Malaysian Economics: FDI and Technology Transfer.

 

Foreign Direct Investment (FDI) and Technology Transfer

1.0 Introduction

    Foreign Direct Investment (FDI) is a long-term investment by MNCs (Multinational Corporations) in countries other than their home market and it can be one of the important indicators in assessing the economic performance of a country over the past decade. Foreign companies own at least 10 per cent equity holding of the company in the country they invest in. FDI covers investments in the form of financial instruments and consists of equity & stock investment funds (including reinvested proceeds) and debt instruments such as intercompany loans, credit trade etc.

    FDIs can be achieved by two methods. The first method is known as greenfield investment. By using this strategy, the company was able to construct factories and plants from the ground up. When it comes to international expansion, companies like McDonald's and Starbucks prefer to use a greenfield approach. The second method is brownfield investment.  This strategy is carried out through cross-border mergers and acquisitions, which necessitate the purchase of an existing foreign firm in the target country. TATA Motors, an Indian truck company, for instance, bought Land Rover and Jaguar from Ford in 2008. This method known as a brownfield investment as TATA Motors did not have to build such factories from the beginning.

2.0 Historical Development of Malaysia’s Foreign Direct Investment (FDI)

    The development of FDI in Malaysia started when the British government colonised Malaya in the early 1920. The investments accounted for more than 90% of total investments that focused on mining and plantation activities. In 1913, it increased by £33 million to £108 million in 1930. While in 1937, the FDI invested by the British government accounted for 70% of the total investment (Graham, 1995).  The need to supply raw material needs for industry in Europe and in particular in Britain became a major factor causing the British government to invest in Malaya.  The involvement of other countries into FDIs in Malaya is very limited to the American and French where they are involved on a small scale in tin mining while Japan is involved in iron investment (Kanapathy, 1971).

    After the Federation of Malaya gained independence from the British, the government tried to adopt a more liberal policy to promote industrial activities and FDI inflows.  Then, the government introduced the Pioneer Industry Ordinance 1958 which aimed to encourage the establishment of as many companies and manufacturing industries as possible.  The incentives offered by this ordinance have piqued the interest of international firms, with the British continuing to be the largest investors at current time.  While other Asia countries, namely Singapore, Japan, and Hong Kong began to show interest in investing in Malaysia. The existence of the Pioneer Industry Ordinance of 1958 had a favourable impact when it was successful in expanding pioneer firm ownership from RM56 million in 1962 to RM345.2 million in 1969. In 1965, total FDI inflows were estimated at RM300 million.

    The importance of further increasing the inflow of FDI increased as Malaysia has lost comparative advantage to the traditional activities of the mining and agriculture sectors.  Hence, the government has vigorously promoted the import substitution industry that has existed since the early 1960s to address this problem.  This import substitution industry has not only succeeded in encouraging the entry of more FDI into the country, but also converted the economy from being fully dependent on the agricultural sector to the manufacturing sector.

    In addition, the government tried to attract more FDI inflows by enacting the Investment Incentives Act 1968 to provide incentives to pilot projects. These incentives include holiday tax, investment tax credit, reinvestment allowance, export allowance and many more.  The act was introduced when there was a policy shift from an emphasis in the import substitution industry to an export orientation.

    Therefore, starting from the 1970s, export-oriented activities and the Promotion of Investment Act 1986 were the main causes for foreign direct investment where Japan, Singapore, and the United States have played an important role in the inflow of such investments.  The government also promotes FDI, specifically in the electric and electronic (E&E) sector, through the establishment of the Free Trade Zone Act 1971. Until 1980, the total FDI was as much as RM730 million.

    By the early 1990s, the pattern of FDI slightly changed as FDI became more focused on high-tech and capital-intensive industries. In line with the launch of the 2020 vision and the MSC project, the government wants to make the Multimedia Super Corridor (MSC) an attraction for FDI in an effort to achieve a fully industrialised nation by 2020. Therefore, in 1998, several incentives were provided to attract information technology companies from abroad to set up their operations in the MSC. Two of the incentives were granting select permission and providing a special package for the establishment of a wafer design project (BNM, 2020).

