Jumps in Approved FDI: Too Early to be Happy?

Compared to the same period last year, approved foreign direct investment (FDI) has increased by 73.4%, from RM16.90 bil to RM29.30 bil in Q1 of 2019. According to the Finance Minister Lim Guan Eng, the approved FDI is expected to create more than 41,200 jobs for Malaysians, of which more than half would be in the manufacturing sector.

Malaysia is benefiting from business relocation, as well as trade and investment diversions caused by the US-China trade war. However, due to escalation of the trade war, the FDI numbers in the coming quarters is still uncertain. Could it remain strong? Would FDI really stir up our economy? Are we too early to be happy with the rising “approved” FDI?

Economists believe that international companies bring in competition and can shake up an existing domestic industry, or create an entirely new industry. Besides, FDI can create new jobs and boost government tax revenues.

Much research has been done to examine the impact of FDI towards economic growth in different countries. Given the conflicting conclusions, Fadhil and Almsafir (2015) chose Malaysia to examine the impact of inward FDI activities on Malaysia’s economic growth. By analysing 1975-2010 annual data, the results showed that FDI inflows together with the human capital development contributed strongly to the host country’s economic growth. As a result, they suggest government should commit more political and fiscal support in developing human capital to induce more FDI inflows which in turn would strengthen country’s economy. 

According to Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias, not only Malaysia, other Asean countries such as Vietnam, Thailand and Indonesia would also benefit from the trade diversion. Thus, Malaysia has to improve its competitiveness in order to sustain the FDI numbers.

BIMB Securities Research economist Imran Nurginias Ibrahim said it might be too early to celebrate the strong “approved” FDI. He pointed out that approved FDIs do not necessarily translate into actual investments by foreign companies. Moreover, it may take time to realise the FDI. Approved FDIs are not actual investments. Prominent economist Jomo Kwame Sundaram also advised that the government should focus on strengthening domestic investors as they form the economy’s foundation.

Reference:

Trade War bane for FDI inflows into Malaysia, The Star, 19 Jun 2019

What is ‘foreign direct investment’? www.ecnmy.org

Fadhil, M.A., Almsafir, M.K. (2015), The role of FDI inflows in economic growth in Malaysia (time series: 1975-2010). Procedia Economics and Finance, 23, 1558-1566