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Exchange Rates

Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another, or for engaging in speculation or trading in the foreign exchange market.

Fixed RatesA fixed exchange rate, also referred to as pegged exchanged rate, is an exchange rate under which the currency of a country is fixed, either to another country’s currency. A fixed exchange rate is an exchange rate system in which one currency’s value is matched against another currency’s value.

Flexible RatesFlexible exchange rates can be defined as exchange rates determined by global supply and demand of currency. In other words, they are prices of foreign exchange determined by the market, that can rapidly change due to supply and demand, and are not pegged nor controlled by central banks.

Merits And Demerits Exchange Rate Pegging

Merits Exchange Rate Pegging• Promotes International Investment

Exchange rates pegging promote international investments. If the exchange rates are fluctuating, the lenders and investors will not be prepared to lend for long-term investments. In modern times when economic transactions and relations among nations have become too vast and complex, it is more useful to follow a exchange rate pegging system.• Necessary for Developing Countries

Exchanges rates pegging are necessary and desirable for the developing countries for carrying out planned development efforts. Fluctuating rates disturb the smooth process of economic development and restrict the inflow of foreign capital.

Demerits Exchange Rate Pegging• Policy ConflictsThe exchange rate pegging may not be compatible with other economic targets for growth, inflation and unemployment and this may cause conflicts of policies. This is especially true if the exchange rate is fixed at a level that is either too high or too low.• SpeculationIf foreign exchange markets believe that there may be a revaluation or devaluation, then there may be a run of speculation. Fighting this may cost the government significantly in terms of their foreign exchange reserves.

The Implication Of Exchange Rate Pegging On The Performance Of Malaysia Economic Development

Foreign Direct Investment Foreign direct investment is an important indicator to boost the

economic growth of Malaysia. Foreign direct investment was identified as a medium in order to

acquire skills, knowledge, technologies and to internationalize business and at the same time to reduce debts.

An open economy that is practiced by Malaysian allow it to become one of the largest recipients of FDI.

Advantages Capital inflows The inflows of FDI have bring in more foreign capital

inflow. Foreign capital brought in by FDI has also been a positive

impact on the country, especially to the capital account, which take advantage of the profits and dividends of foreign investment.

In addition, the national income will increase with the inflow of foreign investment.

This as money flows out of the country will be reduced because many imported goods have been replaced by local products.

Transfer of technology Technology is one of the contributions of foreign

investments into Malaysia. This is because foreign investments allow the transfer of modern technology to the country.

Foreign investors will bring together technology and modern management system as well as professionals who specialize and productive.

They will also implement various programs to train local workers to develop specialist knowledge that local workers can be absorbed into their investment projects.

For example, oil prospecting projects in Terengganu.

Reduce unemployment The main goal of the government encouraging foreign

investment is to increase employment and reduce unemployment in the country. When foreign investment is increasing, many new plant will be established.

In addition, foreign investors from developed countries like the United States can raise higher revenues through the inflow of foreign currency from foreign countries.

Foreign investment will increase the GDP (Gross Domestic Product) of the country and ensure rapid economic growth.

Disadvantages Transfer pricing issues Transfer pricing issues involved in this problem of abuses committed

by foreign companies in particular to avoid the tax burden. Transfer pricing issues are further provides that the deficit on the

balance of state spending. This is because the tax revenue that would have been obtained from a foreign company is not obtained as a result of this distortion.

Most of the profits of foreign companies are usually transferred its main headquarters for example in Japanese or United States of America.

This problem becomes more complicated when it is difficult to detect the tap existed trade between countries of different branches among transnational corporations

Uncertainty factor FDI is influenced by several factors that determine whether

the repellent or puller. One of the determining factors is the low labor cost,

economic and political stability and so on. But here too, the character of FDI to the lodge where even

many factors repellent and puller foreign firms will be in Malaysia for as long as they get benefits such as low cost, attractive policies, labor will greatly benefit them.

If the country is experiencing economic stability for example in the event of an economic crisis may cause investors residing in the country will try to pull out their capital.

Low technological entry Government encouragement to FDI inflows of foreign capital

because hope this will be followed by the transfer of technology.

But the reverse occurs when the rate of absorption technology brought by foreign investors is limited and low due to lack of skilled expertise and high level of technology.

The establishment of free trade zone cannot be denied expand exports and jobs, but some studies show very little transfer of technology and skills development established in the region.

This situation occurs because most companies operating in Malaysia is not considering technology transfer as one of the goals to place their branches here.

SOURCES reduction OF FOREIGN DIRECT INVESTMENT IN MALAYSIA

1) The political instability of the country 2) Ease of poor infrastructure 3) The supply of labor is expensive, low and unskilled 4) Other factors

SOLUTIONS

1) The political instability of the country. The government must ensure the country's political situation is

more stable. This is because, if a country is in a stable political situation, it's unlikely the state could attract foreign investors to invest in Malaysia.

Foreign investors will not take the risk of investing in countries experiencing instability in the country.

Factors that could encourage more foreign investors to invest in our country is a factor of political stability.

We need to retain and maintain political stability that has long existed in our country

2) Ease of poor infrastructure. Upgrading the existing infrastructure. Infrastructure is also one

that could be done in attracting foreign investors to invest in Malaysia, well-equipped facilities not only to attract foreign investors even, countries can also address that Malaysia as an appropriate state to do a better investment.

Efforts to attract foreign investors is not easy and then the government must play a role to ensure that equity is achieve.

Preparation of industrial sites and infrastructure facilities aimed at attracting foreign investors-investors to develop new companies here.

3) The supply of labor is expensive, low and unskilled. Make improvements on the supply side of the labor

force. With a lot of labor, this could help the country to increase foreign investment.

This can be seen when a country has a lot of employees to do any work in addition to his wages are low.

Therefore, foreign investors will be attracted to invest in our country and thus they will create more job opportunities in the country.

4) Other factorsa) The bureaucracy also plays an important role in determining foreign investment. This is because, if the bureaucracy of a country that is not too tight, doubtless foreign

investors will be attracted to invest in a country. Bureaucracy complicates the administration of such investors, for example an

application that requires a long time to be approved, would be inconvenient for foreign investors and will cause them to attract investment to other countries.

b) The foreign investments are often only associated with the economic stability of a country. the economy of a country is not immune from consideration for investors before

investing in a particular country. Of course, investors will find a country with a stable economy to expand their

businesses to get a profitable return them. If a country is underdeveloped and undercapitalized, investors might not be interested

in investing in a country.

RECOMMENDATION

1) Provide incentives scheme to investors. Attractiveness of the incentive scheme is essential to encourage foreign

investment. In this effort, the government gave some advantage to the pioneer investors such as tax exemption for a certain period.

In order to enable foreign investors to invest here, the government should relax its investment rules to allow foreigners to have a bigger equity up to 100% in a project or business.

2) The Malaysian government should send trade missions through the Ministry of Trade and Industry to attract investment from abroad. The delegations aimed to foreign investors about investment potential in

Malaysia either through investment seminars, meetings or media reports. The information investment for foreign investors also delivered through the

Malaysian Industrial Development Authority offices abroad.

3) Making the policy more open and manageable.• To further encourage foreign capital inflows primarily through

FDI, it is important to ensure that trade policy is good because usually a good trade policies to attract FDI inflows.

• Therefore, in the present multinational companies are changing their strategies and become more global, this means that trade policy will be one of the most important attractions of retaining and attracting more foreign direct investment.

• Only needs to be given attention by the government is a policy that ensures opportunities for domestic investors to create a competitive edge by providing strict protection period.