Saturday November 21, 2009

Driving private investments

Mida’s efforts to put Malaysia on the high-growth path

FIRST impressions do matter.

In that sense, with Malaysia still ranked among some of the more competitive economies in the world (being in the top 25 list) by international independent organisations such as the World Economic Forum and International Institute for Management Development, its appeal as an investment destination would generally remain intact.

Datuk Jalilah Baba ... ‘Competitiveness rankings are merely based on executive opinion surveys, and international investors would not base their decisions and location choice solely on those rankings.’

Reports by these international bodies are a good marketing material to “sell” Malaysia to foreign investors who are scouring the fast-booming Asian region for opportunities to grow the businesses.

On a less optimistic note, Malaysia’s competitiveness does not seem to have improved much in recent years, raising concerns over whether the country is losing ground in that realm.

“Certainly not,” says Malaysian Industrial Development Authority (Mida) director-general Datuk Jalilah Baba, pointing out that the latest ranking results have yet to price in the recent policy improvements and liberalisation initiatives of the Government.

Furthermore, she says, “Competitiveness rankings are merely based on executive opinion surveys, so it is understandable that international investors would not base their decisions and location choice solely on those rankings.”

Changing focus

What’s more important, Jalilah says, is that Malaysia continues to improve its infrastructure – ensure ease of doing business and remove the government red tape – to avoid delays in terms of processing applications and providing information. In addition, the transparency and consistency of the country’s policies have to be maintained at all times for Malaysia to remain an attractive investment destination for private investors.

Jalilah concedes, nevertheless, that Malaysia is facing tough competition, especially from emerging markets, in attracting foreign direct investments.

“It’s been challenging, with emerging economies such as China, India, Indonesia and Vietnam opening up,” she explains, adding that competition for the shrinking pie of foreign investments has intensified since the onslaught of the global economic crisis last year.

But Malaysia is on the path of differentiating itself from other emerging economies. The country is now changing its focus in terms of the type of industries that it wants to attract into the country to realise its vision to become a high-income economy by 2020.

“We cannot stay stagnant; we have to move up the value chain by being more selective now,” Jalilah says.

“It’s high time to forego industries that are not in line with the nation’s vision to become a high-income economy,” she adds.

Mida is currently reviewing the country’s investment policy to introduce a new list of industries that can qualify for incentives, and eliminate those that are labour-intensive and have low value add from the list. The revised scheme will be unveiled by the first quarter of next year.

The new focus now is to develop high-technology, knowledge-based and capital-intensive industries, particularly in the new growth areas such as biotechnology, pharmaceutical and medical devices, renewable energy, fine chemicals, petrochemicals, sophisticated industrial and electronic components, machinery and equipment, all of which would require the inflow of foreign technology and expertise.

Focus will also be placed on selected services industries such as those identified under the Third Industrial Master Plan (2006-2020), or IMP3, including business and professional services, distributive trade, construction, education and training, tourism, health, logistics and information and communications technology (ICT), as well as those identified by Mida, such as environmental management.

According to Jalilah, although the new investment scheme has yet to be rolled out, Mida has administratively started discouraging new investments in labour-intensive and low value-add industries from setting foot in the country, and redirecting them to other cost-competitive countries. She argues that such drastic measures need to be taken; otherwise, Malaysia will continue to be stuck in the middle-income trap.

Unpredictable trend

Mida is currently working closely with the National Economic Advisory Council (NEAC) for the development of a new economic model and strategies that can expedite the transition of Malaysia into a high-income economy. As the country’s one-stop investment promotion centre, Mida’s role is to stimulate both domestic and foreign investments to boost the country’s income and propel it into the developed-nation status.

So far, the success of Malaysia in encouraging private investments is evident in the fact that the country is one of the largest trading nations in the world and home to over 5,000 companies from over 40 countries in the manufacturing and related services sectors.

And the move towards a more capital-intensive, high value-added and high technology-based hub for investments is reflected through the increase in the capital intensity, as measured by the capital investment per employee ratio, or CIPE, of projects approved, which rose from RM165,925 in 1990 to RM620,571 last year.

According to Mida, the total value of approved investments in manufacturing projects last year reached an all-time high of RM62.8bil, compared with RM59.9bil in 2007. Foreign direct investments (FDIs) made up 73.4% of the total inflows recorded in 2008, compared with 55.8% the previous year.

But the global economic crisis has exacerbated a sharp downturn in investment activities in the country since the start of 2009. Total approved investments in the manufacturing sector recorded between January and August was valued at only RM19.1bil, out of which 63.9% were FDI.

Nevertheless, Mida is confident of meeting the annual target of RM27.5bil worth of investments as stipulated under the IMP3 this year and the coming years, even though it is unable to predict the trend of investment inflows for the next few years, especially in light of the global economic crisis.

Indeed, it is anyone’s guess as to when and how fast the global economy can recover from the present slump.