    However, the financial crisis of July 1997 caused FDI measured in the form of applications in the manufacturing sector, applications in investor incentives in the hospitality, mining and agriculture sectors issued by The Malaysian Investment Development Authority (MIDA) to fall during the period January 1997 to 1998.  Hence, in order to address these financial issues, the government had to impose a Selected Capital Control Policy (Selective Exchange Control Regime) on 1 September 1998.  Through this radical policy, manufacturers, importers and other businesses in Malaysia still have access to the US dollar and other currencies. The success of this policy, along with the National Economic Recovery Plan, has succeeded in restoring investors’ confidence in the market and secured the position of the Malaysian economy. As a result, the value of approved foreign investment projects increased from RM11.5 billion in 1997 to RM13.1 billion in 1998.

    From these developments, it can be concluded that FDI in Malaysia has changed its priority pattern in a sector. At the beginning of the FDI inflow in Malaysia, the investment was more concentrated in the agriculture and mining sectors.  When the government encouraged industrialization in the early 1970s, FDI became an important engine for the manufacturing sector. While in the 1990s, the entry of FDI was more focused on high-tech industries in line with the launch of MSC and 2020 Vision.  This year, investment activity shows an improvement when Foreign Direct Investment (FDI) in Malaysia maintained a net inflow higher by RM24.7 billion while Foreign Direct Investment Abroad (DIA) by Malaysian investors changed trend to record a net outflow of RM15.0 billion compared to a net inflow of RM4.7 billion in the third quarter 2021.

3.0 Analysis of Malaysia’s FDI Data by Sectors

    In this report, we will be analysing the Foreign Direct Investment (FDI) of the recent five years starting from the year 2017 to 2021. In between these years, it has shown very clear downward and also upward trends because Malaysia has experienced the crippling effect of the global financial crisis and also the recent global pandemic outbreak that started to spread in our country in 2020 which caused a lot of challenges to our country. All the data presented are from reliable sources such as the Department of Statistics Malaysia (DOSM) and Malaysian Investment Development Authority (MIDA). The analysis of data will use Figure 1 below to help see a clearer image on the trend of FDI inflows in Malaysia.

Figure 1: Malaysia's FDI Inflow from 2017 - 2021

    The FDI has been in an upward trend since 2001 except in 2009 which was hugely caused by the global financial crisis. The FDI showed a new high in 2016 with a value of RM47.0 billion and dropped to RM41.0 billion in 2017 which is partly caused by the subdued global growth. However, at the end of 2017 Malaysia’s FDI stood at RM570.3 billion and the FDI flows at that year was largely in equity and investment fund shares which contributed 86.3%. In 2017, FDI in Malaysia was mainly focused on the Services (48.2%) followed by Mining and Quarrying (31.2%). In terms of FDI income, the Manufacturing sector brought the highest income with a share of 53.4% which was then followed by the Services sector with 37.5%. The sum of income from these two sectors were 90.9% to the FDI income in 2017. The top region that contributed to Malaysia’s FDI flows is Asian region which contributed 63.5%, followed by Europe (29.7%). Hong Kong, China and Singapore were the main contributors for Malaysia’s FDI flows.

    In 2018, Malaysia recorded RM30.7 billion which is less than the previous year (RM40.4 billion). The graph shows a continuous downward trend since 2017 due to the low investment in the Mining and Quarrying sector at that time. For the share of FDI flows, the Services sector tops with 50.2% then Manufacturing sector with 47.4% and Construction sector with 2.3% and lastly Agriculture sector with 0.2%. From the total of FDI, 44.9% are from the Asia region while the 33.7% are from the Europe region. As per say in 2017, Hong Kong still tops the highest contributor from the Asia region. Moreover, the sector that was focused on the most was the Service sector particularly in the Financial and Insurance/ takaful and Wholesale and Retail trade activities. The Manufacturing and Construction sectors are followed by the Service sector.

    In 2019, the FDI flows increased to RM32.4 billion as compared to RM30.7 billion in 2018 which shows an increase of 3.1% because of the higher injection of equity from Japan specifically in health activities. The Services sector particularly the health, real estate and financial activities was mainly channelled for the FDI flows as much as RM17.0 billion. The second highest would be the Manufacturing sector (RM7.2 billion) which was mainly in the form of debt instruments and equity in refined petroleum and electric and electric products and lastly followed by the Mining and Quarrying sector (RM5.1 billion). Moreover, the major contributors by country for the FDI flows were Japan, Hong Kong and Netherlands.

