Chapter

Foreign Direct Investment

in Malaysia
Rajah Rasiah

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Learning Objectives

Define Foreign Direct investment.

Explain the positive effects of FDI to Malaysia

economy development.

Explain the negative effects of FDI to Malaysia

economy development.

Incentives for FDI

Example of projects set to tap the benefits of

FDIs.

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Foreign Direct Investments

Define Foreign Direct Investments (FDIs)

An investment made by a company or entity based

in one country, into a company or entity based in
another country.

Foreign direct investments differ substantially from:

1.

Indirect investments such as portfolio flows,

wherein overseas institutions invest in equities
listed on a nation's stock exchange.

2.

Direct investments typically have a significant

degree of influence and control over the
company into which the investment is made.

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Foreign Direct Investments

Define Foreign Direct Investments (FDIs)

Open economies with skilled workforces and good

growth prospects tend to attract larger amounts of
foreign direct investment than closed, highly regulated
economies.

The investing company may make its overseas

investment in a number of ways - either by:

1.

Setting up a subsidiary in the foreign country,

2.

Acquiring shares of an overseas company

3.

A merger or joint venture.

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Foreign Direct Investments

Define Foreign Direct Investments (FDIs)

The accepted threshold for a foreign direct investment

relationship, as defined by the OECD, is 10%. That is,
the foreign investor must own at least 10% or more of
the voting stock or ordinary shares of the investee
company.

An example of foreign direct investment would be an

American company taking a majority stake in a company
in Malaysia.

Another example would be a Malaysian company setting

up a joint venture to develop a mineral deposit in Chile.

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Foreign Direct Investments

Foreign

direct investment (FDI) in

exportoriented firms was promoted actively
with the introduction of the:

1.

Investment Incentives Act of 1968,

2.

Free Trade Zone Act of 1971.

3.

Promotion of Incentives Act of 1986.

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Positive effect of FDI to Malaysia economy

development:
i.

Investors introduce modern technology and

management, increasing level of technical
efficiency as well as promote R&D.

ii.

Investors fill in the gap between domestic

saving and investment.

iii.

Foreign exchange reserve increase due to

inflow of funds.

iv.

Training by foreign firms help develop Malaysian

human capital.

v.

Profit generated from FDI contributes to

corporate tax revenue.

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Foreign Direct Investments

vi. Increase employment opportunity.

vii.New firms lead to setting up of supporting

industries that are required by the set up of
factories and bring prosperity to the local population.

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Negative effect of FDI to Malaysia economy

development:
i.

FDI may harm the environment if foreign firms

investing in Malaysia pollute. Environmental laws are
less stringent in Malaysia.

ii.

Create fierce competition for workforce to the local

industries.

iii.

Global capitalists imperialism.

iv.

Cultural friction that may even harm international

diplomacy.

v.

Various incentives and infrastructure spending to

attract FDI are from public fund (either through
government borrowing or tax).

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1.0 Introduction

Source of FDI in Malaysia

1985 1986 1987 1988 1989 1990 1998 1999 2000 2001 2002

UK

2.8

2.9

3.7

0.4

8.8

4.9

3.6

1.5

3.8

0.6

1.4

USA

11.6

3.1

7.9

11.0

3.6

3.2

49.2

44.4

37.7

18.0

23.0

Japan

27.5

6.8

34.7

25.1

31.3

23.9

14.2

8.1

14.5

17.8

5.0

Taiwan

3.3

6.4

11.8

17.0

24.7

35.9

7.6

2.1

4.6

6.0

2.1

Singapore

10.4

10.9

12.5

8.6

10.6

5.0

7.4

2.1

4.6

6.0

2.1

Korea

2.6

0.2

0.2

0.9

2.2

3.6

0.5

0.2

3.6

9.0

3.1

Germany

n.a.

n.a.

n.a.

n.a.

n.a.

0.7

1.2

1.5

8.3

13.8

44.9

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Investment Region / Corridors

FDI in MSC Development Phase (Post-Crisis

1997/8)

To develop Malaysia as centre for high-tech

industries in ICT.

Incentives included:

i.

Companies located in the MSC will be given MSC-Status,

which entitles them to a 10-year Pioneer Status Tax
Holiday.

ii.

A 100 percent Investment Tax Allowance on new

investments made in cyber cities, and tax exemption on
import of multimedia equipment.