Since the trend of investments and trade of Malaysia is strongly influenced by the economies of its traditional investors and trade partners, Mida feels that attempting to accurately project investment figures for the coming years is not a realistic endeavour.

“Also, because of our new focus, the total investment values that we would attract in the future years would most probably not be as high as in previous years,” Jalilah says.

She explains: “Some of the industries that we are attracting may require comparatively lower start-up capital, and hence, the investment figures may seem to be lower. But these industries tend to have high knowledge content, and may even have higher spillover effects that could lead to more innovation and research and development in the economy, as well as a stronger multiplier effect in terms of job creation that ultimately benefit the country in the long run.”

Based on past years’ data, it is evident that FDI still play a key role in driving Malaysia’s industrial and economic development. Between January 2000 and July 2009, FDI in approved manufacturing projects were valued at RM205.3bil, or 59% of the total investments of RM348bil approved during the period.

The component has made a positive impact on the economy in terms of contribution to gross domestic product (GDP) growth, trade and balance of payments, capital formation, employment, and productivity and efficiency of the system. There have also been spill-over effects in the form of technology transfer; establishment of new domestic companies; expansion of supporting industries, including the development of services sector; as well as joint-venture projects between local companies and private and public institutions of higher learning.

While the Government acknowledges the need to reduce the country’s reliance on FDI, Mida feels that the component is still needed by Malaysia at this juncture because the country still needs as much assistance as possible in terms of foreign technology and expertise to move its economy up the value chain.

Jalilah explains that FDI are also needed to complement domestic investments to help the country achieve its targeted growth rates for the next 10 years. (The Government is targeting an annual growth rate of 5.5% under the 10th Malaysia Plan.)

As it is, domestic investments are still inadequate to stimulate the country’s economy. While the value of approved domestic investments in manufacturing projects rose from RM15.6bil in 2004 to RM26.5bil in 2007, the figure showed a decline to RM16.7bil last year. Between January and August this year, the value of approved domestic investment stood at only RM7bil.

Attributing the downtrend of domestic investments to the global economic crisis that has forced many local exporters to reduce production and implement cost-cutting measures, Mida expects domestic investments to improve next year as the global economy recovers.

Investment outflow

This will be supported by its continuous efforts to promote domestic investments through various measures, including organising seminars and exhibitions, as well as fostering ties with local business chambers and industry associations to exchange ideas and discuss issues pertaining to new business opportunities. These initiatives are to realise the Government’s target of increasing domestic contribution to total investment to 60% by the end of the IMP3.

According to Bank Negara, total direct investment outflow from Malaysia last year stood at RM50.2bil, up from RM38.2bil in the previous year, and RM22.1bil in 2006. The steady increase of Malaysia’s investments overseas over the past few years is a reflection of the country becoming more globalised and integrated into the global economy.

However, due to the global economic crisis, total direct investment outflow from the country during the first half of this year was only RM8.5bil.

The Government, through Mida, encourages Malaysian companies to venture overseas to expand their markets and tap new opportunities and acquire new technologies to sustain their competitiveness, and enable them to transform from regional to global players. In terms of the benefits to the economy, cross-border investments bring in foreign-exchange earnings for the country.

Among the major Malaysian companies that have invested overseas are Petroliam Nasional Bhd (Petronas), Sime Darby Bhd, Malayan Banking Bhd, YTL Corp Bhd, Genting Bhd, Axiata Group Bhd, Tanjong plc, IJM Corp Bhd, KNM Group Bhd and Parkson Holdings Bhd. Some of these companies have acquired advanced technology through the acquisition of foreign companies. These include Petronas’ recent acquisition of a 40% stake in Santos Ltd’s interest in the integrated LNG project in Australia and KNM’s acquisition of German process equipment manufacturer Borsig GmbH last year.

Jalilah explains that cross-border investments are an avenue for Malaysian companies that find it no longer cost-competitive to operate in the domestic market to venture into countries that have certain comparative advantages in their industries. These would likely involve industries like textile and apparel, low-end electrical and electronics, as well as plastic, wood and rubber products.

According to Jalilah, Mida has started encouraging labour-intensive industries to relocate to other countries that could provide them with the necessary resources at more competitive prices.

“If they stay in Malaysia, they will die a natural death, as the country moves up the value chain and become a high-income economy,” Jalilah explains, adding that Malaysia could no longer provide cost-competitive resources to those companies.

But for companies that prefer to stay on in Malaysia, Mida is encouraging them to go for mechanisation and automation of their operations to increase efficiency and productivity and reduce manual labour. In this aspect, various government agencies provide soft loans to assist companies to make the transition.

Ultimately, Jalilah says, companies and industries that remain operative in Malaysia must change in line with the movement of the country’s economy.

More News

Business Links

Latest Jobs from Star-Jobs

Latest from StarProperty