    In 2020, Malaysia has recorded a low net inflow of RM14.6 billion as compared to RM 32.4 billion in the previous year which shows a huge contract by 54.8% partly due to the repercussions from the global economic uncertainties from the global pandemic situation. The decrease in FDI flows was pulled by the lower equity and investment fund shares and higher loans extended to affiliates abroad. The main contributors for the FDI flows in 2020 were the Services and Manufacturing sectors which were then followed by the Mining and Quarrying sectors. The investment in the Services sector was mainly in the financial and utilities activities, while the Manufacturing was focusing on the electrical, transport equipment and other manufacturing subsectors. The main contributors for the FDI flows of our country were Singapore, Thailand and China. To add on, the FDI position at the end of 2020 recorded at RM698.8 billion in which the Services sector was the largest contributor, specifically the financial and wholesale and retail trade activities. Next sector would be the Manufacturing sector with electrical transport equipment and other manufacturing products. Hong Kong, Singapore and Japan remained as the largest investor countries for FDI position. Meanwhile, the investment income decreased as much to RM44.6 billion from RM60.5 billion in 2019, because of the lower income obtained by the foreign companies.

    In 2021, Malaysia has benefitted from the global FDI recovery as the country has recorded RM54.9 billion in net FDI inflows which is the highest inflows since the pre-pandemic. Malaysia has attracted a record-breaking approved investments worth of RM306.5 billion in the manufacturing, services and primary sectors. The FDI for the year 2021 is RM 208.6 billion which accounted for 68.1% of total approved investments with the remaining 31.9% coming from the Domestic Direct Investment (DDI) at RM 97.9 billion. The Manufacturing sector tops the total investments approved in 2021 with a record of RM195.1 billion followed by the Services sector at RM94.1 billion and lastly the primary sector at RM`7.3 billion. The main contributors for the FDI flows are the Netherlands, Singapore, China, Austria and Japan which accounted for 88.9% of total FDI approved in the various sectors.

    In conclusion, Malaysia has faced some challenges throughout the years, but we have also recovered from it. For example, in 2021, we have achieved a high net FDI inflow with an astounding amount of RM54.9 billion. The government plays a role in maintaining the political stability of the country in order to attract more FDI investors into our country.

4.0 The Role of FDI to Technology Transfer in Firms and Industrial Revolution 4.0

    License agreements and outright purchases, purchasing foreign capital goods, FDI inflows, turnkey projects, and various forms of international technical assistance are all ways in which a country can transfer technology. Reverse engineering of imported goods was a major factor in Japan's development, whereas machinery imports and turnkey projects were a major factor in Korea. Considered a vital part of any company's growth, technology upgrading is widely accepted. Foreign direct investment (FDI) is one way in which the ASEAN member countries hope to encourage the transfer of technological know-how between their respective countries.

    FDI plays an important role in technology transfer because it encourages domestic firms to upgrade their technology, allowing employees to learn about the new technology while working for the company and allowing some of them to start their own businesses on the basis of the technology they have acquired. Technology upgrading is widely regarded as a critical component of any company's expansion and development. Attracting foreign direct investment (FDI) into the economies of the ASEAN region has proven to be a successful strategy for promoting technology transfer in the region. As a common thread running through the ASEAN experience, Asian economies have consistently sought multinational production technology to modernise their manufacturing sector, as well as external investments in "mainline" industries.

    Furthermore, foreign direct investment (FDI) is a useful tool for businesses seeking access to critical natural resources. One of the many supply-side factors that influence firms' foreign direct investment decisions is the need to reduce production costs. Many international companies seek access to raw materials in exchange for foreign direct investment (FDI) from host governments. Foreign direct investment (FDI) can also be used by businesses to improve customer service. Furthermore, foreign direct investment (FDI) may be the most effective way for a company to capitalise on a competitive advantage it already possesses. A person who owns a valuable trademark, brand name, or piece of technology may decide to do business in a foreign country instead of selling it there.

