Dec 26, 2010

Malaysia's Competitiveness in Attracting Foreign Direct Investment (FDI) [Part 2]

How to Cite

We, Alex C.Y. , Mazlan,N., Masot,M., Aums,M., Tan,N.X., Yeo,L.H., and Sia,M.S. (2010). “Malaysia’s Competitiveness in Attracting Foreign Direct Investment (FDI)”. Multimedia University, Faculty Business and Law. 


According to the International Development Research Center (IDRC), the promotion of FDI inflows into
Malaysia are always accompanied by the establishment of local private conglomerates and large stated-owned enterprise. This scenario decreases the opportunities for competitions among enterprises within Malaysia, and also reduces the effectiveness and the efficiency of the large state-owned enterprises or Government Linked Corporate (GLC) itself.

3.1 Corruption in Malaysia

Generally, corruption can be defined as giving or obtaining advantages through means which are illegitimate, immoral, and inconsistent with one’s duty or the rights of others ( Corruption often results from patronage, and will bring influences in a country’s FDI inflows in the negative way. According to Bradhan (1997), since foreign investors have to pay extra costs in the form of bribes in order to get licenses or government permits to conduct investment, corruption raises the cost of investment. And such additional costs decrease the expected profitability of investment and so corruption is generally viewed as a tax on profits (Ali Al-Sadig, 2009). In other words, corruption can contributes to a much greater cost of doing business for a foreign investor. Hence, the willingness and intentions from foreign investors to place investment into Malaysia will be reduced, and affect the country’s FDI directly.

Besides, corruption can greatly creates deep impact on a country’s economy, development and society as well. The act of abuse of authorized power for private gain is ruining to a country, since the decisions making are not acquired for public benefit in general, and will bring lesser contribution to the society. More seriously, corruption can falsifies a country’s public policy, damages country’s good governance, tends to misallocate resources and subsequently hurts the poorer citizens.

From the perspective of negative influences of level of corruption on a country’s FDI inflows, the basic concept of corruption is that it represents a cost because it increases the variability connected with investment opportunity, which in turn increase the cost of capital and hinder rates of return for an investment. According to Dunning (1993) and Moosa (2002), from the microeconomics perception, political stability and risk are generally considered by foreign investors in deciding whether to invest or not in a particular location and one of the sources of political risk is corruption (Aw T.Y & Tang T.C,2010). According to Smarzynska and Wei (2002), there are several theoretical justifications depicted that corruption makes local bureaucracy less transparent and hence acts as a tax on foreign investors; corruption affects the decision to make on a local partner; corruption increases the value of using a local partner to cut through the bureaucratic maze; and corruption decreases the effective protection of investor intangible assets and lower the probability that disputes between foreign and domestic partners will be adjudicated fairly (Aw T.Y & Tang T.C,2010). Hence, a country with high level of corruption is less able to attract FDI than other country with low level corruption, since the foreign investors prefer to invest in countries with lower political risk.

However, some may perceive there is a positive relationship between corruption and FDI inflows (Ali Al-Sadiq, 2009). Since they consider corruption as an opportunity, and therefore an MNC’s manager can make use of such blind side in a host country’s institutional environment to benefit from it. According to Bardhan (1997), in the presence of a rigid regulation and an inefficient bureaucracy, corruption may increase bureaucratic efficiency by speeding up the process of decision making (Ali Al-Sadiq, 2009). Nevertheless this viewpoint has been overruled empirically.

There are several measurements of corruption available, and one of the popular measurements is PRS index. The PRS index measures corruption within the political system that threatens foreign investments by distorting the economic and financial environment, reducing the efficiency of government and business by enabling people to assume positions of power through patronage rather than ability, and introducing inherent insatiability into political process (Hafiz, A. & Kanhaya, G.,2006). The corruption index is a scale measurement with a range from 0 to 6, where the 0 represents most corrupted and 6 represent least corrupted. The table below shows the comparison of PRS index of Malaysia with others South-East Asia Countries.
PRS Index (2000)
PRS Index (1984)
Source: PRS index is obtained from Political Risk Services Group, 1979-2004. (Hafiz, A. & Kanhaya, G., 2006)
As at shown in the table above, Malaysia’s PRS Index had been reduced from 5.0 (1984) to 3.0 (2000), which indicated that the corruption’s problems are getting more seriously. Although in the recent years, several bureaucratic corruption scandals in Malaysia had been revealed gradually, but perhaps the revealing are mostly not totally completed with a final judgments. In year 2007, Malaysia economy is perceived by foreign businessmen to be more corrupted comparing with the year 2006, according to a survey carried out by Hong Kong based Political and Economic Risk Consultancy (PERC) (The Star, March 2007). This survey results were released on 13th March 2007, which polled 1476 expatriate business executives in 13 countries and territories across the region in January and February of 2007 (The Star, March 2007). This corruption perception index is somehow important for the foreign investors to make their investment’s decisions. According to PERC managing director Robert Broadfoot, perception in corruption is a key factor to investors, because they are normally make their investment decisions based on perception toward a country, but not the reality (The Star, March 2007).

