Sustaining Malaysia’s FDI Rebound: Promotion is Good, Facilitation Better

Malaysia has always valued foreign direct investments (FDI) as it contributes toward employment, exports and technology transfer, besides enabling the country to join regional production networks. It is therefore not surprising that the remarkable rebound in FDI in 2021 (Figure 1) was celebrated with much media fanfare, especially since FDI has been on the decline since 2016. 

Investments in manufacturing and services increased substantially from 2020 to 2021, with the former increasing by more than fourfold from RM6.9 billion to RM29.8 billion while the latter increased by close to threefold from RM6.9 billion to RM29.8 billion. The rebound in 2021 bucked the past five-year trend as the share of investments in manufacturing far exceeded that in services in 2021 (Figure 2). 

Several factors contribute to the rebound. Externally, global FDI increased by 77 percent after the 2020 contraction. Internally, Malaysia maintained an open stance towards FDI despite unexpected changes in administration, and the transitions from one administration to the next were by and large peaceful. Continual investment promotion, with incentives to attract FDI, furnished extra support. 

The ongoing Covid-19 pandemic also induced investment facilitation measures. In 2020, the Malaysian Investment Development Authority (MIDA established a Project Acceleration and Coordination Unit (PACU) to provide end-to-end facilitation for speedy and efficient implementation of approved projects. Between 2016 and 2020, 70 per cent of approved manufacturing investments were implemented. In 2021, this proportion rose to 80 per cent. 

Subsequently, MIDA revamped its promotion and facilitation measures. The InvestMalaysia portal was launched in March 2021, providing a single gateway for investors to submit and manage their applications online, including approvals for manufacturing licenses, incentives, and exemptions from customs duties. This digitalisation effort aims to accelerate the approval process to facilitate further increases in FDI. Likewise, Malaysia’s Budget 2022 allocation of a special fund of up to RM2 billion to attract strategic FDI will contribute to bringing in more FDI this year.  

Other positive factors include the global shortage of computer chips, as the Covid-induced increases in virtual working, learning, and entertainment, and e-commerce has generated excess demand for products using these components. Intel, which has operated for fifty years in Malaysia and contributes 10 per cent of the country’s annual electrical and electronics exports, projected this shortage to continue into 2023. Consequently, Intel will increase its global investments, including in Malaysia, where it will invest RM30 billion over the next ten years. Germany’s Infineon also plans to expand its investments by RM3.25 billion in the same sector. These are part of the spike in approved manufacturing investments in 2021, which amounted to RM144.7 billion, or 69 per cent of total approved FDI for that year. 

The sharp increase in approved investments led the Milken Institute to rank Malaysia as the emerging Southeast Asian country with the most potential to attract FDI. Malaysia’s institutions and policies for FDI were appraised ahead of Thailand’s, followed by Indonesia, Vietnam and the Philippines. 

However, external conditions are less favourable for 2022. The global outlook for FDI in 2022 is expected to be more subdued as the rebound in 2021 was fuelled by infrastructure investments aided by Covid-19 recovery stimulus packages, while the almost stagnant greenfield investments reflected weak investor confidence. The ongoing war in Ukraine will exacerbate global uncertainty, weaken economic growth, and dampen investor confidence.   

In the face of heightened uncertainty in the external environment, there is a tendency to encourage investment promotion using incentives in 2022 and beyond. While the use of fiscal and non-fiscal incentives are common tools to attract FDI, these are not without costs in terms of tax revenues foregone. Bank Negara Malaysia has estimated that the cost of incentives ranged between RM10-15 billion annually from 2010 to 2015, equivalent to 0.8-1.3% of GDP or 6.0-8.9% of government tax revenue. More incentives and another round of special allocation to attract more FDI are unlikely to be sustainable in view of the need to increase government revenues after two years of extra fiscal stimulus packages for managing the Covid-19 pandemic.

A better way forward is to continue to enhance investment facilitation measures, making it easier for investors to establish and expand their operations, and conduct their day-to-day business in host countries. In this regard, boosting post-investment, after-care services that address investors’ needs and concerns to realise their investments post-approval, will grow in importance. Malaysia’s efforts in addressing concerns and grievances, such as through a formal annual survey of existing investors, can help in investment retention as well as encourage reinvestments. 

Sustaining the rebound in FDI for 2022 and beyond cannot be contingent on more investment promotion and incentives. With much uncertainty still on the horizon, policy interventions that strengthen investment facilitation can go a long way in bolstering investor confidence.

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