    Foreign direct investment helps to connect domestic and international networks, allowing a company to internalise some of its own resources while gaining access to a larger pool of resources from the outside world. Because of these additional resources, the company is in a better position to make additional investments. In order to secure those essential relationships, an investor builds new relationships in a foreign country. According to UNIDO 2004, linking, leveraging, and learning are what companies and countries need to do in order to enable technological development. This means that in order to acquire necessary technologies and skills, one must link with outsiders, leverage existing relationships, and learn from those new relationships in order to get the most out of the new relationships. Learning also involves making many efforts to master process and product technologies, which lays the groundwork for future technological advancements and the creation of new ones.

Finally, FDI serves as a useful conduit for the transfer of technology to domestically owned firms in the host country through technology spillovers. In the manufacturing sector, Managi and Bwalya (2010) looked at how and when technology is transferred from foreign to local firms. From foreign firms in upstream sectors to local firms in downstream sectors, there was evidence of horizontal (inter-industry) and vertical (inter-industry) technology spillovers. Researchers have hypothesised that a country's production structure and productivity are affected by its own R&D capital formation and international technological spillovers. Domestic R&D expenditure is also argued to be important for output and productivity growth, and that R&D capital formation in one country influences production patterns and productivity in another.

    We will now proceed to the next section, which will explore the role of foreign direct investment in the Industrial Revolution 4.0. Industrial revolutions were referred to as such because the innovations that propelled them didn't just boost productivity and efficiency a little bit but they radically revolutionised the way commodities were produced and how work was done. The Industrial Internet of Things (IIoT) and cyber-physical systems (CPS) were smart, autonomous systems that employ computer-based algorithms to monitor and operate physical things such as machinery, robots, and vehicles that are the driving forces behind Industry 4.0. Every part of your supply chain can be made "smart" with Industry 4.0, whether it's manufacturing, factories, warehouses, or logistical storage. However, the supply chain is only one part of the 4.0 revolution. Because of the way it integrates with back-end systems like ERP, businesses now have unparalleled access to and control over their data. In the end, Industry 4.0 is an essential aspect of any company's digital transition.

Setting up supply bases or subsidiaries for the sales and distribution of automation, robotics, additive manufacturing (AM), and other sophisticated manufacturing technologies is a first step in FDI's participation in the industrial revolution 4.0. By building IA centres and innovation hubs in ASEAN, they are able to support and give bespoke solutions to clients. Establishing a local presence near potential customers and providing customer service are both necessary components of these company responsibilities. The factories of multinational automotive, electronics, and other industrial businesses in ASEAN have been automated to increase production efficiency by implementing sophisticated technologies. As an illustration, in 2019 Yokogawa (Japan) opened regional offices and a subsidiary in Thailand to provide the region's manufacturing industry with engineering solutions for industrial processes.

Furthermore, FDI takes action by investing in the modernization of information and communication technologies (ICT) in its own industries. Industry 4.0 transition, government backing for digital infrastructure development, and increased interest in upgrading IA technology are all contributing contributors to the rise in digital investment. Additional factors for technology adoption include a growing number of companies preparing to do so and an evolving digital ecosystem. Industrial Internet of Things (IIoT) and smart factories are being used to improve IA and digital technology. IA technologies are being upgraded in industries in ASEAN by multinational corporations (MNCs). MNEs are pushing hardware and technology solution providers to establish or grow operations in the region so that they can be closer to market opportunities as a result of the advancement of IA technologies by these companies.

In addition, foreign direct investment (FDI) involves the manufacture of IA products, parts, and equipment, as well as the provision of customised advanced manufacturing software solutions. A good example is Siam City Cement (Thailand) investment in modernising its facilities in order to boost output and efficiency. These factories have benefited from technology and solutions given by Fujitsu (Japan). A cement facility in Saraburi Province was modernised by Fujitsu using cutting-edge manufacturing equipment and then digitally networked, allowing for real-time monitoring of operations as well as proactive maintenance. It was in 2017 when Siam City Cement began its shift to a "smart linked factory," a digital factory that integrates people, processes, and machines. When data is collected and analysed in a factory environment such as this one, decisions can be made more quickly.

