MALAYSIA’S foreign direct investment (FDI) decline in 2020 is due to more than just the Covid-19 pandemic, economists said, as neighbouring countries have begun to outpace the former Asian tiger.

The FDI drop is the worst in the region, at a plunge of 68% to US$2.5 billion (RM10.2 billion) last year, figures for 2020 released by the United Nations Conference on Trade and Development (Unctad) last week showed.

Wong Chin-Yoong of University Tunku Abdul Rahman’s Department of Economics said while all Asean countries have experienced a drop in FDI due to the pandemic, Malaysia’s drop was worse because its Asean neighbours still have the advantage in terms of high-end technology and market environment.

“Most of the low-end production FDI is going to Vietnam, while technology companies go to Singapore and Taiwan. Coupled with the pandemic, more FDI moved out of Malaysia,” Wong told The Malaysian Insight.

Even Indonesia did not suffer a significant decline in FDI despite the coronavirus pandemic last year, mainly because of its huge market and a better ecosystem for information technology advances, he added.

“Malaysia just can’t keep up. The science and technology field is immature. Except for the advantages that we maintained in the 1980s and 1990s, such as electronics, chemistry, and machinery, there is little else.”

As such, Wong feels Malaysia has no clear advantage to attract more FDI in the future.

The country is also losing ground in manufacturing and production as other countries have caught up, with China having the best advantages in terms of scale and cost.

Wong said Malaysia’s development model in the past has been the government taking the lead in identifying a certain area of focus and promoting it.

But that alone is insufficient to stay competitive. Other supporting factors include the tax framework, technology transfer, ability to attract foreign professionals and building local suppliers, among others.

Wong said creating a conducive environment for FDI involved better coordination between government ministries.

“Policies should be cross-departmental. We promote one-stop centres but we should be looking at whether overall coordination is up to standard,” he said.

And apart from Malaysia’s structural problems, the political environment has also emerged as a factor that is keeping FDI away, he added.

Malaysia had a change of government a year ago when the 22-month old Pakatan Harapan government was replaced through defections to form the current Perikatan Nasional administration.

The PN government has been criticised for economic policies that fall short amid coronavirus lockdowns that have decimated many businesses and lack of clarity and consistency in fighting the pandemic.

Prof Dr Hoo Ke Ping, economic adviser of KSI Strategic Institute for Asia Pacific, said the low FDI figure for 2020 is actually based on decisions investors have made one to three years prior.

As such, Malaysia’s situation is not so much the result of the Covid-19 pandemic, but other shortcomings that have led foreign investors to decide against investing here.

“This is the so-called time lag, where foreign investors make decisions as early as one to three years beforehand. They do not decide whether to invest in 2020 during the year itself.”

Hoo believed that investors had probably evaluated Malaysia’s situation from 2018 to 2020 in order to decide whether to invest last year.

He added that another miscalculation made in assessing FDI is to confuse it with foreign portfolio investment (FPI), which do not involve brick, mortar and jobs, but the purchase of stocks, bonds and paper financial assets.

“FDI comes here to set up factories and take up long-term residency.”

Going forward, Hoo said movement restrictions, as part of the perceived “mis-governing” of the PN government in handling the Covid-19 crisis, as well as political instability that has put a drag on the country for the last few years, will continue to affect FDI decisions.

Asked whether PH was also responsible for driving FDI away by cancelling and scaling down several large infrastructure projects, Hoo said there were other factors at play, such as the country’s high debt and the continuous political attacks against PH during its administration.

Malaysia recorded RM109.8 billion in approved investments in both FDI and domestic direct investments for the first nine months of 2020. This involves nearly 3,000 projects in the manufacturing, services and primary sectors, which are still to be negotiated and implemented either this year or next year.

In the UNCTAD report on global investment trends and prospects for 2020-2021, Malaysia performed the worst compared to Thailand, where FDI fell by 50%, Singapore (37%), Indonesia (24%) and Vietnam (10%).

Only the Philippines registered an increase in FDI of 29% to US$6.4 billion. – February 6, 2021.