Business

Monday November 2, 2009

Private investments vital for income growth

Policy Perspective - By Tan Sri Sulaiman Mahboob


PRIVATE investment, an important component of aggregate demand, is critical to the welfare of the society because it ensures a steady flow of future income and output while ensuring replacement of depreciated assets within the society.

Unlike in closed communities where investments are from domestic savings, funds move now between countries in search of better return to investments. Thus there is a lot of competition to attract private investments. Although a variety of incentives is used to attract these investment flows, in the final analysis, political stability and quality of infrastructure reign supreme.

Two types of investment flows are often identified. The first is foreign direct investment (FDI), which is long term in nature and is embedded in the social capital of the country once it is incurred.

The other is portfolio flows or short term capital which comes in and goes out to take advantages of the movements in the stock market, interest rates (especially overnight rates) and exchange rates.

In business terms, purchases of assets through mergers and acquisition are often considered investments too. Economists define investments as net new expenditure in assets, such as plants and machinery, and infrastructure.

Hyundai Motor workers at a plant of the company in Ulsan, 410 km south-east of Seoul. South Korea relies heavily on domestic savings as a source of investment. — Reuters

Malaysia has promoted private investments as sources of output, employment, export earnings and technology, thus facilitating our structural transformation. These changes have made our economy more diversified.

There is no doubt we have to continue to promote private investments from both offshore and domestic sources. While FDI are good catalysts in the short and medium term, they have a tendency for subsequent outflows in the form of repatriation of dividends and profit. Malaysia relies a lot on FDI, while in contrast, South Korea relies heavily on domestic savings as a source of investments. Malaysians are now also involved in cross-border investments.

As our economy experiences rising income and savings, we can rely more on domestic investments. The limitation for this is that technology, outside construction and plantation, is relatively lacking among the local entrepreneurs. However, technology and management skills can be bought from the marketplace or acquired through joint ventures.

Malaysia has moved from import substitution industrialisation to export-oriented manufacturing. A major criticism for the reliance on export-oriented industries is the perception that we are a low cost producer and we have enough supply of labour.

In addition, our experience in electronics indicates that the value-added contribution is not too significant given its high import content. Further, this recession which got transmitted into our economy through the external sector, teaches us to increasingly rely on domestic sources of growth.

In reality, we are already facing a serious shortage of labour and Malaysia is no longer a low cost producer. Industries with high labour content therefore have two choices: either they move overseas or they install a plan for upgrading with greater automation, computerisation and increasing use of robotics.

To be sure, the demand for a liberal services sector within the Asean region in 2011 and the changing economics of automobile industries worldwide, and especially within Asean, as well as the entry of low cost players in China and India, demand that our industrial structure rise in the value chain by ensuring that the products we generate are embedded with the contribution of high skill, knowledge and technology and significant services content.

They must as far as possible, be in the nature of final products and no longer components to be exported for further value addition elsewhere.

The total value chain has to rise fast to generate more value and high income in the economy, not only to compensate for the direct and hidden costs that we help meet, but more so to provide high skill jobs and high income to Malaysian workers, many of whom have acquired tertiary education.

In this regard, the wage level has to rise, consistent with productivity improvements and high skills that the workers have. Additionally, a parallel action has to be undertaken to significantly reduce the reliance on foreign labour especially in manufacturing and services sectors.

Moving forward we need to engineer immediately a smooth transition towards a high income and high technology industrialisation.

For this purpose, public policies and the fiscal incentives have to be reset to orchestrate this transition towards the next decade of industrialisation.

Bearing in mind the importance of this matter, it may be inexcusable if this concern is not sufficiently deliberated in the policy calculus of the 10th Malaysia Plan.

  • Tan Sri Dr Sulaiman Mahbob is Malaysian Industrial Development Authority chairman.Email:
    chairman@mida.gov.my .

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