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Mnc and Foreign Direct Investment in Malaysia Essay

Multinational Corporations (MNCs) and Foreign Direct Investment (FDIs) in Malaysia Over the Past Decade: A Detailed Look at their Determinants, Patterns and Effects. 1.1 Multinational Corporation and Foreign Direct Investment in Malaysia Primarily, Multinational Corporations or also known as MNC is defined as a firm that has an extensive involvement in international business, owning or controlling facilities in several different countries other than its home country. In other words, firm or group that derives a quarter of its revenue from operations outside of its home country is considered as a MNC. Typically, these types of companies have offices or factories in different countries and continents, but they are controlled by a centralized head office that is responsible for the coordination of the global management. For such companies, the expansion and penetration into foreign market can commonly be achieved via exporting, licensing, joint venture and also foreign direct investment.

Foreign direct investment or also called as FDI is a term that is commonly and closely linked to MNC and it is described as an investment made by a company or entity that is based on country into a company or entity based in another country. In order for a firm or corporation to become multinational, they must first acquire a controlling stake in foreign firm. This can be achieved by newly creating a foreign firm (international Greenfield investment), acquiring an existing foreign firm through international merger and acquisition and also through joint ventures. Inflows of FDI into a host country greatly affect the overall development of its economy due to the fact that FDI provides external source of capital, management skills, new technologies and also job opportunities. Since Malaysia first opened its door to FDI in the early 1960s, Malaysia has been receiving a steady arrival of MNC from around the world (Bernama 2012), including from Asian countries and as further as European countries and the United States. Malaysian Industrial Development Authority (MIDA), have reported that more than 4000 foreign international companies have set their presence in Malaysia as their offshore base (MIDA, 2009).

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Among the MNC that have the presence in Malaysia are Dell, Intel, Shell, GlaxoSmith Kline (GSK), Schlumberger and many others. Besides the capital city of Malaysia, Kuala Lumpur, other states that have successfully attract MNCs and investors include Penang and Johor Bahru. According to time Magazine, in the manufacturing industry, Penang is featured as among the preferred destinations for MNCs due to several factors such as logistics and geography. This is also in line with the Federal Government initiative to develop Penang into the third metropolis in the country, after Klang Valley and Johor Bahru. 1.2 Determinant As mentioned before, from the time Malaysia undergone into the transformation from an agricultural-based nation to manufacturing-service based nation and from the opening of its door to FDI, the number of MNC present in Malaysia has shown an increasing pattern.

According to Business Times (2012) Malaysia has emerged as the fifth most popular destination for FDI in Asia in the year 2011, with an increase of 31.5 per cent from 2010 to US$11.97 (RM 37.83 billion). At 44 per cent, manufacturing sector continued to be the major contributor to FDI inflows, followed by service sector (35 per cent), mining and quarrying (20.1 per cent), and also forestry and fishing at 0.3 percent (Business Times 2012). Malaysia is also showing a positive outlook as the Economist Corporate Network’s Asia Business Outlook Survey 2012 have shown that half of the 500 multinational companies were planning to increase their investment in Malaysia in the year of 2012. The survey done also revealed that in the aspect of investment priorities for those MNCs, Malaysia is now ranking at number seven out of 12 Asian countries, while in terms of market attractiveness for the purpose of production and manufacturing; Malaysia is ranking at number four.

There are definitely several determinants that resulted in such development. One of the major factors that attracted investors to Malaysia would be the commitment by the government to sustain a business setting that provides companies with the opportunities for growth and profits (Iskandar Malaysia 2012). The commitment is reflected in the government’s continuous efforts to obtain feedback from the business community through channels of consultation like regular government-private sector dialogues. Such dialogues will give the various business communities the opportunity to voice out their views and at the same time to contribute towards the formulation of government policies which concern them. Additionally, Malaysian government has also been very proactive in attracting foreign investment into Malaysia through several policy reforms such as the Investment Incentives Act 1968 that was then repealed and replaced by The Promotion of Investment Act 1986 (PIA 1986).

There are three main incentives covered under this Act, namely Pioneer Status, Investment Tax Allowance and Infrastructure Allowance (KPMG 2005). Pioneer status incentives provide full or partial exemption from the payment of income tax, whereas Investment Tax Allowance provides company with an allowance based on qualifying capital expenditure incurred. In similar manner, Infrastructure Allowance is granted to companies resident in Malaysia which has incurred capital expenditure on infrastructure in respect of business in operation in a promoted area. The introduction of this Act further encourages investment activities in this country, especially in manufacturing industries and it has resulted in the increased number of foreign investors coming into Malaysia.

