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.

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6 Oct 2009 10.36am

Secondly outflow of funds: When the economy gets matured, you start to see funds start to flow out. The key to decide if this is positive or otherwise depends on the reasons and destinations. In the case of Indonesia, obviously it is bad as the corrupt politicians and businessmen are robbing the country blind and park the money … outside Jakarta’s judicial reach. But in the case of Singapore, HK, Taiwan and others for example, these funds are used to buy strategic equities, new technologies or expand local companies’ business overseas. In our case, I see the outflow as positive… Read more »

6 Oct 2009 10.30am

Anil It is hard to find good, contructive and non-political comments on any subjects these days. As such the insight from the analyst was refreshing. I also thought that your opinion was rather misleading on this topic but due to work commitments didnt comment. I think the analyst did cover most important points but I would like to add a few more key points. First about FDI. FDI is often a very misunderstood subject and can be very misleading to those unfamiliar. Please allow me to illustrate via some examples. It is estimated that up to 60% of FDI for… Read more »

5 Oct 2009 4.56pm

(End the) ICA and wait for an explosion of local investments. Keep the ICA and the outflow of investments will continue until this country becomes a basket case like the Philippines. It is this simple.
One more thing the easy money days are all but over for Petronas. The next ten years will see diminishing returns from Petronas.

fast and furious F117
fast and furious F117
5 Oct 2009 3.50pm

Dear Anil, The way these jokers handling the economy and the way MACC investigating those big sharks, the excessive bleeding (capital outflows and shrinking FDIs) will continue and once the petroleum monies dries up, sorry to say, we will be an ‘(outcast) state’ with the deficit reaching sky high, then the next generation will be living in he…..

Andrew I
Andrew I
5 Oct 2009 3.22pm

Erm, advertisement.

5 Oct 2009 3.03pm

People, As far as I can see it, there are only 2 ways. One is to have an Anarchist. No or little government control over investments, capitals or whatever coming in & out of the country. Let the nature of economy find the balance Or doing what all countries have been doing. Continuously assessment on if such decisions benefits the nation Anil, In the contrary to your belief that capitalists have been dominating the market, efforts needed to perform assessment. Ever since independence, even countries like Malaysia are doing so. It’s nothing new When one does these kinds of assessments,… Read more »

5 Oct 2009 2.06pm

Many developing countries rely on FDI as their domestic savings are low. Between EPF/KWAP/Insurance companies, M’sia has too much ( over M$500b) savings generating pitance in terms of returns. As a country we can survive for many yrs w/out FDI, however, the trick is prudent financial mgmt. For that to happen the govt has to get out of business & leave it entirely to the private sector to compete openly. When every big business is owned by the govt, the unscrupulous politicians & their biz friends continue to milk or bleed the system. PKFZ is one fine example.

Andrew I
Andrew I
5 Oct 2009 1.37pm

There seems to be a sudden dearth of comments over the weekend, Anil. Perhaps you should adopt the KTK approach and only allow all comments if and if and if there is no bias in the mainstream media. So what do we mean by that? 1. We learn of an event only when it has been officially denied. 2. Limited front page coverage of PR and only when it’s negative. 3. Buried coverage of PR. 4. Totally irrelevant coverage of the going-ons in the lives of political spouses. 5. Opinionated news stories which should come under commentaries. 6. A constant… Read more »

Gerakan K
Gerakan K
5 Oct 2009 9.50am

FDI is quick and easy route to create millions of jobs. Local investment can be possible if we like USA or China population.

5 Oct 2009 11.28am
Reply to  Gerakan K

Gerakan K. Another point you did not state about local investment is this…..’local investment is possible to drive the local economy if There is no Leakages/Mismanagement/Corruptions’. In malaysia if I am not wrong, the bulk of income comes from the sales of Oil and gas related products. So Malaysia is a bit lucky as the country’s oil and gas sales and other natural commodities more or less offset some loss in FDI.

5 Oct 2009 3.53pm
Reply to  Gerakan K

Australia with lesser population than Malaysia does not stop them to invest heavily in the biotech, solar, IT, etc.

These sorts of high-tech investment need brain besides the capital.

Where is our top brains go? Everyone knows the answer except UMNO (pretend do not know!)

Gerakan K
Gerakan K
6 Oct 2009 12.36pm
Reply to  nkkhoo

Australia is a land of immigrants with plenty capital and higly educated people. You forgot to mention that how big the Australia is and how many natural resource they have compare with Malaysia. Also you also forgot to mention that the relationship of Australia with the US. Australia regard by US as sheriff of Asia.

5 Oct 2009 8.57am

I really really hate it when people especially liberal journalist talk like they are experts in topics that are complicated especially when they don’t know the numbers behind what they are talkinga bout.. Yes, FDI is addictive and not magic without any ills BUT Malaysia cannot discard emphasis on FDI, no country can actually – not even the US which in reality is the biggest recipient of FDI in the world. FDI don’t just bring money, it brings productivity – it forces the economy to up their efficiency and brings new technology, new ideas AND its not directly BUT indirectly… Read more »