FDI also supports Industry 4.0 skills development and training, where some of them have contributed to skills development through training programmes and in the process contribute to upgrading the abilities of workers, who can be freed to conduct greater value-added jobs. It has also established centres of excellence that incorporate training functions, as well as training centres to help clients migrate to Industry 4.0 and learn about the use of digital technologies. Courses and training modules have also been developed in conjunction with academic institutions and institutions of higher learning. ASEAN's technological competence and ability to attract investment will be bolstered by the development and upgrading of human resources and skills.

Finally, foreign direct investment (FDI) creates R&D facilities, technology hubs, and centres of excellence. They give the technology, while research institutes help to bring in local specialists and people, as well as access to companies and the ability to conduct testing on the ground. Industrial AM machinery and platforms, as well as research into new materials and products for AM, account for the vast majority of R&D efforts. Thai oil and gas corporation PTT Chemical Group and Singapore's Nanyang Technological University (NTU) formed a research agreement in 2017 to explore materials for 3D printing car parts. Samsung Electronics started building a $220 million research and development centre in Hanoi, Vietnam, in March 2020. As the largest research facility in Southeast Asia, the centre is expected to boost Huawei's research capabilities in AI, IoT, big data, and 5G technology.

5.0 Challenges to Malaysia’s Foreign Direct Investment (FDI)

Malaysia is one of the countries in the Southeast Asia region known to be one of having a diversified economy. With the diversified economy, Malaysia continues to flourish into being a developed country and a boosted economic condition. One of the major contributors to the growth of the economy in Malaysia is the injection from the Foreign Direct Investment (FDI). According to the Organisation for Economic Cooperation and Development (OECD) Proceedings (1999), Foreign Direct Investment (FDI) has played a leading role in many of the economies of the region, particularly in export sectors, and has been a vital source of foreign capital. 

Despite being said so, Malaysia has not been able to fully escape from the challenges concerning the FDI. According to the Department of Statistics Malaysia (DOSM), Malaysia’s FDI has been showing a downward trend especially during the Pre-COVID19 and the trend continues following the pandemic COVID19. Figure 2 depicted the net inflows of Malaysia’s FDI during the Pre-COVID19 while Figure 3 depicted the net inflows of Malaysia’s FDI during COVID19’s occurrence.

                  Source: Department of Statistics Malaysia (DOSM)

Figure 2: Malaysia's Net FDI During pre-COVID19 from 2016-2018

As seen in the bar chart in Figure 2 above, Malaysia's FDI in 2016 recorded a net inflow of RM47 billion and it continues to record a lower net inflow with RM40.4 billion in 2017 and RM32.6 billion in 2018. Hence the trendline has shown a significantly downward linear trend. 

                     Source: Department of Statistics Malaysia (DOSM)

     Figure 3: Malaysia's Net FDI during COVID-19 from 2019-2020

    As seen in the bar chart in Figure 3 previously, Malaysia's FDI during COVID19 in 2019 recorded a net inflow of RM32.4 billion and worst that it has recorded the lowest net FDI inflow at RM14.6 billion in 2020. Again, leading into a plunge into reduction of Malaysia’s net FDI inflow. 

The analysis of Malaysia's FDI net inflow in the first part of this section is important as it bridges between the downward trend and the issues on what has led to it. By analysing the trend, it can be identified that there are some challenges identified as the challenges to Malaysia's Foreign Direct Investment (FDI). Below are the challenges to the Malaysia’s Foreign Direct Investment (FDI): 

5.1 Increasingly Competitive Market for FDI 

The Foreign Direct Investment (FDI) market of Malaysia has been facing an increasingly competitive market. The competitive market emerged as Malaysia’s FDI market has to always be kept as quality as the neighbouring ASEAN countries especially Singapore who emerged as the country having the highest ever level of FDI in ASEAN according to the ASEAN Investment Report 2021. Not only among the ASEAN countries but Malaysia also has to face the increasingly competitive market from the other countries around the world, mainly the major and fastest economy countries such as the United States, China, Japan and so on. These countries offer many incentives, stable and supportive investment-support systems and attractive FDI promotion hence making their market appear way more attractive and worthy to foreign investors. This explains the reason on how an increasingly competitive market for FDI became a challenge to Malaysia as this country has to actively strive for improvement to be on par with the other countries competitive FDI market. 