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Investment Region / Corridors

iii. Importations of multimedia and training
equipment are duty-free.
iv. Ensure no internet censorship and provide
competitive telecommunications tariffs.
v. Freedom to borrow fund globally.
vi. Unrestricted employment of local and foreign
knowledge workers.
vii. Exemption from selective exchange control
measures.

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Investment Region / Corridors

Iskandar Development Region (IDR) [now known as

Iskandar Malaysia]

Background Information

Officially launched on the 4th Nov. 2006

Key engines of growth identified under the 9th

Malaysia Plan

Located in the state of Johor at southern Peninsular

Malaysia

Covers 2217 km2 of land area

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Investment Region / Corridors

Plan, Incentives and Expectation

Plans to make IDR a strong and sustainable

metropolis of international standing.

The government has committed more than RM 4

billion towards infrastructure development in the
region.

On March 22, Prime Minister Datuk Abdullah Badawi

announced an attractive package of investment
incentives (include 10-year exemption from
corporate tax) for qualifying companies in six target
sectors.

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Investment Region / Corridors

The six target sectors are:

Creative industries, Educational services, financial

advisory and consulting, healthcare, logistics and
tourism-related services.

Foreign workers in IDR would be able to import or

purchase a duty-free car for their personal use.

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Investment Region / Corridors

Companies will be free to employ foreign workers

within the IDR.

Benefits

IDR expected to draw FDI worth US$40billion in the

first seven years.

IDR projected that 817,500 jobs will be created in the

region up to year 2025.

Despite allow employing foreign workers, Malaysian

are expected to make up the majority of the
workforce there.

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Northern Corridor Economic

Region (NCER)

For Agriculture:

Thrust 1: Improve scale and professionalism

Programs for Thrust 1: Professional land

management (Estate concept) and professional
marketing company to create regional brand identity.

Thrust 2: Technology & quality standards.

Programs for Thrust 2: Better seeds, Good

Agricultural Practices (GAP) and NorthStar
Agriculture Scholarships.

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Northern Corridor Economic Region

(NCER)

For Manufacturing:

Trust 1: Increase E&E value added

Trust 2: Develop new sub-sectors

Programs: Micro-Electronics Centre of Excellence;

funded secondment programs; biotechnology,
agriculture downstream; oil & gas

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Northern Corridor Economic Region

(NCER)

For Services

Trust 1: Strengthen tourism

Trust 2: develop logistics & trading services

Programs:

Develop 2-3 of Langkawis outer islands.

2-3 main tourism clusters on mainland.

incentives to encourage flow of raw & semifinished goods into NCER.

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Eastern Corridor Economic

Region (ECER)

Kelantan: Centre for trading, center of education

excellence and to promote agro-based activities such
as poultry rearing and herbal plants cultivation.

Terengganu: Would be geared as a tourism

gateway.

Harnessing its current strengths in the oil, gas and

petrochemical industries.

To be a center of education excellence.

In agriculture, goat rearing and cultivation of citrus

fruits is encouraged.

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Eastern Corridor Economic

Region (ECER)

Pahang: Focus on manufacturing that would be

extended to develop a

Palm oil industrial cluster.

Developed integrated logistic distribution hub as

part of its port city development.

Agriculture sector development included promoting

cattle rearing and pineapple cultivation.

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Sabah Development Corridor

Sabah Development Corridor (SDC)

Main thrusts are:

Transform Sabah into a regional gateway for trade,

investment and tourism;

Continue to make Sabah a harmonious and

prosperous State, irrespective of race and religion;

Make Sabah more technology-savvy for a better

quality of life in the State;

Create more job opportunities in the State; and

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1.0 Introduction

Sarawak Corridor of Renewable Energy (SCORE)

Make Sabah a comfortable place to live in amidst its

rich diverse cultures, heritage and environment.

The core of the SCORE is development of abundant

energy resources, which are hydropower
(28,000MW), coal (1.46 billion tones) and natural
gas (40.9 trillion sq cu ft) found in the central region.

Tanjung Manis: To be a manufacturing and small

industries centre. To be an important regional port
city by 2030.

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Sarawak Corridor of
Renewable Energy (SCORE)

Sarawak Corridor of Renewable Energy (SCORE

Similajau: To be an industrial city underpinning a

new industrial center, housing heavy industries such
as oil & gas, aluminum, steel and silica, with a
deepwater port.

Mukah: To be an education hub and Smart City,

drawing not only academic and research institution
but also skills training centers.

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