This is shown in the vast increased of share of foreign proposed capital investment in the approved manufacturing project from 19% in 1984 to 64% in 1992. Besides the establishment of Free Trade Zone, the introduction of more liberal incentives under PIA 1986 that allows larger percentage of foreign equity ownership in enterprise is also one of the determinants that draw large inflow of FDI into Malaysia. In addition to the government incentives, there are also various policies formulated by the government with the aim to further enhance the attractiveness of Malaysia as the go-to location for FDI. In 2011, several key initiatives have been implemented which comprise of Economic Transformation Program (ETP) and the 10th Malaysia Plan (10MP). These policies lay down the foundation for the country’s transformation into a high income economy, as foreseen in the New Economic Model (NEM).

With this implementation, Malaysia continues to be a cost competitive location that has been able to proficiently attract project with significant level of investment (MIDA 2011). Apart from the policy factors, other factors that attract FDI and MNC are the well-developed infrastructure of Malaysia that is aimed to serve the business community. According to World Investment Report of 2008, MNCs usually invest in countries that have well established network of transportation as well as communication facilities (Alex, et. all 2010). Malaysia undoubtedly fulfill the needs of logistic and communication within its boundary particularly in the Peninsula of Malaysia. These well maintained PLUS highways is an advantage to industries as it link major city centers to seaports and airports throughout the peninsula, thus providing an efficient and effective means of transportation for goods.

Complementary to these highways, a Kuala Lumpur-Bangkok-Kuala Lumpur containerized service that is known as the Asean Rail Express (ARX) has been initiated with the aim of expanding it to become Trans-Asia Rail Link that will comprise of Singapore, Vietnam, Laos, Cambodia, Myanmar and ending up in China (Iskandar Malaysia 2012). In addition to that, the five international airports and seven international seaports definitely make Malaysia an ideal springboard to the Asia Pacific Market (Trade Chakra 2009). As for communication, subsequent to the successful privatization of its Telecommunication department, Malaysia’s telecommunication network has come a long way with the latest digital and fiber optics technology being utilized to provide supreme quality telecommunication service at competitive price. Other than the determinant discussed above, another major factor that attract FDI into Malaysia is the good environment and the political stability of this country (Har et. all 2008).

Despite the several crises that arose recently, Malaysia political environment is still considered as relatively stable in comparison to other countries such as Thailand. Sound environment and stable political environment have attracted many foreign investors to invest in Malaysia because with such stable condition, investors and MNCs will face fewer problem and they will be able to run their business more conveniently and efficiently. According to Ajami and Ricks (1981), the political stability of a country has a positive impact on FDI because political stability is vital in creating a climate of confidence for investor. Bernama (2007) have also reported that the presence of MNCs especially those that have set up regional operating headquarters is a vote of their strong confidence in the strength of the country’s political and economic system. 1.3 Pattern of FDI in Malaysia *Source: United Nations Conference on Trade and Development (UNCTAD) Over the past decades, Malaysia has been received lots of Foreign Direct Investment(FDI).

The flow has reached its peak in 1988 to 1993 and started to decrease after 1996 due to Asian Financial Crisis as well as world trade recession that hit Malaysia apart from other countries. From the graph above, the pattern of FDI flow into Malaysia from year 2000 to 2011 can be observed. It shows that the inflow is inconsistent and fluctuates randomly. However, in overall, Malaysia has attracted a steady inflow of net FDI in the recent decade, averaging 3% of GDP per annum with a peak of 4.5% of GDP in 2007(Har, et. al., 2008). According to UNCTAD’s World Investment Prospects & Survey, 2011-2013, Malaysia has been ranked as one of the top host economies for FDI in 2011-2013. In year 2001, the figures for FDI is much lower compare to the other years due to global trend and collapsed of technology bubble and it increases back in year 2002(The Star Newpaper, 25 March 2010). And this trend once again can be seen during 2009, where the FDI has relatively declined greatly from 2008 because lack of confidence from the foreign investors due to global financial crisis in 2008 and 2009 as mentioned by the Chief Economist RAM Holdings Bhd Dr Yeah Kim Leng(The Star Newspaper, 25 March 2010) and further dampened by the contraction of Malaysia’s export activities.

During 2009, although the government tries to promote and attract more investors by promoting more freedom to the investors, it still did not work out. The FDI dropped by 81% which is from US$7.3bil in 2008 to US$1.4bil in 2009. Whereas from year 2006 to 2008, the FDI in Malaysia is much higher than those previous years because during this period, activities like MNEs mergers and acquisitions, establishment of joint ventures and other new investment activities took place which attract more investors to invest in Malaysia. After the crisis in year 2009, the Foreign Direct Investment(FDI) has increased tremendously in year 2010 with most FDI originated from Asian countries. *Sources : Department of Statistics Malaysia One the reason that led to the FDI increment in 2010 was the purchasing activities of US$1billion worth of stake from a local company by the Company from Republic of Korea.

