Topic 5 Foreign Direct Investment 2

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Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Chapter5

Rajah Rasiah

Foreign Direct Investmentin Malaysia


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Learning Objectives

Define Foreign Direct investment.

Explain the positive effects of FDI to Malaysiaeconomy development.

Explain the negative effects of FDI to Malaysiaeconomy development.

Incentives for FDI

Example of projects set to tap the benefits ofFDIs.


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Foreign Direct Investments

Define Foreign Direct Investments (FDIs)

An investment made by a company or entity basedin one country, into a company or entity based inanother country.

Foreign direct investments differ substantially from:

1. Indirect investments such as portfolio flows,wherein overseas institutions invest in equities

listed on a nation's stock exchange.2. Direct investments typically have a significant

degree of influence and control over thecompany into which the investment is made.


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Open economies with skilled workforces and goodgrowth prospects tend to attract larger amounts offoreign direct investment than closed, highly regulated

economies.

The investing company may make its overseasinvestment in a number of ways - either by:

1. Setting up a subsidiary in the foreign country,

2. Acquiring shares of an overseas company

3. A merger or joint venture.


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The accepted threshold for a foreign direct investmentrelationship, as defined by the OECD, is 10%. That is,the foreign investor must own at least 10% or more of

the voting stock or ordinary shares of the investeecompany.

An example of foreign direct investment would be anAmerican company taking a majority stake in a company

in Malaysia. Another example would be a Malaysian company setting

up a joint venture to develop a mineral deposit in Chile.


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Foreign direct investment (FDI) inexportoriented firms was promoted activelywith the introduction of the:

1. Investment Incentives Act of 1968,

2. Free Trade Zone Act of 1971.

3. Promotion of Incentives Act of 1986.


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Positive effect of FDI to Malaysia economydevelopment:

i. Investors introduce modern technology andmanagement, increasing level of technicalefficiencyas well as promote R&D.

ii. Investors fill in the gap between domestic

saving and investment.

iii. Foreign exchange reserve increase due toinflow of funds.

iv. Training by foreign firms help develop Malaysianhuman capital.

v. Profit generated from FDI contributes tocorporate tax revenue.


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vi. Increase employment opportunity.

vii.New firms lead to setting up of supportingindustries that are required by the set up of

factories and bring prosperity to the local population.


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Negative effect of FDI to Malaysia economydevelopment:

i. FDI may harm the environment if foreign firmsinvesting in Malaysia pollute. Environmental laws areless stringent in Malaysia.

ii. Create fierce competition for workforce to the localindustries.

iii. Global capitalists imperialism.

iv. Cultural frictionthat may even harm international

diplomacy.v. Various incentives and infrastructure spending to

attract FDI are from public fund (either throughgovernment borrowing or tax).


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1.0 Introduction

Source of FDI in Malaysia

1985 1986 1987 1988 1989 1990 1998 1999 2000 2001 2002

UK 2.8 2.9 3.7 0.4 8.8 4.9 3.6 1.5 3.8 0.6 1.4

USA 11.6 3.1 7.9 11.0 3.6 3.2 49.2 44.4 37.7 18.0 23.0

Japan 27.5 6.8 34.7 25.1 31.3 23.9 14.2 8.1 14.5 17.8 5.0

Taiwan 3.3 6.4 11.8 17.0 24.7 35.9 7.6 2.1 4.6 6.0 2.1

Singapore 10.4 10.9 12.5 8.6 10.6 5.0 7.4 2.1 4.6 6.0 2.1

Korea 2.6 0.2 0.2 0.9 2.2 3.6 0.5 0.2 3.6 9.0 3.1

Germany n.a. n.a. n.a. n.a. n.a. 0.7 1.2 1.5 8.3 13.8 44.9


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FDI in MSC Development Phase (Post-Crisis1997/8)

To develop Malaysia as centre for high-tech

industries in ICT. Incentives included:

i. Companies located in the MSCwill be given MSC-Status,which entitles them to a 10-year Pioneer Status Tax

Holiday.ii. A 100 percent Investment Tax Allowance on new

investments made in cyber cities, and tax exemption onimport of multimedia equipment.