Besides, there is with investigation shown that Malaysia’s corruption ranking had fallen down to 56, from 47 in year 2008 (, November 2009). Among all South-East Asia Countries, Malaysia is one of the only two countries which with fallen ranking, together with Thailand. However, Thailand had dropped only 4 places, but Malaysia had dropped 9 places in the same ranking result. Although Malaysia’s government had placed much efforts in fighting corruptions, such as introduced Anti-corruption slogans and granted higher authorities to Malaysian Anti-Corruption Commission, as well as listing Anti-corruption as one of the federal government’s Key Performance Indicator (KPI)  (, November 2009), but the result of combating corruption is not as good as expected.

One of the possible factors that contributed to such scenario is due to the lack of political commitment. More and more cases are left unsettled, while those cases brought to court ended up in loss (, November 2009). In the other hand, the Anti-corruption slogan without any encouraging results of combating corruption, might creates negative impression to foreign investors, as the slogan was addressed as for political deception to win the votes only. Yet, they might further assume that political risks in Malaysia is relatively high, which will stop them to invest into Malaysia.

3.2 Cultures and Languages Differences in Malaysia

According to Johnanson and Vahhe,(1997,1990)(as cited in With regard to cultural differences might affect FDI mode of entry of the Literature Review) believed that the greater the cultural differences are, the more FDI will lead to taking on a joint venture enter the host country market. The information exchanges become more difficult, as social and cultural difference could create uncertainty to the managers of transnational corporations, who tend to underestimate the value of oversea investments. Cultural differences between large MNC in national investment, access to local knowledge is very difficult, so preferred mode of operation in the joint venture (Anderson and Coughlan, 1987). Cultural differences that make managers of transnational corporations do not trust the host country partners; they would prefer to take a higher control entry mode, in order to fully according to their own wishes (Bivens and Lovell, 1966).

According to Pan Zhen and Lu Wang, (1990,2000)(as cited in With regard to cultural differences might affect FDI mode of entry of the Literature Review) analysis of investment in the country’s cultures, investments and cultural differences between countries and China’s FDI into the mode selection effects. The preference-based power from the control of sexually-oriented country, and risk preferences of foreign-owned preferred to enter the Chinese market, those who own cultures and Chinese’s cultures, the greater the differences between the countries, the more likely foreign joint ventures are to be taken to circumvent the cross-broader operation in the risk. The cultural differences will produce both positive and negative influences to the enterprise development (Hofstede G.1993). The most significant negative aspect is that, the cultural differences will cause cultural mis-registrations and cultural conflicts, these factors will restrict enterprise’s survival and development inevitably, and will affect business goal realization frequently. Arjun Bhardwaj (2007) found that, host country trust on location decisions of foreign firms is decided by the mixed support for a direct effect. Besides that, the most important finding is that of an interaction effect of uncertainty avoidance and trust on FDI, uncertainty avoidance moderated the positive relationship between a country’s level of trust and the FDI, the relationship will became weaker as the uncertainty avoidance increased. It should be noted that the host country cultural factors affected FDI inward, after controlling for economic, human capital, institutional, and regulatory antecedents of FDI.

Differences in culture exit due to differences in races, ethnicities, nationality, geographical region, age, physical ability or disability, socioeconomic status, gender identity and language differences. All of these differences can differ the way for communication and interpretations on beliefs, values, as well as norms, in which will affect the behaviors of a relatively large group of people. Some cultural differences in customs and behaviors are obvious. For example, in Switzerland and Germany, punctuality seems to be important but less important in most parts of Africa. Along with important differences, people from varied backgrounds also share many similarities. Even when we acknowledge cultural variation, the fact remains that not everyone in a particular culture behaves identically. Ignoring cross-cultural similarities and intercultural variation can lead to stereotyping people from different backgrounds, exaggerating and caricaturing the other culture, and judging its communication practices as radically different and implicitly wrong. Hence, we must study about cultural of other countries as well to prevent this situation happen. We must learn to adapt and accept conflicts, and learn to appreciate the importance of harmony when communicating cross-culturally. Once we learn to appreciate different sets of rules about how to express and handle disagreements, conducting business will becomes much easier and able to attract more FDI to invest across our country.

Besides that, the world is an uncertain and massively changes marketplace. International politics, economic trends and the forces of nature do affect the competitiveness of Malaysia in attracting FDI. Uncertainty avoidance is a measure of how accepting a culture is of a lack of predictability. Some culture such as Singapore and Hong Kong are comfortable with this fact. Their acceptance of uncertainty allow them to take more risks, relatively more tolerant of behaviors that differs from the norm, and enable a more open society to be formed. Other cultures societies such as Japan, Greece, and Portugal are less comfortable with change. They value tradition and formal rules, and show less tolerance for different ideas. So, we have to study about the different within countries’ traditions, values, and cultures.

Moreover, communicating with others from different backgrounds is not always as easily as just speech and listening to a particular language. Matters including cultures, races and genders may have made others’ experiences quit different from us. Hence, we must learn to accept and adapt other countries cultures and behaviors. We must also respect each other during the communication process to prevent conflicts happen. This can help to promote more satisfying, productive relationships among members of different countries and will increase the competitiveness of Malaysia in attracting FDI inflows.

Furthermore, we must practice and improve our personal skills to enable good communication when we dealing with foreign countries’ members. Language has the power to stir intense emotions. It can motivate, inspire, and amuse audiences. Unfortunately, it can also generate negative feelings such as antagonism, defensiveness, and prejudice. Therefore, we must avoid biased language when we are communicating with others. We must also beware of trigger words to prevent these conflicts happen. Some social scientists have suggested that conversation between men and women is a kind of cross-cultural communication in which members of each sex are not speaking different dialects but “genderlects.” Accepting gender differences can lead to smoother relationship across the countries. By the way, gender isn’t the only factor that influences conversational style. Cultural, geographical, and occupational influences also play a role on it.

