WITH the Covid-19 pandemic impacting businesses, workers and households in different degrees since its onset, the fear of losing foreign direct investors resonates in many developing countries like Malaysia.Ā Ā
Looking at the last two years, from the first quarter (Q1) of 2018 to the fourth quarter of 2020, it was observed that the highestāÆ foreign direct investmentāÆ inflow was recorded at RM19.4 billion in Q1āÆ2019, a year before the pandemic.āÆĀ
In 2020, as weāÆ entered the year of the pandemic, the āÆFDIāÆ inflowāÆ forāÆ Q1 and Q2 was valued at RM6.4 billion and RM2.2 billion.āÆ An FDIāÆ outflow of RM800 million was recorded in the third quarter of 2020.āÆ In the last quarter, FDIāÆ inflow was recorded at RM6.1 billion. With this said, the stock of FDIs was at an all-time high in 2020 compared with 2018. This means that even though new FDIs decreased, theāÆ total stock of direct investment (or FDIs still in the country) was still the highest recorded in two years.
In terms of attractiveness, in the past five years at least, there is the sentiment that Malaysiaās competitiveness edge to attract FDIs has weakened. There are several factors that influence Malaysiaās attractiveness as a destination country for investors.Ā Ā
The first is market size. Malaysia is a relatively small market compared to our neighbouring countries like Indonesia or Thailand, or Vietnam. As an investor, the bigger the market, the more attractive the country is. This is why the original Trans-Pacific Partnership and Regional Comprehensive Economic PartnershipĀ countries, like the United States and India, were particularly attractive for other member countries.Ā
The second is stability. Stability here encompasses social, political, economic and also environmental factors.āÆāÆĀ
There is strong evidence that suggest when the country is politically stable, FDIs will increase.āÆ Political stability āÆis an important determinant for highāÆ FDIāÆ inflows.āÆ FDIāÆ is a long-term investment activity and every type of threat discouragesāÆ FDI āÆinflows. Multinational corporations (MNCs) avoidāÆ FDI āÆin cases of āÆpolitical instabilityāÆ due to high risk and switch to risk-free countries. For any developing country,āÆ FDIāÆ inflow is an integral part of development and growth. Without FDIs, transfer of technology and knowhow will not be able to happen organically between international and local firms.āÆĀ
The third factor is the ease of doing business in Malaysia. Although Malaysiaās ranking has improved in terms of policies, there are still reports of unclear guidelines,āÆ lack of one-stop centres for investors, overcrowding of different sectors by state-owned enterprises and difficulties hiring workers āÆby both local and international firms.āÆĀ
The fourth factor is externalities. Given the impact of the pandemic and the weakening of global trade and rising trade tensions in the past year,āÆ FDIāÆ inflows in general are affected worldwide. To manage externalities, clear policies that are communicated well can provide stability to investors and industries. This ties back to the second factor on stability.Ā
In a nutshell, attracting the āright typeā of investors will not ensure the attractiveness of Malaysia as an investorsā destination in the long run. Policymakers need to look at improving market size through free-trade agreements, providing stability through clear policies and regulations, improving on ease of doing business and managing other externalities. When the foundation is laid out well, Malaysia can be attractive again for all types of investors.Ā