Outward FDI: A Practical Illustration

In the Star today:

Why Indons replaced M'sia as top palm oil producer?
Hanim Adnan

Malaysian palm oil sector must not lose its focus

INDONESIA’S taking over Malaysia as the world’s largest crude palm oil (CPO) producer in 2006 had often been associated with the mammoth size of the oil palm planted areas.

In fact, many however failed to comprehend that it was the much increased CPO production in the ensuing years – mainly in terms of higher fresh fruit bunches yield and oil extraction rates – that significantly set Indonesia far ahead from Malaysia’s continued stagnanting [sic] CPO production.

I wouldn’t reference Indonesia’s taking over the top spot as palm oil producer in terms of a competition between countries. Part of Indonesia’s success is their greater abundance of land and labour (though not necessarily cheaper), relative to Malaysia.

More importantly, it’s also an FDI story – a Malaysian FDI story. For example 54.7% of KLK’s plantation land is in Indonesia, and 38.5% of Sime Darby’s (warning: pdf link), a product of continued outward investment from Malaysia.

Indonesia’s success in palm oil production will translate into greater corporate earnings, which means improved Malaysian net foreign assets and inward income flows. The really big deal is that it partly shifts income from Malaysian labour to Indonesian labour, as from labour to capital. That’s an issue in itself, but let’s not get too caught up in nationalistic comparisons.