Beyond FDI towards a sustainable economy

A couple of weeks ago, I wrote an article on the Malaysian economy, which also touched on the net investment outflows from Malaysia in recent times: Capital outflows cloud economic outlook (Asia Times).

That prompted a thoughtful response from an analyst who makes a valid point – that we must discard our obsession with securing foreign direct investments (FDI), which has blinded us to alternative paths towards a more sustainable domestic economy. Instead, he says, we need to look at how we can promote domestic investment while assessing qualitatively how beneficial each investment is to the people and to the local economy:

Generally nice article. However, I thought the section on investment flows was somewhat misleading, although the overall question — why are Malaysians investing abroad — is valid and important.

Comparing IIP, i.e., net flows, in the way presented, is not, in my view, helpful. Further, it feeds into all that obsession about incoming FDI. At a glance, and to a non-careful reader, it suggests an outflow of foreign capital, which is not the case. For instances of such outflows of foreign capital, look at Ireland, which had a -20b of inward FDI, i.e., actual divestment.

Post-Asian Financial Crisis, and leaving out Singapore as a special case, Malaysia has remained the second most attractive site, after Thailand, for incoming FDI, with Vietnam catching up with Indonesia and, in 2008, overtaking it, as the third. That’s true in terms of value, while as number of greenfield projects, we had the second largest number to Vietnam, until 2008 when Thailand overtook us.

Of some concern, perhaps, is that from having the largest FDI inward stock pre-Asian Financial Crisis, Thailand has now leapt ahead, with Indonesia fast catching up. However, there needs to be some investigation of the composition of that stock — recall that in the aftermath of the AFC, there were some fire-sales of assets in both Thailand and Indonesia, so that FDI may well comprise equity rather than greenfield investments. If so, then it comes down to how we weigh this up.

But the real concern, as I see it, are in other areas:

1. As a percentage of fixed gross capital formation, leaving out Singapore (as a special case) and poverty-stricken Cambodia, we have the highest FDI: gross fixed capital formation in the region at around 18-19 per cent.

Worse is that outward FDI amounts to 32 per cent of gross fixed capital formation, i.e., even more than inward FDI.

2. Among developing countries, Malaysia is a stand-out in that outbound FDI exceeds inbound FDI, and by an increasing amount. What this suggests is that we do not lack capital — hence the continued emphasis on FDI by both the BN and the PR is, I believe, misplaced. A comparison here might be Korea and Taiwan. In both instances, FDI outflow > FDI inflow. Those are developed economies, now searching for opportunities abroad, while keeping their backyard pretty much to themselves. The other comparison would be the USA where, despite its sucking in so much of the world’s capital, FDI outflow > FDI inflow, excepting the madness of 2007.

A good proportion of this out-bound FDI in 2008 was due to mergers and acquisitions, i.e., Malaysians buying up assets and firms, probably the ill-timed Maybank purchases…

Putting it together suggests that Malaysian capital is moving out.

How do we assess this? There are a number of ways:

1. The most negative is to see it as a capital strike by Malaysian capitalists. This can be for any number of reasons: they don’t like government policy because it favours workers too much (and that does not have to be because it actually does, but the capitalists want more); or due to NEP considerations, but that wasn’t an issue previously; or simply that costs have gone up here, including labour costs, relative to other places.

2. The most positive is to see it as Malaysia becoming a significant global player, not just a host country. That’s how the government and its spokespeople would like to spin it.

3. A more neutral approach is to assess the investments made and in what way they benefit the country, not just the capitalists making the investments. For instance, there have been investments in oil palm plantations in Indonesia and elsewhere. It’s hard to see how that benefits us as a country, other than by way of taxable remittances of profits. Contrariwise, Petronas investments arguably benefit the country in so far as they are a state-owned corporation and in so far as they help secure energy supplies for us.

Whatever, we come back to policy designs that will prioritise domestic investment by domestic capital, and not get so worked up about satisfying foreign investment demands.