The environment for foreign direct investment (FDI)

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The environment for foreign direct investment (FDI) has become very competitive and it is important for countries to critically examine their investment policies and ensure their relevance and effectiveness in attracting and benefiting from FDI. Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the world´s developing countries. More than ever, countries at all levels of development seek to leverage FDI for development, including Malaysia.

Malaysia has made the transition from being an essentially primary commodity producing economy over the last three decades to one in which manufacturing contributes more than 30 per cent of annual GDP and the overwhelming majority of exports. This transformation has been facilitated by an export-led investment strategy, in which FDI from more developed nations has played a key role.

To accelerate its economic transition, Malaysia has launched various policies and programmes with varying degrees of success. This paper examines the role and impact of both the FDIs and domestic investments on Malaysia’s actual economic growth and development. They will be linked to exports, employment, and domestic equity levels. It should be noted that most of the requirements Malaysia has applied have been "voluntary" in nature in that they have been used as conditions for the receipt by the investor of an incentive or other advantage.

Research Methods

To find data and information on FDI in Malaysia, as well as its role and impact on the economic growth and development, a lot of reading was done, namely of

  • Malaysia’s economic policies since independence in 1957
  • Malaysia International Trade and Industry reports
  • UNCTAD publications
  • Malaysian Industrial Development Authority (MIDA) reports
  • MIDA website (
  • Bank Negara Malaysia Annual reports of various issues
  • Multimedia Development Corporation website ()
  • and other academic publications (listed in the bibliography)

Analysis of Information and Data

In order fully to understand the role and impact of FDIs in the Malaysian context, it is important to place the analysis in the broader context of the country's evolving approach to economic development. Malaysia’s policies have comprised a complex mix of restrictions, requirements and incentives. After independence in 1957, Malaysia passed through a stage in which the focus was on import-substitution. This was followed by the passing of the Investment Incentive Act in 1968 to encourage labour-intensive, export-oriented industrialization and employment generation. Several other related policies and programmes were also introduced, notably the Free Trade Zone Act (1971) for the attraction of export-oriented TNCs. This Act led to the establishment of 10 zones offering subsidized infrastructure, expedited customs formalities and freedom of import duties and export taxes. made the issuance of licences for industrial activity conditional upon compliance with the New Economic Policy guidelines stipulating 30 per cent Malay share of corporate ownership. In the 1980s, a period of heavy industrialization was pursued to further economic diversification, increase local linkages, promote Bumiputera small and medium-sized enterprises (SMEs) and to upgrade the country's technological capacity. The heavy industrialization programme took the form of new joint venture projects between state-owned enterprises and foreign (mostly Japanese and Korean) partners in automotives, motorcycle assembly, steel, cement, fertiliser, petrochemical and other industries (Felker and Jomo, 2002).

The economic downturn of the mid-1980s seriously affected Malaysia’s development plans and led the Government to encourage more public-private cooperation. Various incentives for private sector participation were introduced to support other policy efforts in a more liberal direction. FDI was given more attention and new ventures were granted more generous treatment and flexibility with regard to foreign equity participation, especially in export-oriented industries. In 1985, the Industrial Master Plan identified three policy instruments for increasing technology capability: research manpower, institutional arrangements (such as industrial parks), and R&D incentives. Twelve priority sector development plans were announced as part of a comprehensive strategy.

Despite slow economic growth during the early years of the Master Plan period, most of the defined targets were achieved (MITI, 1986-1995). To give a further fillip to the Industrial Master Plan, the Promotion of Investment Act of 1986 was enacted to develop priority industries identified in the Plan. Under this Act, the Labour Utilisation Relief incentive was abolished and pioneer status incentives were delinked from capital investment criteria. In addition, tax incentives introduced for training, R&D and reinvestment complemented the Promotion of Investment Act. Other instruments to promote industrial development included exemption of import duty on raw materials, tariff protection for certain industries and financial and credit assistance. The Second Industrial Master Plan, 1996-2005 extended the Plan's approach beyond export manufacturing operations towards more locally-integrated clusters. Emphasis was shifted to encourage supporting industries, including the services sector. This Second Plan also focused on integration of manufacturing operations along the value chain through investments in R&D and design capability, development of integrated supporting industries, packaging, distribution and marketing activities.

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Discussion of Findings

1. Export

In 1991, a broad reform of Malaysia’s investment policy regime was carried out by phasing out tax incentives for exports and reducing the scope of the pioneer status. However, full tax exemptions were granted to investments in specific higher technology and strategic sectors. Incentives were increasingly tied to technological deepening, exports and domestic sourcing of inputs. Applications for pioneer status were to be more rigorously screened using four broad criteria: value added of 30-50 per cent, local content levels of 20-50 per cent, depth ...

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