RM170 billion. This is Anwar’s favourite number now and how much China has committed in investing in Malaysia. This isn’t new. Foreign direct investments (FDI) have always been a mainstay in Malaysia’s economic development and politics. In the 1980s, Mahathir started this off with an aggressive industrialization plan that aimed to attract investments from overseas.
However, that was 40 years ago. Does this economic model of attracting investments really still hold up? What are the pros and cons of it? Let’s look deeper into this topic and unravel what should Malaysia do moving forward.
In theory, foreign direct investments create jobs, and allow technology transfer.
What is the reason for Malaysia or other countries to attract foreign direct investments? These investments can create jobs for the locals, and transfer technology to the local companies. Company A invests about RM100 million in building a factory in your area. Company A will need workers, and hence will hire local Malaysians. It will then teach them how to operate the machineries and equipment. At the same time, these workers will get salary and benefits that could help support their living and also access to healthcare services (through company insurance mainly).
Furthermore, through Company A’s training, workers would get to know the ins and outs of the technology of the company. Suppliers to Company A would also get to know the technology and from there, some technology transfer would be in place. Other local companies can then incorporate those technologies to start new product offerings. This can reduce cost of production for most companies and inevitably lead to more job creation.
Essentially, those are the motivations in attracting foreign direct investments. There are just some technologies from overseas that can vastly improve the productivity of the economy and society in general.
The Malaysian Government Has Used FDI as one of their Main Political Policy to Gain Support.
It is no secret that the Malaysian government and any other governments in the Southeast region use FDI as a main political policy tool to garner support from the masses. It doesn’t require the government to build local technological capabilities from the ground up, and they don’t have to fund them (this is actually one of the biggest reasons). Foreign companies typically have deep pockets as they are multi-national in nature, and doesn’t have much problems in forking out the money. They just want several things from countries where they are investing in:
- Lower cost of labour.
- Tax incentives and exemptions.
- Access to strategic locations of trade in the world.
For the government, this is a win-win. On one hand, these foreign investments will create some jobs for the local population. On another, they don’t have to fork out money to invest and only need to offer incentives and exemptions to these companies. To the government who has short-term political objectives, this is ideal. Getting local companies to invest will require them to obtain funding from the local market and banks, and hence requires more resources from the government. Foreign multi-national companies are normally more well-capitalised and have much more resources to obtain higher returns on investments.
FDI did Help in Malaysia’s Economic Development But Made It Dependent.
In this paper published in University Teknologi Mara, the authors concluded that foreign direct investment has a direct positive effect on economic growth from 1989 to 2018. It created jobs and increased worker wages also according to this paper by Zainol, Naiemah, and Maizura (2022). It is undeniable that FDI did contribute to Malaysia’s economy development but I also argue that we have become dependent on it.
In 2021, FDI encompasses about 5% of Malaysia’s GDP, which rose back to 2010’s level following a gradual trend downwards. While we don’t depend that much anymore compared to the 1980s and 1990s, this 5% is still high compared to the global average of 2.2%. Whether we like it or not, Malaysia still depends on FDI to drive growth.
It also crowded out some of the domestic investments that could have replaced FDI.
I have always wondered why couldn’t domestic investments take that role FDI is taking now. I think my answer to that is that Malaysia does not have that high of a capability compared to other countries. Bank Negara’s article on economic complexity, posited that FDI was the main catalyst for the rise in economic complexity of Malaysia since the 1980s.
In my opinion, while FDI may be useful as a catalyst to improving economic complexity, it has lead to complacency in the domestic industries in developing local capabilities. The FDI will still keep coming right? Yes, because Malaysia is still stuck in the middle-income trap of providing cheap labour for low-value added activities. Foreign companies look at us as a cheap center to produce their goods and services. Malaysia’s economic complexity is still low when compared to other countries in the region.
FDI has always been touted as a magic bullet by many governments and that include Malaysia too. After all, governments don’t need to fork out any money and FDIs have high chances of succeeding and creating jobs for the locals. However, we may have become too reliant on them and should look instead to develop our local capabilities.