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Lastly, we must also build up our interpersonal skills. Building positive relationships among the members of other countries can help in attracting FDI into Malaysia. The ability to work well with others is very important when Malaysia want to attract FDI. Therefore, good interpersonal communication skills are important. The ability and skills to interacting well with others need to be improved as Malaysia tried to attract FDI because improve the personal communication skills that are so important for individuals and organizations. To attract FDI, Malaysia should keep an open mind. Listening with an open mind makes good sense because others people probably have knowledge that you don’t. Besides, providing useful information, listening open-mindedly can also promote good relationships with foreign countries. This will help Malaysia to attract more FDI.

3.3 Education in Malaysia

In a paper entitled ‘Educational and income inequality in Malaysia’, Rahmah Ismail claimed that inequality in educational attainment may contribute to inequality in income distribution. Students, both in urban and rural areas, must be able to reach the provision of better and more efficient services in our education system. This can enhance our ability to produce local skilled talents. Malaysia has been moving up the industrialization development chain from one that is labour-intensive to capital and technology-intensive. Consequently, this development alters the pattern of demand for labour required by the industries by raising the demands for skilled and also highly educated workers as the economy moves up the value chain. Incentives for the development of intellectual properties in the area of information and communication technology (ICT), biotechnology and high-value adding manufacturing, including in sourcing of high-value adding processes and out-sourcing of low-value adding process are now given priority. This profound shift in the government’s macroeconomic policy will result in structural changes required in the economy, as we cannot compete using the old industrial economy. Though Malaysia had been producing thousands of graduates every year, it is not far-fetched to state that our educational system is not up to standard and neither is the vast graduates produced by the system. Since the supply of this type of skilled talents lagged behind their demand, then the skilled workers were able to command an increasing premium over unskilled workers. At the same time, the divergence of the wages of skilled and unskilled workers is said to be enhanced by the massive entry of unskilled foreign labour into the Malaysia economy that dampened the wages of unskilled labour.

Besides, Malaysia had been very selective with regard to the type of FDI to accept. FDI projects that were lower down the value chain and largely dependent on cheap labour were turned away. In fact, human capital development is one of the key factors to increase overall productivities, which will determine the volume of FDI inflows. Countries with better human capital resources will increase the attractiveness of that particular country’s investment climate, as it will increase the level of skill of the country’s workforce and improve the social-political climate in the country. The 9th Malaysia Plan recognized quality of human capital as a key determinant in the achievement of the plan’s goals and objectives. And the current Malaysia educational system is with several disadvantages, such as: rote learning without real understanding of the learned theories, pressure to study just for passing the examinations, and an emphasis on uniformity are the norm. As such, the government is recently taking into consideration to rebuild our current examinations’ system. One of the key considerations is to abolish the PMR examination, in which has become less meaningful since all secondary students will be promoted into SPM level, regardless how is the results obtained in PMR examination.   

3.4 Infrastructures, Sciences and the ICT  

Logistic and communication infrastructures are both the fundamental determinate for a country’s economic to growth, as well as to attract the FDI. Communication facilities are used for establishing connection networks with the remote areas around the country and the logistic facilities are the important backbone for transporting services. Countries with proper infrastructures facilities are able to gains more substantial amount of FDI, and the logistic and the communication networks are both facilitates to better supply chain management, as well as better distribution networks development.

Besides, there is with significant effects of public investment rate on FDI. Public investment can either be in basic facility, such as transportation system, educational institution, water and sewage facilities, could direct facilitate FDI inflows and in projects for the public sector enterprises where the product compete, which for input factor and also the market with those of the private sector involved. In Malaysia, both logistic and communication facilities have been massively financed by the government. The adverse consequences of government activities via the public sector have been noted by a group of observers. They are the reduction of fair competition among private firms in Malaysia (Ghazali, 1988) and the generation of macroeconomic problems, such as balance of payment deficits and inflations (Fischer, 1988).

According to Badlisham Ghazali (2010), IT would be hard to deny that the continued infusion of technology across all economic sectors in the country is key to driving productivity and innovation (Business Time, 2010 October 14). Besides, both of Implementation Council Meeting (ICM) and MSC Malaysia International Advisory Panel Meeting, had concluded that ICT empowerment is a source of national competitive advantages (Business Time, 2010 October 14). In order to encourage the development of ICT within Malaysia, the Malaysia’s Budget of 2011 have proposed 4 key policies, which includes : [1] Public-private partnership investment to actively facilitate the diffusion of ICT through all economic sectors, [2] Tax incentives for private sector to encourage technology refresh, [3] Investments to strengthen the ICT human capital pool particularly in talent growth attraction and quality development, and [4] Incentives to increase ICT adoption by SMEs (Business Times, 2010 October 14).

Green technology is another increasingly new technology, where Malaysia is planed to involve in actively. According to prime minister Datuk Seri Najib Razak, the government is planning to make Malaysia the regional center for green energy, especially solar energy, and the research shown that green technology investments would be able to reduce global greenhouse gas emissions by as much as 30 percent by 2020, without harming business profitability and the economic growth (New Straits Times, 2010 October 14). Malaysia has attracted over RM12billion or US$4billion in FDI to the solar photo-voltaic industry, and the prime minister declared that employing in green technology as country’s new growth engine is no longer an option, but is a must in light of an increasingly environmentally-conscious marketplace (New Straits Times, 2010 October 14).

