Wednesday, June 16, 2021

Not the beginning of the end if Malaysia lags behind in FDIs

While detractors play a vital role in keeping the government on its toes, we do not need to despair over our FDI situation relative to that of our neighbours.

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There’s been much hype and agitation and, by extension, circulation of kopitiam talk about reports of Malaysia falling behind its regional counterparts and peers in terms of foreign direction investment (FDI) which includes losing out on key strategic investments so that we’re now (yet again) supposed to be on that path towards becoming a failed state (which we’ve heard before).

Such a grim outlook is justified on the basis that, e.g. according to a United Nations Conference on Trade & Development (Unctad) report, “Investment flows to developing countries in Asia could fall up to 45% in 2020” (June 16, 2020), it’s highlighted that Indonesia, Singapore and Vietnam received more than 80% of the US$156 billion in FDI that Asean countries pulled in last year. Only 5% or just US$7.8 billion went to Malaysia – which of course doesn’t seem to augur well for us.

Some of the specific examples making the rounds on social media and messaging apps include:

• Samsung Electronics intending to shift its display production operations from China to Vietnam – but which has actually been officially denied by the company itself. For the record, Samsung already has six factories and two research and development (R&D) centres in Vietnam.

• Apple through its manufacturing partner, Foxconn, is moving only some (i.e. not wholesale) of the iPad and MacBook assembly lines to Vietnam from China as part of the “parallel supply chain” strategy. This means that there’s scope for other regional countries such as Malaysia to attract the rest of this production network in the global value chain (GVC);

• Tesla building a factory in Indonesia and even contemplating a SpaceX launchpad too – when in reality talks between the electric vehicle and clean energy company with the Indonesian government are still ongoing;

• Amazon investing US$2.8 billion to build a localised data centre (Amazon Web Services/AWS Region consisting of interconnected clusters known as Availability Zones) for its cloud computing services in West Java, Indonesia. Data localisation would also minimise the potential for aggressive tax avoidance (transfer pricing) for companies such as Amazon. But should Indonesia decide to go ahead and join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the advantages gained from data localisation will be diluted. This is since the CPTPP has an in-built bias against data localisation and this with the corresponding tax implications alongside intellectual property rights (IPR).

• Alibaba, Bytedance and Tencent, etc setting up their regional headquarters in Singapore. This has no bearing at all on the investment in our own digitalisation drive, including assimilation of 5G technology. It should be recalled that Alibaba had co-invested in the establishment of what is the world’s first Digital Free Trade Zone (DFTZ).

Nonetheless, this isn’t a case for complacency and resting on our laurels.

In the context of the ongoing Covid-19 pandemic, we are seeing the acceleration of international and regional cooperation (especially the latter) where Covid-19 affects the whole spectrum of trade and investment linkages such as the supply chain in vaccine procurement and manufacturing, the growth of e-commerce as well as supply chain reconfiguration brought about by reshoring and onshoring, etc.

The solution, therefore, isn’t to be overly dependent on China which could “reproduce” the kind of ramifications and unravelling analogous to the “dependency theory” (which basically stipulates that we as a periphery nation end up losing our resources to China as the core nation), but to further intensify the diversification of our supply chain lines.

Other policy measures to ramp up our efforts in the face of friendly (and complementary) rivalry from our regional competitors would be as follows – based on the counter-logic that we shouldn’t be overly reliant on FDI as such.

Firstly, we must increase our domestic direct investment (DDI) and strengthen our SME base.

A new policy vision is called for in which the existing policy paradigm is turned on its head with SMEs at the forefront and as a catalyst of economic and employment growth. It would also benefit GLCs and foreign investors as the spillover effect is reversed.

One of the ways to do this is to boost and strengthen SME linkages and production networks in Asean, thus enabling SMEs to contribute towards intra-Asean trade and investment flows as well as regional integration. This could be done through the pre-existing Asean Inclusive Business Framework within the broader structure of the Asean Economic Community (AEC).

Furthermore, the SMEs of Malaysia, Singapore, Thailand and Indonesia should enhance cooperation and involvement in e.g. the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT) and the Singapore-Johor-Riau Growth Triangle (Sijori).

Secondly, strengthening regional cooperation through Asean and the Regional Comprehensive Economic Partnership (RCEP) – greater regional interdependency.

There should be an Asean Industrial and Economic Masterplan (paralleling the Asean Connectivity Masterplan 2025, for example) that apportions and designates production network and supply chain bases along the competitive edges and advantages and strategic locations of the member-states. So that, for example, the manufacturing lines and zones of Vietnam for electrical & electronic (E&E) products is fully integrated with Malaysia’s.

Other policy steps would include the resuscitation of cross-border listings such as the Asean Trading Link (set up in 2012) by building upon the Asean Capital Markets Forum (ACMF) for cross-border offerings of collective investment schemes (CIS). The revival of the Central Limit Order Book (CLOB) that was banned without any prior warning set against the backdrop of the Asian Financial Crisis (AFC) should perhaps be reconsidered as part of a ringgit stabilisation strategy.

Thirdly, increase fiscal deficit to invest in DDI, including in research and development (R&D) and generate loose full employment – job creation strategy at the heart of our macro-economic strategy.

It’s recommended that a macro-economic strategy with jobs creation – including as part of the spillover effects of R&D in green and renewable technologies – at its heart be part of the government’s priority for the next five to 10 years, even as the low-touch economy, digitalisation and automation increasingly become the new normal with Covid-19 as the impetus.

Fiscal consolidation in the medium term, important though that is, will have to be modified and adjusted according to business cycles and therefore shouldn’t be considered as cast in stone.

Fourthly, further diversify and boost our trade and investment links beyond our traditional FDI partners – looking to Latin America (Central & South), Middle East, Central Asia, North Africa and Sub-Saharan Africa.

Beyond the immediate region, East Asia, North America and the European Union (EU), the international trade and industry ministry (Miti) through its two wings of the Malaysia External Trade Development Corporation (Matrade) and the Malaysian Investment Development Authority (Mida) should deepen our trade and investment linkages, respectively, with the rapidly growing economies and emerging markets of Latin America, Central Asia, Middle East and North Africa (Mena) and Sub-Saharan Africa. Argentina, for example, is steadily becoming an important trading partner. From January to August of last year, both exports to and imports from Argentina grew by 23.4 and 20.1%, respectively, which outpaced Malaysia’s global trade record during the initial waves of Covid-19, according to Miti Deputy Secretary-General Hairil Yahri Yaacob.

In conclusion, detractors do play a vital and indispensable role in keeping the government of the day on its toes. That said, we need not go to one extreme and lament in despair and hopelessness at our situation relative to our neighbours in terms of FDI, stereotypically seen as the “saviour” of our economy and economic development.

If there’s to be a new national consensus of the next phase in national development, let it be one that’s renewed by self-belief/confidence – avoiding the twin extremes of isolationism/autarky and over-dependence – that we have what it takes to make that leap and transformation as a nation.

Jason Loh Seong Wei is head of social, law and human rights at independent think tank Emir Research.

The views expressed in this article are those of the author(s) and do not necessarily reflect the position of MalaysiaNow.

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