WEAK private investment is a significant challenge for Malaysia as it will set back future economic growth prospects by slowing the accumulation of capital, productivity growth and the expansion of exports.
Malaysia’s private investment growth has slowed markedly to 1.5% per annum (pa) in 2016-2021 from 12.1% pa in 2011-2015.
Private investment to GDP ratio also has fallen in recent years from 17% in 2018 to 15.0% in 2021. In 2020, the devastating impact of the COVID-19 pandemic caused a sharp decline of 11.9% in private investment before rising moderately by 2.6% in 2021.
A host of obstacles are holding back private investment growth: weak global and domestic economic prospects; high operating, regulatory and compliance costs; distorted incentives and policies; the shortage of manpower; lack of financing for SMEs; low profitability and return on investment as well as slowing foreign investment inflows.
Political risk and policy uncertainties have also been factors associated with weak investors’ sentiment.
Malaysia is facing a daunting challenge as our regional rivals like Singapore, Indonesia, Vietnam and the Philippines are making headway in attracting foreign direct investment (FDI) through enhancing their investment climate.
Net FDI inflows into Malaysia averaged US$8.3 bil in 2015-2020 which were significantly lower compared to US$82.5 bil in Singapore, Indonesia (US$17.4 bil) and Vietnam (US$14.3 bil) while moderately higher than US$7.0 bil in the Philippines.
Drastic reforms needed
It is therefore vital that Malaysia in the aftermath of COVID-19 pandemic should attain a much higher rate of private investment by improving its domestic investment climate vis-à-vis enhancing a conducive ecosystem, ensuring macroeconomic stability, maintaining policies certainty, enhancing tax and cost competitiveness as well as easing regulatory and compliance costs.
While Malaysia needs continued inflows of high quality FDI, domestic direct investment (DDI) is equally important to build a strong base of competitive home-grown industries that are not only formidable to withstand competitive pressures from foreign firms in the home market but also competitive global players in international markets.
So, what more needs to be done? While we welcome the establishment of a National Investment Council under the National Investment Aspiration to review, restructure and formulate investment-related policies as well as resolution of key implementation issues, a dedicated taskforce of high-level council can be formed to reinforce the Government’s determination to promote inclusive, robust and sustainable DDI.
We reckon that there are cross-cutting issues and problems encountered by foreign investors, domestic businesses and investors, especially micro and small medium enterprises (MSMEs) who tend to suffer more from these shortcomings.
There are specific areas that call for immediate and drastic reforms as outlined below.
- Bureaucratic hassles or red tape: This is most frequently cited by businesses as hindering or preventing action or decision-making. Excessive regulations or rigid conformity to formal rules that are considered redundant or outdated need to be removed and streamlined.
Among the business pain points when interacting with government agencies and departments as well as local authorities include delays and the long approval process; non transparent, inconsistent and confusing; hassles of interacting with multiple agencies; providing the same information multiple times; filling out of seemingly unnecessary paperwork; obtaining unnecessary licenses; and having multiple people or committees to approve a decision.
- Easing regulatory burden and compliance costs: Clearly, there is a need to simplify and streamline the regulatory system to significantly reduce its burden on the conduct of business. The most frequently cited negative impacts of regulation were financial cost and time.
Models of more efficient regulatory systems should not be too difficult to adopt: They include (i) “Regulatory Guillotine” which is risk-based approach for enforcement, inspection, control and supervision to reduce the types of control/supervisory; and (ii) “Cost-in, Cost-out” system which enforces agencies to restrict an increase of the costs of newly introduced or reinforced regulations by abolishing/relaxing regulations that carry an equal or more amount of costs. Simpler and more transparent regulations also reduce corruption.
Bureaucratic constraints
Some businesses also felt that regulators could shift their focus from enforcement to education while ensuring that regulations provide the flexibility for businesses to adapt and grow. Ironing out elements of regulations that perceived as disproportionate would improve their credibility.
- Review, consolidate and reform investment incentives and tax system: Re-evaluate the incentives, reassess their usefulness and under-utilisation with a view to consolidate and streamline them with a performance monitoring system, taking into consideration what businesses need while drawing out an exit plan to phase out the incentives.
When the rationale for granting tax and financial incentives is based more on discretionary and subjective qualifications and reporting requirements instead of automatic and objective requirements, they can instigate rent-seeking behaviour and facilitate abuses on the granting of approvals process.
Making incentives available automatically signal to investors that the government is making the investment process friendlier. Setting time limits on incentives would send a signal to potential investors that there is limited window for benefits.
- Re-orientate the one-stop-centre (OSC): The effectiveness and functionality of OSC can be enhanced in terms of accessing to all services offered at OSC remotely, ie in applying for business registration, submit relevant documents, and make appropriate fee payments. Remove the need of “inter-facing” with multiple departments as well as the requirement of manual submission.
The electronic OSC must serve to bring together relevant government agencies to provide efficient, transparent and fast-tracked services to investors.
It is pleasing to the ears that the National Economic Action Council (NEAC) has indicated that the Economic Planning Unit, the Finance Ministry and the International Trade and Industry Ministry (MITI) will review the proposals by the National Chamber of Commerce and Industry of Malaysia (NCCIM) to revive DDI.
Among these include reform initiatives to reduce 50% of bureaucratic constraints; consolidate investment incentives; review foreign workers’ management and prepare an action plan to expand stronger linkages between SMEs-DFI.
Cumbersome and burdensome regulatory system is costly to doing business, and acts as a strong deterrent to investment and productivity growth.
Policymakers must make their actions predictable, provide forward guidance and reduce ambiguity and arbitrariness in the implementation of policies, business procedures and regulations. – May 3, 2022
Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