3.5 Malaysia’s Legal System, Rules and Regulations

Every country has its own legal system in place to keep order. In areas of business, particularly FDI, investors consider different dimension of the potential environment’s legal framework before undertaking investment. The Malaysian legal system is substantially based on the English legal system and on the principal of common law, a legacy of British colonial rule. The High Court has jurisdiction over all criminal and civil matters, while the Court of Appeal hears appeals from the High Court. The Federal Court, in turn, hears appeals from the Court of Appeal, and has jurisdiction over constitutional law matters. The King of Malaysia on the advice of the Prime Minister appoints judges to the Federal Court.  Different  researchers have drawn relationship between FDI inflow and the following elements of regulatory frameworks: poor governance and inhospitable regulatory environments (Dupasquier and Osakwe, 2006 ); several specific trade and FDI policies like, foreign ownership ceiling in sectors open for FDI, policy on reputation of capital and remittance of profit (Tarzi, 2005) , government regulations and restrictions on equity holdings by foreigners (Cotton and Ramachandran, 2001 ) all are found to have negative impact on FDI inflow. According to Biglaiser and DoRouen (2006), goverments that implements reforms are not always more likely to attract FDI inflow.

Corruption is another issue to be seen in relation to the legal system. Corruption has been implicated as hampering economic activity and economic development (Voyer and Beamish, 2004). Most researchers found out that the presence of high corruption and low transparency have negative effect on the inflow of FDI (Zhao and Du, 2003; Habib and Zurawicki, 2002; Kersan-Skabic and Orlic, 2007).

Intellectual Property Right (IPR) protection is also critical factor for importing and involvement in high-tech areas. Ensuring property right in Malaysia (Fedderke and Romm, 2006) and developing countries (Kapuria-Foreman, 2007) were identified as one factor affecting FDI inflow. A large sample of host country study (Nunnenkamp and Spatz, 2004) points out that IPR protection affects FDI inflow. As it has been the case for other determinant factors, opposing views are forwarded for this variable. Investigation of the interaction of industry characteristics and IPR on multinational firms’ behavior, (Nicholson, 2007), suggest that when IPRs are strong, firms in industries with high investment in research and development (R&D) are more likely to enter a market by licensing to an unaffiliated host firm resulting in lower FDI inflow. Hence the effect is dependent on the kind of investment under investigation.
As for custom’s regulation, Malaysia has adopted the Harmonized Commodity Description and coding system for classification of goods. Duties for imported goods are generally levied ad valorem although some specific duties are imposed on a number of items as prescribed in the Customs Duties Order (Menon, 2002).

Over the last few years, Malaysia has abolished import duties on a wide range of raw materials, machinery and components to encourage foreign direct investments. Malaysia is also committed to the ASEAN Common Effective Preferential Tariffs (CEPT) whereby import duties imposed on 99.48 of Tariff Lines from ASEAN countries has duties of between 0-5% only. By 1 Jan 2010, import duties on all the tariff lines will be eliminated except for: as per SENSITIVE and HIGHLY SENSITIVE (,2010).

In the regulations for imports and exports, Malaysia practices free trade (import & export) policy and most imports are without restrictions under open general licenses. However, certain licenses are required for specific controlled products e.g. firearms, motor vehicles, pharmaceuticals, foodstuffs etc.

Exports are generally subject only to exchange-control regulations, whereby export proceeds should be sent back to the country within six-month period. Licenses are required for the export of primary products e.g. palm oil and timber, petroleum, minerals and other raw materials.

Malaysia’s currency regulations have always maintained a liberal foreign exchange administration policy. The implementation of foreign exchange administration policy in Malaysia supports the monitoring of capital flows into and out of the country to preserve its financial and economic stability. As part of Malaysia's continuous efforts to increase efficiency and reduce cost of doing business, the foreign exchange administration policies have been progressively liber-aliased and simplified.

There is no restriction on payments to non-resident for the import of goods and services. However, payments must be made in foreign currency (other than the currencies of Israel, Serbia and Montenegro).
As for custom’s declaration of goods, present laws require pharmaceutical / medicine shops and persons involved in the handling of gazette drugs, food (others as prescribe in the Customs order) to be registered with the Ministry of Health. Regulations on pesticides and chemicals designated as poisons are more stringent. The use of certain additives in food products must be disclosed, and it may not exceed permissible level.

All persons, who manufacture, sell, distribute, or import drugs or cosmetics must be licensed by the Ministry’s Drug Control Authority.  (, 2010)
As for product’s labeling, rules and regulations exist for labeling and packaging for products, but it varies according to the industry sectors. The registration regulations for consumer food products tend to have the most stringent regulations including the ‘HALAL’ for labeling purposes in view of the large Muslim population.

Different products and services would fall under the control of different Ministry in Malaysia. As such, it is important to contact the relevant ministry for the regulations e.g. Pre-packed drugs must bear labels in English or Bahasa Malaysia that designate the substance or the active ingredients and quantitative particulars.
The Food Act imposes compulsory labeling and shelf life on the packaging. Most of the household electrical products must be approved by Electrical Inspectorate Department prior to the importation and distribution, are some of the examples.

