UNIVERSITI MALAYSIA PERLIS

BFT 204 INTERNATIONAL FINANCE

INDIVIDUAL RESEARCH PAPER FOREIGN DIRECT INVESTMENT in MALAYSIA

PREPARED BY,
NOR AINNA AFIQAH BT MOHAMMAD ROSMAN KRISHNAN 091240960

EXECUTIVE SUMMARY

Foreign Direct Investment is one of the entry modes for investors to the foreign country. Normally, the investors will make some researches on which mode of entry they should choose based on which want will benefits them the most. Other examples of mode of entry to foreign country are like exporting, franchising or joint venture. Those mode mentioned have their own advantages and also the disadvantages for the investors. Anyone can be a foreign direct investor and they could be from various sectors in economy. Some of them are as follows:

An individual A group of related individuals An incorporated or unincorporated entity A public company or private company A group of related enterprises A government body An estate (law), trust or other societal organization Any combination of the above.

INTRODUCTION

Foreign Direct Investment or also known as the foreign investment refers to long term participation by country A into country B. It usually involves participation in management, jointventure, transfer of technology and expertise. Foreign Direct Investment (FDI) in Malaysia is sometimes also defined as the holding of at least 10% of the total equity in a resident company by a non-resident investor. Some other definitions of FDI in Malaysia is consequent transactions in financial assets and liabilities between resident companies and non-resident direct investors linked by a foreign direct investment relationship (FDIR) The transactions could be between Malaysian companies and with its immediate or ultimate parent or fellow companies. Based on some researches done, there are two types of FDI: Inward foreign direct investment is defined as the capital provided from a foreign direct investor residing in a country, to that economy, which is residing in another country. As for example, General Motors decides to open a factory in Malaysia. They are going to need some capital. That capital is inward FDI for Malaysia.

Outward foreign direct investment on the other hand is the capital that provided by the investor residing in a country to any other country which results in a net FDI inflow (positive or negative) and stock of foreign direct investment, which is the cumulative number for a given period.

Direct investment excludes investment through purchase of shares.

OBJECTIVES

To know more on what does it mean by foreign direct investment in Malaysia? By doing this research, I get to know more on what does it mean by FDI in Malaysia. It is different from the notes that we were taught in class as the definitions is quite general.

To understand the actual definition of foreign direct investment. Some of the students are still not clear enough on what is FDI, how to get involved in FDI and the risk that arise when someone get involve into FDI.

To gain knowledge on how is FDI doing in Malaysia.

DATA & METHODOLOGY

There are various methods used in completing this research paper. Some of the methods are like Internet websites, research journals and also from the newspapers archives. Firstly, starts with the main method used which is the Internet websites. By searching those related websites, I tend to get some useful information that I need. The Internet websites also do provide some research journals or and some paperwork by some lecturers in local universities. Next, is by analyzing the journals. There are about two or more journals related to the topics. Some of them are written by some foreign professionals. These journals mainly talks about how FDI could affect the Malaysia economy and the factors that will boost up FDI in Malaysia. Last but not least, are based on the newspapers archives. I do make some readings on those old newspapers cut or their archives. This helps me in finding some old data and graphs to help me in completing this research paper.

FINDINGS

Malaysia has been one of the most successful Southeast Asian countries in attracting Foreign Direct Investment (FDI). The Malaysian government has improved the value of the present determinants and is considering new strategies to attract FDI. Since 1957, Malaysia has taken advantage of tangible assets ( e.g : natural resources, abundant labour) and also the intangible assets (e.g : trade status under Generalized System of Preferences (GSP), macroeconomic stability, liberal trade regime, and a resourceful legal infrastructure) to bring in FDI. The Government of Malaysias (GOM) main policy is to bind FDI as a part of the economic development strategy to acquire foreign technology, capital, and skills. Malaysia has been an encouraging economy to foreign investors. The reinvestment and the new capital injection among the present foreign companies specified their assurance in Malaysian investment. The FDI movement is actually derived from financial institutions and non transaction factors like foreign exchanges, price changes, and other changes during the reference period.

