI. ranked first among all countries in approved FDI in Malaysia's manufacturing sector with approved new manufacturing investments totaling RM5. Principal U.5 billion. Datuk Mustapa Mohamed announced that there was a sharp reduction in FDI and Malaysia only received RM4.S.8 billion approved for 2008.S. trade protection and tax incentives Efficiency of public sector Economic and exchange rate stability Back to the topic on about the foreign direct investment in Malaysia. in 1999. for the whole of 2008. Malaysia was very much ahead of Vietnam on attracting FDI. 60% of which is in the oil and gas and petrochemical sectors with the rest in manufacturing. $9.37 billion). The foreign investments accounted for 73. In addition to that. $30.1 billion foreign direct investment (FDI). $5 billion. Malaysia was the United States' 10th-largest trading partner and its 12th-largest export market. according to Wikipedia. FDI in other Asian countries such as Vietnam and Singapore has grown rapidly. The Malaysian Government encourages Foreign Direct Investment (FDI). investment approved by the Malaysian Investment Development Authority (MIDA) was concentrated in the chemicals. imports from Malaysia reached U. In 1999. for the first five months of 2009. while U. and electrical sectors. U. $21. the U.S. which was all time high. The Minister of International Trade and Industry at that time. especially semiconductors and other electronic products.S. and Malaysia totaled U.2 billion (US$1. two-way bilateral trade between the U. According to Malaysian statistics. exports totaled U.1 billion and U.S.S.S.S. with U. 8 . Malaysia received RM 46. exports to Malaysia totaling U. imports from Malaysia increasing to U. On the other hand.S. $11. electronics.S.4 billion. During the first half of 2000.S.6 billion.4 percent of the total investments of RM62. private investment in Malaysia exceeded $10 billion. The cumulative value of U. about 78% reduction.2 billion FDI.    External demand and export market potential Tariff .S.S. Malaysia is an important trading partner for the United States.

2% to RM522. Certainly. There is no direct measure for technology transfer. FDI plays several roles in the Malaysia economy. and.11 billion in the same period of 2006. FDI provides the fastest and most effective way to deploy new technologies in developing host countries. It has been observed that investing firms would naturally have ready international markets for their products. The most important one is to generate economic growth by increasing domestic capital information. Its first role is to increase domestic capital formation which leads to incremental economic growth through expansion of production capacity. (Refer graph 2) The third crucial role of FDI is to facilitate the transfer of new technology to the host economy.38 billion. Therefore. (Refer graph 3) 9 . the host economy benefits because it circumvents the need for domestic firms to spend resources and time to penetrate and acquire foreign markets. However. Malaysia's total trade increased by 2. increases the production frontier of developing countries. (Refer graph 1) The second role of FDI is to fuel export growth. the success of this depends on the absorptive capacity of the host economy. like other capital inflows. “FDI functions as one way to bridge an inter-temporal gap of capital demand and supply. Technology is also easier to be absorbed if the technology gap is narrower. less advanced technologies are easier to be absorbed. compared with RM511. which normally suffer a shortage of capital” Krugman and Obstfeld (1994) . Higher economic growth creates favorable investment environment which attracts investment from any other firms.In the first six months of 2007.

In addition to that. Pakistan. FDI also tend to lead to higher employment through the expansion of the economy and job creation. It was reported by the MOF (2005) that in 2004 there were 1. The massive influx of foreign investments into the manufacturing sector was pivotal in its transformation from an agricultural economy to an industrialized economy. The demand for labour exceeds supply by a very large extent that most manufacturing industries now depend on imported labour from Indonesia. Bangladesh.3 million foreign workers making up 12% of total employment. Nepal. (Refer graph 4) FDI also act as the agent of transformation in the Malaysian economy. Vietnamese. India and other countries. (Refer graph 5) 10 . 31% of employments in the manufacturing sector were foreign labour.

Without the FDI activities. The other factors such as politic conditions and our currency value may also be one of the factors. As mentioned above. As we all know. There is numerous numbers of ways to attract those investors such as about the availability of labour. foreign direct investment is one of the most important activities that lead to the expansion of economy. based on the analysis done on the researchers’ journals and articles. the economic condition of Malaysia will decline even though it will not be too much.CONCLUSION & RECOMMENDATION As a conclusion. FDI has many roles towards our country. here. Thus. Other than that. some small suggestion is Malaysia should increase and try to attract more foreign investors to invest into our country. the production cost for a company here in the Asian country are quite low compare to those in Europe. It contributes the most to our national income. 11 . most suggest that economic condition are not depend mainly on FDI itself. This will indirectly attract foreign investors as they will be cutting cost on that.

org 3.tradechakra. http://en.wikipedia.upm. Norzanalia Saadun. Economy of Malaysia. Azmi Shahrin Bin Abdul Rahim http://economics.edu. Definition of Foreign Direct Investment.about. What is inward FDI? http://wiki.pdf 4.php 12 . http://psasir.com 2.answers.com/Q/What_is_inward_fdi 5. http://economics. FDI in Malaysia.com/cs/economicsglossary/g/fdi. The Changing Role Of FDI In The Malaysian Economy. Characteristics of and factors affecting foreign direct investment in the malaysian furniture industry.my/6106/1/FH_2007_2(1-24).htm 6. Trade Chakra http://www.com/economy/malaysia/fdi-in-malaysia-198.REFERENCES 1.dstcentre.

other factors such as the depreciation of the Ringgit and global demand would have had a greater impact on the growth of exports. It is not likely that Malaysia would have experienced the tremendous growth in exports without the benefit of FDI. some suggests that there is a break in the relationship between FDI and economic growth. It may also be that the economy is now more efficient and therefore being less dependent upon FDI for expansion.APPENDICES In 1998. Since then. 13 .

The case for Malaysia is as shown in the graph above. Malaysia can be considered to be at full employment 14 .Productivity index would serve as a suitable proxy under the assumption that adoption of technology leads to higher productivity.

The pivotal year was 1987 when output from the manufacturing sector overtook output from the agricultural sector.Graph above shows that the dominance of the manufacturing sector in the economy coincided with the inflow of FDI. 15 .

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