    For instance, according to Crowe LLP which is known for its established performance in public accounting, consulting and technology firms with offices all around the world has acknowledged that indeed Singapore is the first country in ASEAN to receive the largest FDI inflow. This is particular because of Singapore's global economic standing, stable political landscape and support for innovation which are the keys that attract foreign investors. Those indicators have transformed Singapore's FDI market into becoming way more competitive and they have become a challenge to Malaysia’s FDI market in such a way that questions the ability of Malaysia to create a similarly strong FDI market.

5.2 Improper Strategies Implementation 

    Apart from that, improper strategies implemented by the Malaysia’s Government may also be the challenge to improve the performance of the country’s FDI market. This may occur due to ineffective strategies which are done hastily without proper market survey or market run prior to its full and effective implementation. However, most of the time, improper strategies implementation and decision makings may be resulted from an unclear policy framework and instructions from the top of the Government. Issues such as selective decision making, biasness and corruption will consequently lead to political instability which consequently affect the economy especially the FDI market. This is because political instability causes the foreign investors to lose their confidence to invest in the country’s market as there are risks of poor decision making and economic action plans to occur. Hence, it becomes a challenge to Malaysia to build a supportive environment especially to the foreign investors. Failure to propose proper strategies implementation would often lead to foreign investors reallocating their investment to other countries. 

    Another issue to look into is the FDI restrictions to certain sectors in Malaysia. Despite being recognized as FDI-friendly, certain sectors faced restrictions in FDI hence making these sectors a little bit tedious to be invested in by the foreign investors as they have to follow certain guided rules to be eligible for an FDI in the sectors. Among the sectors are education, communication and multimedia, water and energy supply. The restrictions may limit the development and slow down the opportunity for Malaysia’s FDI market to grow as other countries’ FDI market practices openness. 

    As an example to this keypoint, according to EU-Malaysia Chamber of Commerce and Industry (Eurocham) to MalaysiaKini in 2021, the horrible investment climate of Malaysia back then during the Perikatan Nasional (PN) rule has became the factor of many foreign investors to pull out from investing in Malaysia’s FDI market. The Government at that time was considered as a backdoor government which has failed to instill trust among the foreign investors as well as many incompetent decision have been made that appeared to be unattractive and not beneficial to them. 

5.3 Change in Investors Preferences 

    The next challenge to Malaysia’s FDI market is the change in foreign investors’ preferences. Foreign investors usually make the decision to invest by foreseeing and analysing the FDI market of the countries from time to time. It is an important aspect to them as that will enable them to project their return of investment as well as ensuring that their investment will be aligned with their short term and long term goals. Hence, the foreign investors will only enter the FDI market if they are confident enough of the FDI market. This challenge is difficult for not only Malaysia but other countries’ FDI market as its considered as an external challenge that is hard to be controlled. The investors preferences and decisions are often influenced by the changes in the current situation such as the change in economic performance, political stability, Multinational Corporations objectives and others. Hence, it is important for Malaysia’s FDI market to continuously improve and enhance their performance to maintain a good rapport and image with the potential foreign investors.

    To demonstrate this, we may look into an example of a Multinational Corporation (MNC) named Tesla that prefers to invest in Indonesia for the production of their Electric Vehicle (EV) battery supply chain rather than Malaysia because Indonesia is known to be having greater population henceforth making them be the most suitable country for Tesla to invest as Indonesia could provide a great amount of manpower for the production. 

6.0 Advantages of Malaysia’s Foreign Direct Investment (FDI)

    An advantage that we can see clearly is that the country is able to create more job opportunities for economic growth. With the inflow of FDI, the market can accommodate more  diverse job opportunities for the workers to choose from where the employment rate can be increased in order to move in line with the increment of income. For example, Dyson, a British owned company invests in factories from the manufacturing industry in Malaysia to produce the products that they designed which create high demand of labour as the company is already in the global market due to their popularity and their quality standards. With the investment, they are able to cut on their labour expenses as the wage in Malaysia is considered cheaper than their own country. 