As for labour forces, all persons seeking entry into Malaysia must possess valid national or other international recognized travel documents valid for travel to Malaysia. These passports or travel documents must be valid for at least six months beyond the date of entry of Malaysia. For instance, Swiss nationals do not require a visa for travel of less than 3 months (Nadia and Suria, 2009)

3.6 Malaysia’s Taxation and Commercial’s Practises

Malaysia taxation policies are imposed by federal legislation passed by Parliament. The individual states do not collect taxes.

Some of the main tax legislations are the Income Tax-1967, Promotion of Investments Act-1986, Real Property Gains Tax Act-1976, and Petroleum Income Tax Act-1967. Offshore companies carrying on an offshore bness activity are subject to a preferential tax regime under the Labuan Offshore Business Activity Tax Act-1990. Certain taxpayers are taxed on special bases e.g. banks, insurance, air transport etc.
Malaysia has the following direct and indirect taxes:
            Direct taxes
1.      Income tax - is levied on individuals, companies and other taxable entities
2.      Real property gains tax - this is levied on capital gains arising from disposal of real estate, rights on real estate and shares in real property companies where the property is situated in Malaysia
3.      Petroleum income tax - this is levied on upstream petroleum companies

Indirect taxes
1.      Stamp duty - is imposed on certain documents e.g. agreements for transactions such as transfer of real estate, rental agreements, etc,
2.      Sales tax - is imposed on purchase of certain manufactured goods. The tax is collected at the point of importation or when the goods are sold by a Malaysian manufacturer to a non-manufacturer e.g. trading company.
3.      Service tax - this is imposed services provided by hotels, restaurants and certain prescribed professional establishments and when their turnover reaches certain threshold.
4.      Import duties - these are tariffs imposed on import of goods as prescribed in the Customs Duties Order.
Malaysia commercial law is another left-over from the British legacy. The domestic legal system is open and accessible. In the past, cases of foreign investment disputes, although it is rare, the dispute settlement has been handled with satisfaction. However, many firms choose to include mandatory arbitration clauses in the contract.

Malaysia is also a signatory to the UN-sponsored Convention on the settlement of Investment Disputes. In the local front, the Malaysian government has set up the Kuala Lumpur Regional Centre for Arbitration under the auspices of the Asian-African legal Consultative Committee to offer international arbitration mediation and conciliation for trade disputes. Commercial law firms of international standing are available in the country. However, it is noted that commercial disputes will takes a while for a final settlement through the court process. (Musbri Mohamed, 2009)

As for setting up companies, all companies intending to do business in Malaysia are required to register with the Companies Commission of  Malaysia which is formerly called Registrar OF Companies under Ministry of domestic Trade & Consumer affairs which is responsible for the administration of the companies act. This includes keeping files open for public inspection. (UHY, 2009)

Most large Malaysian companies have been involved in trade and industry for generations, and many have excelled in international and regional markets. Thus, foreign investors seeking joint-venture partners in Malaysia will be able to select from a wide range of companies to find one that matches their needs. MIDA also assists foreign investors in business match-making to start joint-venture projects or to undertake contract manufacturing. As the  government welcomes foreign investors investment into Malaysia, various agencies and trade association including MIDA, Federation of Malaysia Manufacturers, Small & Medium industries, The Chinese Chamber of Commerce etc, assist foreign investors to identify local joint venture partners in the manufacturing, trading and services sectors. (MIDA, 2009)

Malaysia welcomes and is actively inviting foreign investors through MIDA( Malaysian Industrial Development Authority ), particularly in export-oriented manufacturing and high-tech industries under the promotional of investments Act 1986 and the Industrial Co ordination Act 1975. MIDA was established to act as a one-stop Centre to administer the regulation of investment in the manufacturing sectors of the Ministry of International Trade & Industry. The government recognized the need for foreign capital investments and technology for the development of the country. MIDA’s major functions are to recommend to MITI policies and strategies on industrial promotion and development, to evaluate applications for investment incentives, and to process application for manufacturing licenses. Policy and guidelines are set and interpreted withy flexibility; conditions imposed on foreign investors are usually flexible and are based on the merits of individual projects. At the moment, foreign investors are allowed majority equity in most of the industries. Various incentives are offered to investors in promoted industries. These include 5-10 years tax holidays and investment and reinvestment allowances are also offered. Another actively promoted sector for foreign investment is in the information technology industry particularly in the Multimedia Super Corridor (MSC). It is located in a 15 by 40 kilometer area south of Kuala Lumpur. Investors in the MSC area receive a host of tax incentives and regulatory exemptions. Profits are freely remittable and exchange controls are minimal. Malaysia also signed investment guarantee agreements with various countries including Switzerland. (Kaziah Abdul Kadir, 2009)

In the procedures for collecting payment, it is customary for a creditor to negotiate with a financially difficult debtor when an unsecured debt has become due for some suitable arrangement for repayment. It is only when the repayment fails; creditor will then resort to legal recovery method. Malaysia‘s judicial system is relatively effective for such purpose, however, in view of back-log in the judiciary system, it will take a few years for the case to be settled. Private debt collection agency is another avenue, but it is not widely used as the fee is quite substantial (15-25% on amount collected).

