Between domestic and foreign investment: It’s all about ease of doing business

By Lee Heng Guie


MALAYSIA’S private investment growth rate and share of gross domestic product (GDP) has been decelerating in recent years. Weighed down by external and domestic factors, private investment’s momentum had moderated from 12.1% pr annum (pa) between 2011 and 2015 to 4.8% pa between 2016 and 2019.

Amongst these include uneven state of global economic conditions post 2008-2009 Global Financial Crisis, weakening domestic economic growth, weak investment climate, including high regulatory and compliance costs, lingering uncertainty about policy transition as well as political instability.

In the first nine months of last year, private investment declined by 13.2% year-on-year (yoy) as the COVID-19 pandemic-induced recession and extremely weak sentiments have caused businesses and companies to slash capital spending.

The Malaysian Investment Development Authority’s (MIDA) approved domestic direct investment (DDI) had declined by 6.0% pa from RM175.1 bil in 2014 to RM128.5 bil in 2019, while approved foreign direct investment (FDI) increased by 5.1% pa from RM64.6 bil in 2014 to RM82.9 bil in 2019.

From January to September last year, approved DDI contracted by 21.6% to RM67.2 bil to make up 61.2% of total approvals while approved FDI went down by 34.9% to RM42.6 bil.

For the period from 2010 to 2019, DDI had accounted for a higher share of total approvals, averaging 69% amid a declining share in recent years. FDI share of total approved investment was averaging 31% pa for the same period.

Actual FDI inflows into Malaysia had declined by 5.3% pa from 2016 to 2019 from an average growth of +6.2% pa between 2011 and 2015. This year, net FDI inflows contracted sharply by 56.2% to RM13.9 bil.

Gross FDI also declined by 0.3% pa from 2016 to 2019 compared to +1.5% pa from 2011 to 2015. Last year, it contracted sharply by 54.4% to RM17.1 bil.

Private investment is an important component of overall economy. Sustaining private investment, which makes up of domestic and foreign investment, is needed to expand and diversify our industrial base, raise productive capacity and increase economic growth, accelerate technological progress, create high-income paying jobs and increase exports.

Domestic and foreign investments can have strong complementary or substitution interactions between each other. Policymakers were often being asked should we focus on efforts on domestic investment or foreign investment? There are questions whether foreign direct investment crowd in domestic investment, or foreign direct investment crowd out domestic investment?

Easier compliance procedure a win-win for all

Substantive research studies had validated the benefits of FDI, which amongst other include employment creation, the deepening of industrial base through technology transfer and technical know-how, enhance linkages with domestic firms, embrace better business practices management, establish business network and access to international markets as well as supporting domestic financial system and capital market.

Sustaining high quality domestic investment is equally important and must continue to be facilitated in driving Malaysia’s economy and expanding industrial structure, especially the development of small-and medium-size enterprises (98.5% of total business establishments; 38.9% of GDP in 2019; 48.4% (or 7.3 million) of total employment; and 17.9% of total exports).

Granted, domestic investment’s size and value of capital investment in the manufacturing sector is smaller (RM48.6 mil per project) relative to that of foreign investment (RM121.7 mil per project) as well as less capital-and high technology intensive investment during the period from 2010 to 2019, the nature and type of domestic investments span a cross section of sectors and businesses, and hence, create jobs usually many more than FDI.

Backed by a pool of capable domestic businesses and SMEs in the home market, multinational corporations would be keen to expand existing operation and set up new plants in an environment where the existing ecosystem is able to support their operations, especially our domestic players are capable to integrate with high-value added global supply chains.

Domestic indigenous industries are the backbone of Malaysia’s investment and industrial development. They are deep rooted in Malaysia and here to stay, and hence, should be given further investment facilitation at the Federal, state and local authorities in a coordinated manner.

Time is of the essence for investors to secure a fast and quick approval of their investment applications and the resolve of matters, including operational issues relating to doing business.

The departments and agencies at all levels (Federal, state and local authorities) play a decisive role in creating a predictable enabling business investment environment while efficiently facilitating investment at ease, regardless domestic investors/companies (large, SMEs and small businesses) and foreign investors.

A renewed focus on improving the regulatory and investment facilitation offer a key to reducing friction costs in Government-business interactions.

Common Government-to-business pain points are delays, lack of transparency in the approval process, paperwork burden, duplication, inconsistency and complexity.

While most businesses would welcome fewer regulations, what they really want is to spend less time and effort on compliance.

There is widespread agreement that Federal, state and local authorities need to refocus on removing the obstacles that businesses face in fostering an environment conducive to investing and doing business here.

It is in the Government’s interest to make regulations and compliances as painless as possible. Policymakers must harness the power of investment by making both domestic and foreign investment working together to generate the maximum benefits for our economy. – Feb 15, 2021


Lee Heng Guei is the executive director of the Social Economic Research Centre

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

Subscribe and get top news delivered to your Inbox everyday for FREE