Political and business risks the right ingredients for foreign investors to flee

A STRONG and united government is required to attract investors into Malaysia while addressing business risks in order to reverse the country’s decline in foreign direct investments (FDI).

While there are many factors that determine FDI inflow into Malaysia, investors must be confident that the returns on their investments must be able to out-weigh the cost of doing business in the country, according to economics professor Dr Annuar Nassir.

Commonly, investors will take into account the size of the local market, ease of doing business, labour cost, availability of raw materials, political stability, transport and infrastructure efficiency as well as tax rates, among others.

“In Malaysia’s case, however, there are plausible reasons why we are relatively weak compared to neighbouring countries like Indonesia, Singapore, and Vietnam,” Annuar who is attached to the Xiamen University Malaysia’s School of Economics and Management told FocusM.

“Aside from the less conducive investment climate and less attractive offers to foreign investors, political instability poses a significant risk that will discourage investment.”

Elaborating on the unconducive investment climate, Annuar noted that Malaysia’s high rate of trade crimes such as smuggling of essential goods like cooking oil, meat products and cigarettes have posed multiple risks to businesses.

A case in point is the high degree of illicit cigarette trade in Malaysia which has resulted in Philip Morris International ceasing its local cigarette production at its Seremban facility in 2012.

In 2016, British American Tobacco (M) Bhd shut down its factory in Petaling Jaya, while Japan Tobacco International closed its Shah Alam factory as high quantity of illegal cigarettes flooded the market following a surprise excise hike in 2015.

These closures have caused significant losses to the country as a multi-billion eco-system supported by FDIs came to an end.

Fast forward to today, the tobacco black market remains at an alarming level with more than six out of 10 cigarettes sold in Malaysia being classified as illegal. Today, Malaysia’s shadow economy or black market is valued at RM300 bil.

When asked what can be done to attract investors back to Malaysia, Annuar pointed out that only a strong and united government can convince investors to return to the Malaysian shores.

“In addition to political stability, a strong government can also address leakages and other business risks that deter investments while putting in place structural reforms that can spur FDIs,” he opined.

“However, looking at the political arena right now, all parties are fragmented with none being in a dominant position. As such, political risk remains unless this situation is resolved quickly, perhaps through the call for elections once the situation permits.”

Moving forward, Annuar offered his two cents by urging the relevant authorities to emulate China’s effort to stimulate domestic investments and consumptions as another means of generating more revenue for the country instead of relying heavily on exports.

According to the United Nations Conference on Trade and Development (UNCTAD) report, Indonesia’s FDI stood at RM74.2 bil (US$18 bil) in 2020 at a time when Malaysia’s FDI posted a contraction to about RM10.3 bil (US$2.5 bil).

Elsewhere in the Southeast Asian region, Singapore recorded an FDI inflow of RM239 bil (US$58 bil) while Vietnam raked in RM57 bil (US$14 bil). – April 9, 2021

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