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3.7 The Political Instability and Policies Inconsistency Problems

The Malaysian government has provided various incentives to encourage FDI but most of our competitors have also provided similar incentives package (Lim, 2002). So, government had formulated various policies from the mid 2009 including the New Economic Model, 10th Malaysia Plan, Government Transformation Plan and Economic Transformation Plan to attract foreign investment.

 What are the factors affect foreign investor decisions to invest in our country? One of the key factors affects the FDI to invest in Malaysia because of the good environment (Har, Teo & Yee 2008). The good environment will encourage foreign investor to invest in our country because with the good conditions make investors face fewer problem and they can run their business conveniently and make more profits. The social and political situation of Malaysia was encouraging factors for the realisation of FDI because Malaysia is among the friendliest and hospitable places in the world to work and live in.

Previous researchers indicate that political stability is a pre-requisite to attract FDI, but it is not a strong drive for FDI inflow (UNCTAD, 1998). While political instability reduces the inflow of FDI and also changes the nature of FDI from an investment in the country’s future into a drain on a country’s future (Henley, 2004). Political instability could be a serious deterrent for FDI as it creates uncertainties and increases risks and costs (OBwona, 2003). According to Ajami and Ricks (1981) and Nigh (1985) a country with political stability has a positive influence on FDI. Political stability is important for creating a climate of confidence for investors. This is also supported by (Henley, 2004) because, the foreign investors need to confident with the government for will not to take over their investments, that their agreement will be honoured, that conflicts will not destroy their investments, and make business too expensive (Henley, 2004). Thus, political stability is essential for FDI inflow which has large effect whether the foreign investors will invest in Malaysia or not and it will encourages investments in long-term business. So, Government plays an important role in maintaining political stability, because the investor have to adjust their strategies in accordance with the new policies if a new government come in with highly different policies. The long term political stability then will make foreign investor confident with their businesses will succeed and remain profitable.

Manage and Sync Music

 After former Deputy Prime Minister Anwar Ibrahim was released sodomy charge in 2004, he went to be the opposition leader for the coalition known as Pakatan Rakyat. He put pressure on the government under the Prime Minister Najib Abdul Razak for many accusations of cronyism, bribery and seeking advice from APCO, a jewish firm. In 2008, a new allegation of sodomy was made surface by his former aide, accusing him of sodomy. Popular with Sodomy II, this allegation went public and popular all over the world as the world leaders and foreign investors keep watching at close distance. This political chaos has tarnished Malaysia reputation among foreign investors and several of them even warn Malaysia government for a fair trial of Anwar Ibrahim. One of the famous examples here came from British tycoon Richard Branson when he said that the ongoing sodomy trial against opposition leader Anwar Ibrahim was discouraging investors from coming to Malaysia. The case is like a thorn because it has gone on for a long time and it damages Malaysia a lot as Malaysia has a good reputation. Malaysia can be more liberal and a lot more people will invest. Malaysian leader should get rid of these things that are damaging the country’s reputation quickly. Branson, the founder of the sprawling Virgin business empire, said Malaysia would have more success in wooing foreign funds if it adopted a more open and competitive business policy. The Malaysian political environment which has continuous crises between the government and opposition parties can be the reason why FDI declined last year, as the Deputy International Trade and Industry Minister, Mukhriz Mahathir said. He accused the opposition actions often maligned the name of country caused many foreign investors are afraid to come to Malaysia.

Variables that will come under government factors are government incentives, economic policies, and political environment and government promotions towards FDI. The Malaysian government has provided various incentives to encourage FDI. Brewer (1993); Woodward and Rolfe (1993); Kerr and Peter (2001); Tung and Cho (2000) and He and Guisinger (1993) found that tax incentives had a positive effect on FDI. The tax is expected to have an inverse relationship with FDI, which means lower taxes will promote FDI and vice versa (Kerr & Peter, 2001). However, according to Lim (1983) the tax incentives do not affect FDI because most of our competitors have also provided similar incentives package (Lim, 2002).

Besides government incentives, Malaysia government also had formulated various policies from the mid 2009 including the New Economic Model, 10th Malaysia Plan, Government Transformation Plan and Economic Transformation Plan as part of the economic development strategy to FDI and acquire foreign technology, capital, and skill.

 One of the key factors affects the FDI to invest in Malaysia because of the good environment (Har, Teo & Yee 2008). According to them, the good environment will encourage foreign investor to invest in our country because with the good conditions make investors face fewer problem and they can run their business conveniently and make more profits. The political environment refers to the laws and regulations passed by governments that can affect viability of multinational company operations in the host country (Griffin & Pustay 1999). Sound political environment can encourage FDI due to the role they play in lowering profit uncertainty (Agarwal, 1980; Schneider and Frey, 1985).

 Previous researchers indicate that political stability is a pre-requisite to attract FDI, but it is not a strong drive for FDI inflow (UNCTAD, 1998). Political instability reduces the inflow of FDI and also changes the nature of FDI from an investment in the country’s future into a drain on a country’s future (Henley, 2004). Political instability could be a serious deterrent for FDI as it creates uncertainties and increases risks and costs (OBwona, 2003). According to Ajami and Ricks (1981) and Nigh (1985) a country with political stability has a positive influence on FDI. Political stability is important for creating a climate of confidence for investors. This is also supported by (Henley, 2004) because, the foreign investors need to confident with the government for will not to take over their investments, that their agreement will be honoured, that conflicts will not destroy their investments, and make business too expensive (Henley, 2004). Thus, political stability is needed to attract and essential for FDI inflow which has large effect whether the foreign investors will invest in Malaysia or not and it will encourages investments in long-term business. So, Government plays an important role in maintaining political stability, because the investors have to adjust their strategies in accordance with the new policies if a new government come in with highly different policies. The long term political stability then will make foreign investor confident with their businesses will succeed and remain profitable.

