The value of FDI inflows into Malaysia should be directly proportional to the value of human capital development…BUT IS IT NOT??

Saturday September 10, 2011

In search of the right FDIs

AT YOUR SERVICE

By DATUK DR REBECCA STA MARIA

Sec-Gen, Ministry of International Trade and Industry

rebecca@miti.gov.my

The search for the right type of Foreign Direct Investment (FDI) is top priority in our goal to reach developed nation status by 2020.

Foreign Direct Investment (FDI) is a significant source of growth for many developing countries, including Malaysia.

Up to the early eighties, for example, our industrial production was dominated by low-tech and resource-based products such as food, textile, wood products petrochemicals and rubber. And domestic demand was the principal source of economic growth.

In the following two decades, the flow of FDIs into the country transformed the composition of Malaysia’s industrial output. Medium and high-tech goods displaced resource-based goods as the primary drivers of growth.

In 1980, about 80% of exports were resource-based. By 1990, the figure had dropped to about 50%, and by 2007, it was less than 30%.

The value of FDI inflows into Malaysia has varied from year to year, depending on the state of the world economy as well as Malaysia’s own competitive position as an investment destination.

It is worth noting that these inflows were broad-based, with manufacturing having a 60% share, services 30% and oil and gas 9%.

FDIs are valued not only for the funding they represent, but also for the technology and expertise they bring. Recipient countries look to FDIs to create jobs, transfer technology, and support the development of related or downstream industries.

The evolution of the electronics industry in Malaysia illustrates how FDIs can affect industrial development. In the seventies, when MNCs started investing in Malaysia, the electronic firms that were established were engaged primarily in basic assembly-type, labour-intensive operations. Value add was minimal, little or no technology transfer took place, and the jobs created were mostly of a low-level nature.

After thirty years, the industry has matured and climbed far up the value chain. Assembly-type operations have been replaced by sophisticated high-tech manufacturing. Malaysians are employed at senior levels in operations and management. High level research and development work is being undertaken in a number of companies.

The impact of these developments on the local economy has been far reaching. A number of local companies have sprung up to service the bigger MNCs and to manufacture parts for them. And some have developed into independent technology companies in their own right.

This success story illustrates how an agglomeration of FDIs in the same or related industry can develop synergies and linkages to stimulate the development of a wide swath of downstream activities.

Going forward, it is clear that FDIs will continue to be a major source of funding and expertise to support Malaysia’s development. This reliance on FDIs poses two policy questions: What can be done to make Malaysia an investment destination of choice? And what kind of FDIs should we target?

Historically, investors have been attracted to Malaysia because of its geographical location, its low-cost advantage, and the availability of good support infrastructure.

Today, however, many other locations in Asia and elsewhere offer similar or comparable incentives. In a very real sense, therefore, MNCs are now spoilt for choice, and countries like ours must travel the extra mile to attract FDIs.

That means fine-tuning the package of incentives we currently offer to potential investors. But these incentives alone may not be enough. We need to offer a comparative advantage that is so superior that investors will find it difficult to relocate their investments elsewhere.

I believe we already have the basic elements of this point of differentiation: we have the human capital – the ready pool of workers with the technical skills – that MNCs need. The availability of skilled workers is a key consideration in the investment decision-making process, and not many competing investment destinations can make an equivalent offer.

But we need to develop this point of differentiation. Our current pool of knowledge workers is small, especially at higher technical levels. So the strategy to focus on is clear: we must produce more and better qualified knowledge workers. If this can be done, we will have a distinct competitive advantage.

Our current economic transformation plan is focused on developing knowledge-intensive and higher value-add industries. So quality FDIs will be targeted in manufacturing sectors.

The services sector is targeted to occupy a bigger chunk of the economy over the next ten years. So the focus will also be on attracting FDIs to sectors such as logistics, research and development and healthcare.

Our declared goal is to reach developed nation status by 2020. FDIs can support this effort by serving as a source of funds and technology. So the search for FDIs – not any FDI, but the right type of FDI – will continue to be a priority assignment of the Ministry of international Trade and Industry.

________________________________________

© 1995-2011 Star Publications (Malaysia) Bhd (Co No 10894-D)