Mock Test 2 Answer

Explain the recent FDI trend in Malaysia. (20m)

Continued from class session

……….

FDI in MSC Development Phase (Post-Crisis 1997/8)

1. To develop Malaysia as centre for high-tech industries in ICT.
2. Incentives included:
 Companies located in the MSC will be given MSC-
Status, which entitles them to a 10-year Pioneer Status Tax Holiday.
 A 100 percent Investment Tax Allowance on new
investments made in cyber cities, and tax exemption on import of multimedia
equipment.
 Importations of multimedia and training equipment
are duty-free.
 Ensure no internet censorship and provide
competitive telecommunications tariffs.
 Freedom to borrow fund globally.
 Unrestricted employment of local and foreign
knowledge workers.
 Exemption from selective exchange control
measures.

Strong FDI in the late 1980s

• Introduction of the Investment Incentives Act 1968
• Establishment of free trade zones in the early 1970s
• Provision of export incentives
• Acceleration of open policy in the 1980s
• larger percentage of foreign equity ownership in enterprise under the Promotion
of Investment Act (PIA), 1986.
• This effort resulted in a large inflow of FDI after 1987 (FDI inflow grew at an
annual average rate of 38.7% between 1986 and 1996).

2000s
Malaysia remained as a favourable economy to foreign investors as implied by
the FDI position in 2007 which grew two fold since 2001

Total stock of FDI which increased substantially in the period of 2006 and 2007
was mainly due to mergers & acquisitions (M&A) of existing multinational
companies (MNCs), joint ventures and new investment activities.

For the period of 2003 – 2007, manufacturing, financial intermediation, mining

and services2 were the main four sectors of FDI recipients.
Manufacturing sector remained dominant, accounted for more than half of the
total FDI. This was followed by financial intermediation. However, as at
December 2007 both manufacturing and financial intermediation shares declined:
manufacturing, from 57.9 per cent to 52.6 per cent and financial intermediation,
from 29.3 per cent to 15.6 per cent. On the contrary, the value and shares of
services and mining sectors increased in 2007.

The FDI in the agriculture sector surged tremendously over the period of four
years following M&A activities. The value of this sector increased sharply from
RM0.4 billion in 2003 to RM9.3 billion in 2007 (+2,225.0%). The services
(+1,306.3%) and real estate sectors (+311.1%) experienced similar upward
trend, albeit relatively smaller FDIs.

During the period, the value of FDI in trade/commerce increased more than two
fold. This is mainly due to the influx of hypermarkets and International
Procurement Centres (IPC) in the country

Largest decline in FDI inflows at 81% in 2009 within ASEAN

(i) the economic crisis which began in 2008 and continued in 2009, whereby global FDIs
experienced a reduction of 31% as investors worldwide were more prudent in making
investment decisions involving large funds;
(ii) the transition period of Malaysia’s current emphasis to attract high value added, high
technology, and high-wage investments in accordance with the Government’s effort
to become a high-income nation has in a way resulted in a drop in FDIs;
(iii) Rising competition for FDI, from both new emerging market economies and
established investment centres; and
(iv) Many approved projects were not implemented or delayed implementation due to
difficulty in obtaining funding.