 From 2007 to 2009, Malaysia experienced political instability and considerable macroeconomic fluctuation (BTI, 2010). The Malaysian political environment which has continuous crises between the government and opposition parties where opposition actions often maligned the name of country may caused many foreign investors are afraid to come to Malaysia, the racial issues between the majority Bumiputras and the minority Indians and Chinese also affect the country’s FDI attractiveness.

 The major and the biggest change in policy involving Malaysia was back in 1998 when the Asian financial crisis attacked and the Malaysian ringgit was falling very fast to almost 60% of its value, the Prime Minister at that time Mahathir Mohamad had to make a radical decision. He decided to impose a strict capital controls that prevented investors from taking money out of the country and then he pegged the ringgit at RM3.80 to the U.S. dollar. His action enraged foreign governments and investors whereby many of them felt threaten until some of them even declared to never set foot in Malaysia again. This action in changing policy overnight and make the investors felt uneasy had led to the fall in the foreign investments.

 The threat and uneasiness were dissolved over time along with the capital control introduced by Mahathir as the only thing that didn’t change was the ringgit’s peg to the dollar. Mahathir’s initial intention to peg the ringgit was to prevent the ringgit value to fall and weaken further. As the time passing by and Malaysian economy grew rapidly had led to the problem of undervaluation of ringgit up to 15% at one time. This hurt Malaysians because the cost to import foreign products became expensive and it led to inflation in Malaysian economy. For foreign investors it was another story, the situation led them to bring more capital into the country, with the labor and goods became cheaper they hoped to earn more profit from the economic situation.

 In 2005, immediately after China announced to call off its yuan peg, Malaysia made the call on July 21, 2005 with announcement from Bank Negara Malaysia to abandon the ringgit peg to the U.S. dollar. This move comes with immediate effect to float the ringgit and let the value being determined by economic fundamentals. Although the ringgit was floated but Bank Negara Malaysia still keep monitoring closely to ensure the exchange rate remains close to its fair value to promote stability of the exchange rate as their primary objective of policy.

 The government at that time, under Prime Minister Abdullah Ahmad Badawi believed that the change in policy will strengthen the economy. The ringgit showed strong appreciation after the announcement and the value of ringgit grew strongly until it reached RM3.00 to the U.S. dollar in October this year. These moves made the Malaysian import of foreign products become cheaper and increase the Malaysians buying power. But on other hand, Malaysia revenue from oil and gas sector suffers huge loss since the trading was conducted in U.S. dollar.

 As the Malaysia ringgit appreciates and getting more value, Malaysian products has become more expensive to foreign importers. This is a major impact because Malaysia’s main exports are electronic goods and the expensive currency will make the country less attractive as a cheap production centre. It has to take note that Malaysia is facing a major competition from China for low cost production as well as from Vietnam and other country. This affected the value of foreign investment into the country as it value keeps decreasing.

 Malaysia government has a unique policy of controlling the capital market in Malaysia through GLC (government linked company). This policy makes most of the big companies, especially companies that involve in commodities goods and utilities services such as electricity and foods, are under or run by the government. These policies to make sure, even with privatisation the public interests are kept at the best level. But under this policy, it is hard to see a competition inside the country and the GLCs themselves are less competitive, let alone the shares bought by foreign investors.

 This has prevented more foreign investors to come and invest hence less and less foreign direct investment (FDI) flows into the country. The government need to break up big companies and let them compete against each other to make the economy become more interesting for foreign investors. For example, the success story of AirAsia, a Malaysia-based budget carrier which they came with a lower cost base and they helped transform Malaysia. And that is because they are more nimble than bigger government-run companies.

 Attracting foreign direct investment (FDI) has been a strong point in Malaysia's economic transformation since industrialization was introduced in the mid-1960s, starting with the import substitution industries. Thanks to that farsighted policy, Malaysia has not only emerged as a semi-industrialised nation, but more importantly, has been able to achieve high economic growth, distribute income more evenly and eradicate poverty. The much-maligned New Economic Policy (NEP) affirmative plan did not stunt growth. On the contrary, FDI flows were quickened during the plan period. Export-oriented industries took hold and Malaysia became a major global manufacturing centre for electrical and electronic goods.

 But in recent years, a combination of factors have colluded to make attracting FDI more challenging. Key among them is the rising labour cost. Malaysia no longer has cheap labour and the people are becoming more selective about jobs. Understandably so because the average Malaysian is more educated, has higher expectations and needs a higher income to cope with the rising cost of living. At the same time, the poor and low-income countries of the region are becoming more open and stable, and are offering the kind of incentives that Malaysia can no longer match. There are Indonesia, Thailand, Vietnam, Cambodia, Laos and Myanmar, who offer cheap labour, an abundance of land and a large domestic market, which
Malaysia does not have. One very positive aspect of industrialization that is often neglected or not fully realised is the shift away from land-based development. Had industrialization not been introduced, much more of the country's tropical rainforest would have been cleared to make way for agriculture. The shift from agriculture to industry has saved the forests and environment.