Investment income of FDI has three parts; Reinvested earnings Dividends are distributed earnings allocated to shares and other forms of participation in the equity of incorporated private enterprises, public corporations, and cooperatives. Interests are income on loans and debt securities.

FDI statistics are used by policy makers as a tool to devise foreign investment policy. A joint survey between Department of Statistics, Malaysia and Bank Negara Malaysia is performed to further improve the capability in giving detailed analysis. The growing Malaysian economy is open for foreign direct investments. International trade is rising with a growing manufacturing and petroleum industry.
Manoj Yadav, www.suite101.com

Malaysia is one of the three countries (Singapore, Malaysia and Indonesia) that control the Strait of Malacca one of the most important shipping lanes in the world. Thus, international trade plays a large role in the Malaysian economy. Since 1970, Malaysia has changed from a raw material exporter to a more open emerging multi-sector economy. In 2007, Malaysia was the 3rd largest economy in Southeast Asia. The total GDP of Malaysia is $381.1 billion and it ranks 30th in the world. Agriculture contributes 10.1% to the total GDP. The major agricultural products are rubber, palm oil, rice, timber and cocoa. The manufacturing industry contributes 42.3% to the total GDP of Malaysia. The major industries in Malaysia are rubber and palm oil processing, light manufacturing, electronics, logging and petroleum production. For some additional information, listed below are some of the export and import details in Malaysia. The total value of international trade in Malaysia is $275.9 billion. The share of exports in the total international trade is $156.4 billion. The major commodities exported from Malaysia are electronic equipments, petroleum and liquefied natural gas, wood and wood products, palm oil, rubber, textiles and chemicals. Malaysia is one of the worlds largest exporters of semiconductor devices. The petroleum company of Malaysia, PETRONAS supplies 40% of government revenues. This shows that Malaysia are now involve largely either investing on other countries or being a country that have a stable economic condition which can easily attract investors. Based on some readings done, there are various factors that will affect the foreign direct investment. The most important factors that will affect FDI are as follows: Stability of government Investment guarantee agreement with the country Freedom to remit earning, interest royalties and repatriate capital Availability of skilled labour force and supply of power, water and gas Prevalence of peaceful industrial relations Transportation cost and facilities Support of banking and insurance services
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External demand and export market potential Tariff , trade protection and tax incentives Efficiency of public sector Economic and exchange rate stability

Back to the topic on about the foreign direct investment in Malaysia, according to Wikipedia, Malaysia received RM 46.1 billion foreign direct investment (FDI), which was all time high, for the whole of 2008. The foreign investments accounted for 73.4 percent of the total investments of RM62.8 billion approved for 2008. The Minister of International Trade and Industry at that time, Datuk Mustapa Mohamed announced that there was a sharp reduction in FDI and Malaysia only received RM4.2 billion FDI, about 78% reduction, for the first five months of 2009. On the other hand, FDI in other Asian countries such as Vietnam and Singapore has grown rapidly. Malaysia was very much ahead of Vietnam on attracting FDI. Now it has to compete with the latter for the FDI. In addition to that, Malaysia is an important trading partner for the United States. In 1999, two-way bilateral trade between the U.S. and Malaysia totaled U.S. $30.5 billion, with U.S. exports to Malaysia totaling U.S. $9.1 billion and U.S. imports from Malaysia increasing to U.S. $21.4 billion. Malaysia was the United States' 10th-largest trading partner and its 12th-largest export market. During the first half of 2000, U.S. exports totaled U.S. $5 billion, while U.S. imports from Malaysia reached U.S. $11.6 billion. The Malaysian Government encourages Foreign Direct Investment (FDI). According to Malaysian statistics, in 1999, the U.S. ranked first among all countries in approved FDI in Malaysia's manufacturing sector with approved new manufacturing investments totaling RM5.2 billion (US$1.37 billion). Principal U.S. investment approved by the Malaysian Investment Development Authority (MIDA) was concentrated in the chemicals, electronics, and electrical sectors. The cumulative value of U.S. private investment in Malaysia exceeded $10 billion, 60% of which is in the oil and gas and petrochemical sectors with the rest in manufacturing, especially semiconductors and other electronic products.