Investment Region / Corridors


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iii. Importationsof multimedia and trainingequipment are duty-free.

iv. Ensure no internet censorship and providecompetitive telecommunications tariffs.

v. Freedom to borrow fund globally.

vi. Unrestricted employment of local and foreignknowledge workers.

vii. Exemption from selective exchange controlmeasures.



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Ch. 1: #Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011


Plan, Incentives and Expectation

Plans to make IDR a strong and sustainablemetropolis of international standing.

The government has committed more than RM 4billion towards infrastructure development in theregion.

On March 22, Prime Minister Datuk Abdullah Badawi

announced an attractive package of investmentincentives (include 10-year exemption fromcorporate tax) for qualifying companies in six targetsectors.


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The six target sectors are:

Creativeindustries, Educationalservices, financialadvisoryand consulting, healthcare, logisticsand

tourism-related services. Foreign workers in IDR would be able to import or

purchase a duty-free car for their personal use.


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Companies will be free to employ foreign workerswithin the IDR.

Benefits

IDR expected to draw FDI worth US$40billion in thefirst seven years.

IDR projected that 817,500 jobs will be created in theregion up to year 2025.

Despite allow employing foreign workers, Malaysianare expected to make up the majority of theworkforce there.



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Northern Corridor EconomicRegion (NCER)

For Agriculture:

Thrust 1: Improve scale and professionalism

Programs for Thrust 1: Professional land

management (Estate concept) and professionalmarketing companyto create regional brand identity.

Thrust 2: Technology & quality standards.

Programs for Thrust 2: Better seeds, GoodAgricultural Practices (GAP)and NorthStarAgriculture Scholarships.


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Northern Corridor Economic Region(NCER)

For Manufacturing:

Trust 1: Increase E&E value added

Trust 2: Develop new sub-sectors

Programs: Micro-Electronics Centre of Excellence;funded secondment programs; biotechnology,agriculture downstream; oil & gas


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Northern Corridor Economic Region(NCER)

For Services

Trust 1: Strengthen tourism

Trust 2: develop logistics & trading services

Programs:

Develop2-3 of Langkawis outer islands.

2-3 main tourism clusters on mainland.

incentives to encourage flow of raw & semi-finished goods into NCER.


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Eastern Corridor EconomicRegion (ECER)

Kelantan: Centre for trading, center of educationexcellence and to promote agro-based activities suchas poultry rearing and herbal plants cultivation.

Terengganu:Would be geared as a tourismgateway.

Harnessing its current strengths in the oil, gas andpetrochemical industries.

To be a center of education excellence.

In agriculture, goat rearing and cultivation of citrusfruitsis encouraged.


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Eastern Corridor EconomicRegion (ECER)

Pahang:Focus on manufacturing that would beextended to develop a

Palm oil industrial cluster.

Developed integrated logistic distribution hub aspart of its port city development.

Agriculture sector development included promotingcattle rearing and pineapple cultivation.


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Sabah Development Corridor

Sabah Development Corridor (SDC)

Main thrusts are:

Transform Sabah into a regional gateway for trade,

investment and tourism; Continue to make Sabah a harmoniousand

prosperous State, irrespective of race and religion;

Make Sabah more technology-savvy for a better

quality of life in the State;

Create more job opportunities in the State; and


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1.0 Introduction

Sarawak Corridor of Renewable Energy (SCORE)

Make Sabah a comfortable place to live in amidst itsrich diverse cultures, heritage and environment.

The core of the SCORE is development of abundantenergy resources, which are hydropower(28,000MW), coal (1.46 billion tones) and naturalgas (40.9 trillion sq cu ft) found in the central region.

Tanjung Manis: To be a manufacturing and smallindustries centre.To be an important regional portcity by 2030.


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Ch. 1: #Malaysian Economy Oxford Fajar Sdn Bhd (008974-T) 2011

Sarawak Corridor ofRenewable Energy (SCORE)

Sarawak Corridor of Renewable Energy (SCORE

Similajau: To be an industrial city underpinning anew industrial center, housing heavy industries suchas oil & gas, aluminum, steel and silica, with a

deepwater port.

Mukah:To be an education hub and Smart City,drawing not only academic and research institutionbut also skills training centers.

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Topic 5 Foreign Direct Investment 2