Tok Pah: Focus On Domestic Investment

When the news broke a couple of months back about the dramatic fall in FDI to Malaysia in 2009, I thought most of the commentary was missing the point. The issue to me was poor investment as a whole over the past decade – low FDI was just symptomatic of a bigger problem. The Minister of International Trade and Industry is now signalling that the government recognises the real issues:

Foreign Direct Investments vs Domestic Investments

THE domestic debate on whether a country should focus on foreign direct investments (FDIs) or direct domestic investments (DDIs) is gaining traction as Malaysia moves towards increasing private investment under the 10th Malaysia Plan. Questions are being raised on the impact and contribution of FDIs versus domestic investments on the economy.

...Looking at these numbers, questions may be asked as to whether FDIs are necessary. Or can we ignore FDIs completely and depend only on domestic investments?

...Of course there are also downsides to FDIs. There was not much linkage with the domestic economy. In the early stages, there was little value-added as components were mainly imported. In the 1970s and 1980s, many FDIs were only in assembly-type operations. We became more dependent on foreign labour, and remittance abroad kept on growing. Large multinational corporations became complacent as the government was quite generous in approving applications for foreign labour. In a way, this has created a vicious cycle of dependence on foreign labour which is extremely difficult to break.

...Questions have been raised as to whether FDIs continue to be relevant...

...Our position is that Malaysia will continue to need foreign investments. But FDIs of a different kind. We have been talking about quality FDIs. But, what are quality FDIs?

Quality FDIs are those which generate more benefits and spin-offs to the local economy. They will have to possess the following features:

• Strong linkages to the domestic economy including SMEs in terms of local sourcing;
• Investments which are more capital-intensive which will not require too much foreign labour; and
• Investments which are knowledge-intensive, which will pay higher wages.

This will be our focus going forward. In other words, we have to be selective because our wages are higher compared with those in neighbouring countries. We have decided to attract these kind of industries to the country. Some might say that we have also failed to attract quality investments. This is not entirely true.

Going forward, we are going to focus more and more on domestic investment. I am not saying that FDIs are no longer relevant. They continue to be important, but given the competitive environment and our large domestic savings, we need to motivate our own people to put more money into the country...

...Despite these constraints, we believe there is potential to boost domestic investments. These will be in the area of infrastructure development, resource-based industries and in property development. Some of our investors are beginning to develop capabilities in the area of manufacturing.

...How do we get our entrepreneurs to invest more in the country? We know that a number of our large corporations including government-linked companies have invested large sums both locally and overseas. Khazanah, CIMB Bank, Maybank, YTL, Genting, Petronas, Sime Darby are among some of our companies which have sought opportunities abroad.

While we are not preventing them from going abroad, we have to further improve the domestic investment climate, to motivate them to invest more locally. We have to continue reducing red tape and bureaucracy and making government rules and procedures more transparent. But above all, we have to create more opportunities for them to invest in the domestic economy.

I’ll repeat what I said earlier:

• We have over-capacity in existing industries, particularly low value-added export industries
• Seeking FDI and investment to these industries will only depress returns (and wages) further
• Ergo, to boost investment and growth, we need to diversify away from existing industries and build new high-value added ones