Reviving DDI, FDI crucial to economic recovery

IT is time to rebuild domestic and foreign investor confidence in times of uncertainty as our economy emerges from the Covid-19 pandemic and is currently entering the recovery stage.

Domestic direct investment (DDI) and foreign direct investment (FDI) flows, which have been a key building block of private investment in Malaysia, have to be revived to sustain economic growth, create high-income jobs and expand exports.

Private investment, DDI and FDI flows were already slowing before the Covid-19 outbreak amid uneven state of global economic growth, rising trade protectionism, domestic political and policy transition since 2018 and other external uncertainties.

Private investment’s momentum had moderated sharply to 4.8% pa in 2016-2019 from 12.1% pa in 2011-2015.

Total approved investment projects in services, manufacturing and primary sectors had declined by 2.8% pa in 2015-2019 compared to a strong increase of 10.1% pa in 2007-2014.

Approved DDI had declined by 6.4% pa from RM175.1 bil in 2014 to RM125.5 bil in 2019 while approved FDI increased by 5.0% pa from RM36.1 bil in 2015 to RM82.4 bil in 2019.

The unprecedented pandemic crisis has added more risks to investment flows.

In 1Q 2020, private investment contracted by 2.3% y-o-y and will likely to end an estimated annual contraction of at least 12% for this year.

Total approved investment in services, manufacturing and primary sectors slumped by 34.8% y-o-y to RM37.4 bil in 1Q 2020, due to both declines in approved DDI (-4.5% y-o-y to RM26.3 bil) and approved FDI, which contracted at a sharper rate of 62.9% to RM11.1 bil.

One key challenge to recovery is to restore confidence of both domestic and foreign investors, which is not an impossible task.

Our policymakers must not miss out the chances to do whatever it takes to reduce investor risk, foster investment expansion, and attract new investment through ensuring a predictable trade and investment policy, regulatory certainty, and targeted investment promotion.

A World Bank report, which has surveyed 2,400 business executives in 10 major emerging market countries reported that low taxes, low labour costs, and access to natural resources matter less to their investment decisions than political and economic stability and a predictable legal and regulatory environment.

Government policies and regulations play a decisive role in fostering business competitiveness.

Although lowering effective tax rates help boost FDI, the effect is stronger if augmented with good investment climate – one that is highly contingent on the government’s commitment to improve transparency and reduce bureaucratic as well as create stable and predictable investment climate, with proper contract enforcement and safeguarding property rights, embedded in sound macroeconomic policies and institutions as well as fair competition.

The supply of knowledge and skilled workforce is also crucial to support the industrial transformation.

Maintaining good governance, a clear articulation of rules and regulations as well as reducing regulation risks can facilitate business to make better informed investment decision.

This calls for the need of regulatory reforms at the federal government level, states and local authorities to streamline as well as ease unnecessary regulations and compliance on businesses.

The World Bank’s estimations model suggests that regulatory risk can deter multi-national enterprises from entering or expanding operations in a country.

A 1%-point reduction in regulatory risk tends to boost the likelihood of an investor entering or expanding in a host country by as much as 2% points.

By contrast, a 1%-point increase in the host country’s trade-to-GDP ratio boosts the likelihood by no more than 0.6% point.

What is crucial is that we must set a clear and right policy direction and continued to ensure that the underlying economic fundamentals are resilient and investment climate is conducive.

While waiting for the domestic economic recovery to be firmly in place, domestic companies and foreign investors would have to start focusing on domestic growth and investment prospects in the medium-and long-term to commit direct investment.

It was reported that the Japan External Trade Organisation has indicated that 15 out of more than 80 Japanese enterprises have received support from the government to move factories to Vietnam, a move aims to improve the gap in the Japanese supply chain since the Covid-19 pandemic had disrupted the global supply chains.

It was also reported that the Japanese government would start paying some companies to move factories out of China back to their home country or to Southeast Asia.

Looking ahead, global and regional competition game for FDI flows will step up post the Covid-19 pandemic amid the expected sharp fall in global FDI flows by between 5-15% in 2020 as well as the anticipated gradual global recovery in 2021.

It is inevitable that Malaysia will continue to face stiff competition from our peers in Asean to attract global FDI flows, especially during the trade war tension and pandemic outbreak as part of foreign MNCs’ investment diversification strategy to minimise the supply chain disruptions.

Malaysian Investment Authority Development (Mida), to date, has facilitated 85 companies from China as well as from different parts of the world for relocation or redeployment of activities to Malaysia due to the US-China trade war.

Of the total, Mida has successfully captured 32 projects with investments amounting to RM14 bil and seven projects are currently under evaluation with investments valued at RM6.22 bil.

Mida is currently pursuing a total of 109 project leads from Japanese companies.

There is clearly still room for Malaysia to improve the World Bank’s ease of doing business ranking (12th in 2020). Revisit to further streamlining of impediments to investment in Malaysia.

These include:

  • Starting a business: Local entrepreneurs continue to face cumbersome procedures to start and operate a business. Malaysia ranks 126th on this indicator, taking 8.5 procedures and 17.5 days.
  • Paying taxes: Malaysia ranks 80th on this indicator as domestic companies spend an average of 174 hours annually to comply with fiscal obligations, slightly more than the OECD high-income average of 159 hours.
  • Legal rights and enforcing contracts.

There have been no reforms in these areas over last five years and hence, it is crucial to enhance regulations that protect the rights of lenders and borrowers, and improve the efficiency of the judicial system.

For instance, the time needed to enforce a contract in Malaysia has taken 425 days compared to Thailand (reduced from 440 to 420 days in Thailand), and in Indonesia (from 471 days to 403 days).

Towards this end, we welcome  the investment facilitation measures as announced in Penjana namely, zero tax rate for a period of 10-15 years for reshoring of capital investment from abroad to Malaysia; 100% Investment Tax Allowance and Special Reinvestment Allowance; the establishment of Project Acceleration & Coordination Unit at Mida to simplify and coordinate application process across federal, state and local authorities; and a two working days fast track manufacturing licence approval for non-sensitive industry.

These initiatives must be well executed without delay as our competitors also have stepped up their plates. – July 25, 2020.

Lee Heng Guie is the executive director of Socio-Economic Research Centre, an independent research organisation.

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