Wednesday, September 08, 2010

Foreign Direct Investments Vs Domestic Investments

THE domestic debate on whether a country should focus on foreign direct investments (FDIs) or direct domestic investments (DDIs) is gaining traction as Malaysia moves towards increasing private investment under the 10th Malaysia Plan. Questions are being raised on the impact and contribution of FDIs versus domestic investments on the economy.

Before I go any further, some definitions are in order. What is FDI? What is direct investment abroad and what is domestic investment? FDI is defined as a long-term investment in a foreign country. It has three components, namely equity capital, reinvested earnings and intra-company loans. Domestic investment is investment by local companies in the domestic market.

Cases where Malaysian conglomerates invest overseas are known as direct investments abroad.The labs initiated by PEMANDU have identified 131 projects, also referred to as Entry Point Projects. These are projects which will be launched in the next five years. It is hoped that the implementation of these projects will help stimulate private investment.

By definition, Entry Point Projects are just the beginning, and going forward, there will be other investments which might result from their implementation. What is interesting is the following:

*That a large proportion is private investment, i.e. 92 per cent, with projects requiring public sector funding amounting to only 8 per cent; and

* About 80 per cent of these projects are domestic investments with the remainder coming from FDIs.Looking at these numbers, questions may be asked as to whether FDIs are necessary. Or can we ignore FDIs completely and depend only on domestic investments?

Let us begin by looking at the role of FDIs in Malaysia's economic development. Malacca had been a leading centre of commerce and trade between the 14th to the 19th centuries. Its strategic location in the Straits of Malacca made it a coveted settlement. Traders from China, India, the Middle East and neighbouring regions converged into the thriving port for trade and commerce. As early as the 14th century, Malacca had attracted FDIs in services.

Later in our history, we had the British coming to Malaya to invest in rubber and tin. British investments in these two commodities resulted in the laying of railway tracks and the construction of roads to transport commodities to the markets. This in turn opened up the country for development. We also earned valuable foreign exchange for these exports and a significant cross-section of "Malayans" benefitted in the form of higher income. Kuala Lumpur, Ipoh and Penang grew as a result of booming trade in these commodities. This is a very simple illustration of the benefit of foreign investments.

In the 1970s and 1980s, Malaysia began to attract investments in the electronics sector. We have a growing population and the farms and tin mines can no longer absorb the surplus labour from the rural areas. Fortunately, the factories in Penang, Shah Alam and Johor were able to provide job opportunities for our young people. Without FDIs, our unemployment rate would have jumped to more than 20 per cent. The young boys and girls who worked in these factories were able to send money home, thus providing income support to their families.

We also have been attracting investments in the services industry. Foreign banks opened up branches in Penang and Kuala Lumpur. There were also investments in transport and logistics. All these have provided job and business opportunities for our people.

Of course there are also downsides to FDIs. There was not much linkage with the domestic economy. In the early stages, there was little value-added as components were mainly imported. In the 1970s and 1980s, many FDIs were only in assembly-type operations. We became more dependent on foreign labour, and remittance abroad kept on growing. Large multinational corporations became complacent as the government was quite generous in approving applications for foreign labour. In a way, this has created a vicious cycle of dependence on foreign labour which is extremely difficult to break.

All told, FDIs on balance have played an important role in our country's development. We liberalised foreign equity requirements in 1988 which further stimulated FDI flows. We were considered as one of the tiger economies, and this status was achieved partly because Malaysia was one of the major destinations for FDIs.Questions have been raised as to whether FDIs continue to be relevant. These questions have been asked because of the following:

* The lack of linkages with the local economy;
* In some cases, imported components remain high;
* Dependence on foreign labour has increased;
* Dependence on foreign labour has increased;
* Domestic wages have been depressed;
* Our failure to effectively move up the value chain;
* The volatile nature of FDIs especially in the earlier days, some FDIs were footloose in nature;
* Greater competition from China and some neighbouring countries; and
* The apparent neglect of domestic investments.

Our position is that Malaysia will continue to need foreign investments. But FDIs of a different kind. We have been talking about quality FDIs. But, what are quality FDIs?Quality FDIs are those which generate more benefits and spin-offs to the local economy. They will have to possess the following features:

* Strong linkages to the domestic economy including SMEs in terms of local sourcing;
* Investments which are more capital-intensive which will not require too much foreign labour; and
* Investments which are knowledge-intensive, which will pay higher wages.

This will be our focus going forward. In other words, we have to be selective because our wages are higher compared with those in neighbouring countries. We have decided to attract these kind of industries to the country. Some might say that we have also failed to attract quality investments. This is not entirely true.

Going forward, we are going to focus more and more on domestic investment. I am not saying that FDIs are no longer relevant. They continue to be important, but given the competitive environment and our large domestic savings, we need to motivate our own people to put more money into the country.

However, it is acknowledged that domestic investments cannot create as much impact as FDIs for the following reasons:

* Our people do not possess sophisticated technology as the Japanese and Germans;
* Our domestic companies do not have extensive overseas marketing network;
* We do not have many regional and global companies; and
* Our domestic market is relatively small.

Notwithstanding the above, we have examples of Malaysian companies investing overseas with high level of technology. But we do not have enough of them.

Despite these constraints, we believe there is potential to boost domestic investments. These will be in the area of infrastructure development, resource-based industries and in property development. Some of our investors are beginning to develop capabilities in the area of manufacturing.

How do we get our entrepreneurs to invest more in the country? We know that a number of our large corporations including government-linked companies have invested large sums both locally and overseas. Khazanah, CIMB Bank, Maybank, YTL, Genting, Petronas, Sime Darby are among some of our companies which have sought opportunities abroad.

While we are not preventing them from going abroad, we have to further improve the domestic investment climate, to motivate them to invest more locally. We have to continue reducing red tape and bureaucracy and making government rules and procedures more transparent. But above all, we have to create more opportunities for them to invest in the domestic economy.

5 comments:

Financial Planning said...

FDIs and DDIs both are essential for the growth of a country.More FDIS can attract more investors in a country, and which will create more job opportunities for the public.

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