During the period of 2006-2009, there are 3 sectors or industries that dominated the FDI received namely the manufacturing, services and oil and gas sectors. Based on the below chart, comparing with all the industries in Malaysia, manufacturing industries shows a highest figures or amount of FDI received and followed by a service sector etc(NST business Times,6th July 2012). And according to Bank Negara annual report, 41% of the FDI received were found in the manufacturing sector whereas services and oil and gas both received 37% and 17% respectively. *Adopted from CEIC *Sources : Department of Statistics Malaysia Last year, among all the states in Malaysia, Penang has received the highest amount of FDI which exceeded the other states followed by Sarawak(Shazwan Mustafa Kamal,2011). From below data, Selangor has contributed most GDP since year 2000 until 2009.

And it were reported that most of the GDP were contributed from the non-local company, showing that there has been high foreign investment within that state. However, in 2011, Penang has showed an improvement in attracting FDI by surpassing Selangor in receiving FDI and maintain in the top list for 2 years since 2010. (more graph in the appendix) 1.4 Effects of FDI on Malaysia. Over the years, there are many impacts of Foreign Direct Investment(FDI) towards Malaysia in many aspects. One of the distinct effects of FDI on Malaysia is the growth of the country’s economy ever since 1990s especially in the manufacturing sector like petroleum, chemical industries and etc by increasing the domestic capital. Hence, the production capacity also increases and further leads to economic growth. This later creates a favorable investment environment that could help in attracting other investment from other investors and further increase the FDI into the country.

According to Krugman and Obstfeld (1994), “FDI functions as one way to bridge an inter-temporal gap of capital demand and supply, and, like other capital inflows, increases the production frontier of developing countries, which normally suffer a shortage of capital”. The economic growth in Malaysia can be seen through the growth of its GDP as shown in the below graph. Malaysia’s GDP seems to be steadily increased in year 2005-2007 where the FDI is high and declined in year 2009 where the global financial crisis affected Malaysia. From the perspective of employment in Malaysia, the FDI inflow by the Multinational Companies has caused an increase in the domestic employment rate. More job opportunities were created and offered to the citizens in Malaysia especially in the manufacturing sector due to the economy expansion in Malaysia. The standard of living of Malaysians is now getting better and better.

This can be observed in below data: During the year 2007, when the growth rate for Malaysia is the highest, there is less unemployment, showing that there have been more job opportunities that lead to better employment rate. And when the employment rate increase, the standard of living also increased among Malaysian. Based on the graph above, the rate for unemployment in year 2009 is the highest. This is when the growth rate in Malaysia is the lowest. People are losing job due to less job opportunities and bad economy during that period. According to Minister in the Prime Minister’s Department Tan Sri Nor Mohd Yakcop, 3.3millions of job opportunities has arisen in 2011 after the implementation of the Economic Transformation Programme that has been used to attract foreign investors(Raina Ng, 23 September 2011).

Apart from that, FDI has been an important vehicle in transferring many aspects such as new technologies, management and production skills and knowledge. There has been an improvement on the level of skills and knowledge amongst the employees in Malaysia and our local entrepreneurs. When the multinational company brings in their expertise to Malaysia, indirectly Malaysian will be able to learn some skills and knowledge from the foreigners through training or hands-on learning and improve on their technical capabilities. Employees in Malaysia are more expose to high technologies and efficiencies in managing the company’s management.

Thus, this allows them to produce products that are competitive enough to compete in the international arena. And workers also are able to increase the production capacity by adapting the new technologies into the production process and this further led to increase the growth in GDP in Malaysia. Looking at previous year in 1990s where FDI started to increase in Malaysia, there has been a major improvement in the Malaysia’s export performance if compare to year 1980s with less FDI even up until now.

Since Multinational Companies(MNC) has present in many international market, hence FDI from this organizations is consider as a potential source in transfer process of managerial knowledge, skills as well as new technologies that able to help in better production efficiencies and be competitive in the international arena in terms of pricing and quality of the products. The domestic firms can either obtain the information on the MNCs directly or indirectly to improve their production. The leakage of this information is known as the ‘spillovers’ and it can occur directly or indirectly. Once the domestic exporters have obtained the information regarding the international market, then they can produce accordingly to the international standard and increase the exports.

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