In the first six months of 2007, Malaysia's total trade increased by 2.2% to RM522.38 billion, compared with RM511.11 billion in the same period of 2006. FDI plays several roles in the Malaysia economy. The most important one is to generate economic growth by increasing domestic capital information. FDI functions as one way to bridge an inter-temporal gap of capital demand and supply, and, like other capital inflows, increases the production frontier of developing countries, which normally suffer a shortage of capital
Krugman and Obstfeld (1994)

Its first role is to increase domestic capital formation which leads to incremental

economic growth through expansion of production capacity. Higher economic growth creates favorable investment environment which attracts investment from any other firms. (Refer graph 1)

The second role of FDI is to fuel export growth. It has been observed that investing firms would naturally have ready international markets for their products. Therefore, the host economy benefits because it circumvents the need for domestic firms to spend resources and time to penetrate and acquire foreign markets. (Refer graph 2)

The third crucial role of FDI is to facilitate the transfer of new technology to the host economy. FDI provides the fastest and most effective way to deploy new technologies in developing host countries. However, the success of this depends on the absorptive capacity of the host economy. Certainly, less advanced technologies are easier to be absorbed. Technology is also easier to be absorbed if the technology gap is narrower. There is no direct measure for technology transfer. (Refer graph 3)

In addition to that, FDI also tend to lead to higher employment through the expansion of the economy and job creation. The demand for labour exceeds supply by a very large extent that most manufacturing industries now depend on imported labour from Indonesia, Bangladesh, Pakistan, Vietnamese, Nepal, India and other countries. It was reported by the MOF (2005) that in 2004 there were 1.3 million foreign workers making up 12% of total employment. 31% of employments in the manufacturing sector were foreign labour. (Refer graph 4)

FDI also act as the agent of transformation in the Malaysian economy. The massive influx of foreign investments into the manufacturing sector was pivotal in its transformation from an agricultural economy to an industrialized economy. (Refer graph 5)

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CONCLUSION & RECOMMENDATION

As a conclusion, foreign direct investment is one of the most important activities that lead to the expansion of economy. It contributes the most to our national income. As mentioned above, FDI has many roles towards our country. Without the FDI activities, the economic condition of Malaysia will decline even though it will not be too much. Other than that, based on the analysis done on the researchers journals and articles, most suggest that economic condition are not depend mainly on FDI itself. The other factors such as politic conditions and our currency value may also be one of the factors.

Thus, here, some small suggestion is Malaysia should increase and try to attract more foreign investors to invest into our country. There is numerous numbers of ways to attract those investors such as about the availability of labour. As we all know, the production cost for a company here in the Asian country are quite low compare to those in Europe. This will indirectly attract foreign investors as they will be cutting cost on that.

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REFERENCES

1. The Changing Role Of FDI In The Malaysian Economy, Azmi Shahrin Bin Abdul Rahim
http://economics.dstcentre.com

2. Economy of Malaysia,
http://en.wikipedia.org

3. Characteristics of and factors affecting foreign direct investment in the malaysian furniture industry, Norzanalia Saadun.
http://psasir.upm.edu.my/6106/1/FH_2007_2(1-24).pdf

4. What is inward FDI?

http://wiki.answers.com/Q/What_is_inward_fdi

5. Definition of Foreign Direct Investment.

http://economics.about.com/cs/economicsglossary/g/fdi.htm

6. FDI in Malaysia, Trade Chakra

http://www.tradechakra.com/economy/malaysia/fdi-in-malaysia-198.php

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APPENDICES

In 1998, some suggests that there is a break in the relationship between FDI and economic growth. It may also be that the economy is now more efficient and therefore being less dependent upon FDI for expansion.

Since then, other factors such as the depreciation of the Ringgit and global demand would have had a greater impact on the growth of exports. It is not likely that Malaysia would have experienced the tremendous growth in exports without the benefit of FDI.

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Productivity index would serve as a suitable proxy under the assumption that adoption of technology leads to higher productivity. The case for Malaysia is as shown in the graph above.

Malaysia can be considered to be at full employment

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Graph above shows that the dominance of the manufacturing sector in the economy coincided with the inflow of FDI. The pivotal year was 1987 when output from the manufacturing sector overtook output from the agricultural sector.

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