By Goh Lim Thye
Since its economic emergence in the early 1990s, Malaysia has been a noteworthy player in attracting Foreign Direct Investment (FDI) within the ASEAN region. Beginning with a robust FDI influx of USD 2.6 billion in 1990, Malaysia quickly cemented its position as a prime destination for foreign investment, second only to Singapore, which attracted USD 5.54 billion in the same year. This period marked the start of Malaysia’s ascendancy as an investment hub, characterized by a strategic economic position and an investor-friendly climate. Throughout the 1990s, Malaysia not only sustained but also enhanced its status as a key destination for foreign investment, capitalizing on its robust economic policies and favourable investment environment.
However, a shift in this upward trajectory emerged post-2004. Malaysia’s FDI figures, which were a promising USD 4.065 billion in 2004, began to show a concerning decline, falling behind its ASEAN peers. This downward trend was particularly stark after 2008, signalling Malaysia’s diminishing competitive edge against emerging economies like Vietnam. The situation showed some signs of recovery in 2021, with Malaysia attracting USD 12.17 billion in FDI, but this was modest in comparison to Singapore’s towering USD 131 billion. Other ASEAN countries like Indonesia and Vietnam also outperformed Malaysia, attracting USD 21.9 billion and USD 17.9 billion respectively in 2021.
In 2022, Malaysia witnessed a notable improvement in its FDI figures, achieving USD 16.93 billion, which exceeded Thailand’s FDI of USD 10.03 billion. However, the gap with leading ASEAN nations was still substantial. Singapore continued its dominance in the region with an FDI inflow of USD 141 billion, and Indonesia and Vietnam maintained their strong performances with USD 21.9 billion and USD 17.9 billion, respectively.
This dynamic situation underscores the critical need for Malaysia to enhance its appeal to investors. Failing to do so may result in five key consequences due to reduced foreign direct investment (FDI) inflows into Malaysia’s economy.
1. Worsening Balance of Payments Deficit:
FDI is a vital component of the financial account, it contributes to the balance of payments by bringing in foreign currency, which is essential for funding imports and servicing external debt. Thus, the decline in FDI inflows to Malaysia potentially leading to a balance of payments deficit. This deficit can trigger several economic repercussions: a depreciation of the Malaysian Ringgit due to weakened investor confidence, increased costs for imports leading to inflationary pressures as outlined by the International Monetary Fund (IMF), and a possible impact on Malaysia’s international credit rating, making external borrowing more costly. Furthermore, a balance of payments deficit may necessitate the use of foreign exchange reserves to stabilize the currency and manage liquidity, as noted by the Asian Development Bank. Such a scenario underscores the wider macroeconomic vulnerabilities that Malaysia faces, beyond the direct effects of decreased FDI, highlighting the importance of a balanced approach in managing FDI inflows to ensure overall economic stability and growth.
2. Economic Growth Stagnation:
The reduction in FDI inflows can significantly stagnate Malaysia’s economic growth. Historically, FDI has been a critical driver of Malaysia’s economy, contributing to GDP growth through capital investment, technology transfer, and job creation. According to the World Bank, FDI directly correlates with economic expansion in developing countries like Malaysia. The decline in FDI since the mid-2000s has coincided with a noticeable slowdown in Malaysia’s GDP growth rate. This trend signifies a possible direct impact of diminishing FDI on the overall economic momentum, as reduced foreign capital leads to fewer investments in key sectors and limits the scope for economic diversification. Hence, a sustained reduction in FDI could further exacerbate this slowdown, potentially leading to long-term economic stagnation.
3. Decline in Technological Advancement:
Foreign investments are often accompanied by technological advancements and skill transfers. With the decline in FDI, there is a significant risk of a slowdown in the pace of technological advancement in Malaysia. This could have a ripple effect on various sectors, particularly in high-tech industries where innovation is crucial for competitiveness. The lack of new technologies may also impede Malaysia’s ability to participate in the global value chain effectively, as noted in a report by the Asian Development Bank. This technological stagnation could lead to Malaysia falling behind its regional counterparts, impacting its long-term economic prospects and attractiveness as a destination for future investments.
4. Reduction in Employment Opportunities:
FDI inflows have traditionally been a source of employment generation in Malaysia. The decline in FDI can lead to a decrease in job creation, particularly in sectors that are heavily reliant on foreign capital. The reduction in job opportunities can have far-reaching implications for the Malaysian workforce, especially in terms of high-skilled employment. The Asian Development Bank’s reports suggest that diminished FDI can lead to a talent exodus, as professionals seek better opportunities abroad, further weakening Malaysia’s human capital base.
5. Diminished Global Economic Integration:
FDI is a key factor in ensuring a country’s integration into the global economy. A decline in FDI inflows can lead to reduced global economic integration for Malaysia. This diminished integration can have several negative consequences, including limited access to international markets, reduced competitiveness in exports, and lesser participation in global supply chains. The impact can be particularly pronounced in sectors like manufacturing and services, which have historically benefited from FDI-driven global linkages. Reduced integration also means that Malaysia may miss out on opportunities arising from global economic trends, further limiting its economic growth potential in a highly interconnected world economy.
In conclusion, Malaysia’s journey as an FDI destination in the ASEAN region has seen significant ebbs and flows since its economic emergence in the early 1990s. Initially a robust investment hub, it experienced a decline post-2004, falling behind ASEAN peers like Singapore, Indonesia, and Vietnam. The decline in FDI not only risks worsening Malaysia’s balance of payments deficit but also poses threats to economic growth, technological advancement, employment opportunities, and global economic integration. To regain its competitive edge, Malaysia must urgently strengthen policy frameworks, improve infrastructure, and create a more favourable business climate. Adapting to global investment trends and revitalizing economic strategies are crucial for Malaysia to attract sustainable FDI, ensuring its long-term economic growth and regional prominence. Failure to address these challenges could have lasting repercussions on Malaysia’s economic stability and global standing.
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The author is a Senior Lecturer at the Department of Economics, Faculty of Business and Economics, Universiti Malaya, and can be reached at ltgoh@um.edu.my
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