 While the government's efforts to revive and diversify the economy are laudable, it must make sure the wealth garnered is distributed equitably. In recent decades, income gaps among the races have widened. The move by Prime Minister Najib Abdul Razak to further widen and diversify the base of the nation's economy is commendable. The Star newspaper, on June 23, reported that the Prime Minister unveil a number of significant liberalisation measures. The target is the services sector. With the new measures, Najib hopes the share of the services sector will increase from its current 55% to 70%. Malaysia are not liberalising to conform to some new economic orthodoxy nor is it for the sole purpose of attracting foreign investments and capital. The objective is clear, to ensure that Malaysians benefit from the competitive dynamics that are shaping the global marketplace for ideas, talents and funds so that we can emerge stronger, become more globalised and ultimately thrive in this new world order.


Malaysia is a multiracial, multicultural and with rich natural recourses country. The living standard in Malaysia’s major towns, such as Kuala Lumpur, Johor Bahru, and Penang are relatively high if compared with other South East Asia countries. Besides, the cost of living within Malaysia is relatively low as well. This scenario in fact can be the key determinant to attract FDI, as they can enjoy the same standard of living with relatively low cost of living. Also, Malaysia’s in general are using not only Malay and English as the languages, but we do have the most complete Chinese based educational system in the world, other than China and Taiwan. Also, Arabic and Tamil, as well as other local dialects, are widely in used as well. This enable Malaysia to have languages advantages over its other countries. Based on the fundamentals above, we do believe that Malaysia in fact can be much more seductive to FDI over other regional countries.

The GDP per capita of Malaysia is $14800, and is one of the highest in South East Asia. 70% of Malaysian population lived in urban areas, with life expectancy of 72 years at birth and an 88.7% literacy rate, and the country’s capital – Kuala Lumpur is rated as an alpha world city (Manoj Yadav, 2010 May 15). An alpha world city is known as global city, which deemed to be an important node point to the networks of the global economy system and play important role for globalisation process. On average, a salary of RM4000/month is enough for basic living life style in Malaysia, and above RM6000/month will ensures a decent living, as well as with RM10000/month will generate a lifestyle which is really comfortable (EvanoOruvan,2008).

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However, Malaysia can no longer rely on cheap labour and low cost of production as the way to attract FDI. In fact, we should compete on quality and perceived value generation. As such, we need to reduce inefficiency and wastage, while focusing on improving productivity. We need to focus on the priority on growth with equity, as unequal income distribution is not conductive for promoting social cohesion and providing an acceptable level of quality of life for all Malaysians. It is also inconsistent with out aspiration of becoming a high-income and high value-added economy that envisaged in the New Economic Model (NEM) which was unveiled by current Prime Minister.             

There are several aspects should be take note in the policy making process in order to advance the pattern of Foreign Direct Investment in the various manufacturing industries in the country. First, since that certain physical infrastructure and human aspects are closed to manufacturing are concern to the eyes of foreign investors, the provision of a well trained and efficient labour force, other infrastructural facilities and special or subsidized industrial sites can attract the attention of foreign investor to certain designated industries. Then, the allocation of credit facilities and special funds for the firms that involve in industries which are under invested can also increase the flow of FDI into those industries. This is because a lot of foreign firms regard the possibility for local finance as one of the important considerations in their FDI decisions. 

Malaysia government should also try to produce a generation of workforces which are capable in communicate in English, which is the main language in global business world. However, policy which aims to improve the scholar’s English proficiency should not affect their mother languages learning opportunity as well. This is because we believe that a society with multicultural and multi-languages proficiency will be the focus on FDI in the next decades. The reason is simply because of, Chinese which is the main language for China region will because the second language for businesses, since China is currently the world 2nd bigger economy just behind U.S.A. The important of Tamil as a language in business world will be increasingly high together with the development of India as the world class economy. Also, the Arabic language is somehow important since that it’s the main language in used in the Middle East, as well as the language for Islamic financial and banking world. In order to improve the competitive of Malaysia in attracting FDI within the South-East Asia countries, Malaysia should work hard from the communication aspect. The ability to communicate is very importance. Virtually everyone communicates at work. So, if Malaysia wants to be competitive in attracting FDI, the communication skill must be improved. Good communicators have the desire to persuade, an interest in talking and working with other people, and an outgoing, ascendant personality. This will help Malaysia able to compete with other countries within the South-East Asia. Good communicators able to persuade, sell ideas, negotiate, and other forms of speaking when they are dealing with foreign corporate. 

In order for the economy to move up the effectiveness and competitive value chain, attributes such as creativity, risk taking, entrepreneurship, and adaptability are necessary. Only with a proper education system that promotes problem-solving skills, communication, and teamwork can inculcate these types of attributes. The quality of teaching also needs to be seriously reviewed. This would require the increasing the motivation and stature of the teaching profession.

Also several important factors that affect FDI inflows are including infrastructure availability, quality of the banking system, characteristics of trade and competition policy and public security. And the policy consistency and predictability of policy makers moves should be taken into account as well, as the key determinate to attract FDI. Furthermore, the government should figures out a consistent formula of policies that are not only can attract more FDI-inflow, but also can enable the integration of FDI into the host economy, as well as sustainable economy growth in the long term.  


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