    FDI can also be the driving tool to increase the exports of a country like Malaysia as most companies that venture into FDI are already in the global market . With the high demand of the companies, the firms have to increase their input to produce higher productivity in order to obtain the desired output to satisfy the demand of consumers. An example that can be highlighted is the globally renowned brand, Apple having one of their manufacturing factories in Malaysia. Apple’s products are always in demand hence when they have their manufacturing factory in Malaysia producing one of their products, Mac Mini, the country is able to increase the exports of the country as the firm needs to satisfy the demand of its consumers. The Bank Negara Malaysia has also forecasted that the export growth is at 8.2% for the year 2021 with the recovery from the pandemic. 

    The third advantage that can be highlighted with the influx of FDI is the advancement of technology as the firms originate from countries that utilise advanced technology with upgraded training for the labour force in order to maximise the productivity of the firms. Hence, as FDI happens, the firms are able to transfer their technology used in their home country into the host country, in this case Malaysia where the technology used can cause the manufacturing or services process to be done quicker than the traditional ways. Taking into account the digital economy that boosted the economic growth in 2019 with the digitalisation of the services industry. Malaysia is able to progress with the development of more e-commerce sites from neighbouring countries like Singapore with Shopee that encourage local entrepreneurs to venture into that can increase the export of the goods to other countries too. Not only that, the digital economy can also be seen with another simple instance of Google expanding their brand into Malaysia and bringing the technology used in the home country for the host country to adapt to which ease the process of the host country.

7.0 Disadvantages of Malaysia’s Foreign Direct Investment (FDI)

    Moving on to the disadvantages of FDI, political changes possess risks for FDI to take place in Malaysia as in 2018 to the current year of 2022, the country has experienced three different changes of political leaders that shock the stock markets in Malaysia as the transactions occurring in Malaysia become uncertain for the investors to continue. With the change of leaders, the policies in the country would be changing as well to adapt to the new government. Not only that, the political instability is also due to the corruption that has happened in the previous governments that came to light as the change of political leaders result in the unstable control of the country. A case that can be seen is the 1MDB scandal, the infamous scandal that shocked the world involving the former prime minister of Malaysia taking the funds from what was supposed to be an investment for the welfare of the public. 

    FDI is also a disadvantage as it can result in modern day colonialism that occurs due to the foreign investors monopolising the local economy, extracting possibilities for the domestic investors to start or expand their business. The market in Malaysia will be extremely competitive for the domestic investor to penetrate into which results in the country being dominated by foreign firms that want to maximise their profits by exploiting cheap labour as well as cheaper land expenses for the firms which allow them to expand the size of their firm in Malaysia. An example that can be provided is Alliance Steel which is owned by Chinese firms that invested into factories in Kuantan which allow them to expand their land easily with the cheap land expenditure as well as cheap labour expenses with the usage of contract workers to cut down on their operation costs. This discourages the state government to intervene as the firm attracts profit for the economic growth of the state.

    Lastly, a disadvantage that can be highlighted is that there will be a decrease in domestic investment which interrelates with the second disadvantage that there is an occurrence of modern day colonialism. Since it is covered that foreign investors would monopolise the local economy, domestic investors would feel less inclined to invest into the country as they have lesser incentives to offer to the local economy. It is demotivating to compete with the foreign investors to invest in labour and land in Malaysia as the foreign investors offer a higher wage as compared to domestic investors. Even when expanding the land size, local investors are much less likely to be prioritised by the government as the amount of foreign investors is higher hence, the government will tend to establish policies to protect the interests of the stakeholders of FDI. 

8.0 Conclusion

    All in all, FDI can impact the growth of the economy positively when it is facilitated by the government in order to maintain the equilibrium with domestic investments.  It can play the main role to establish the economy of a developing country and help the country in becoming a developed country like China who is the world's second largest FDI recipient.  The government should also provide cushion policies in order to reduce the disadvantages of FDI in Malaysia by ensuring that the interests of the investors are well protected regardless of the situation of the country both locally and internationally. The strategies provided should also be well researched and thoroughly arranged in order to convince the investors to invest for the long term that can provide them the security of their transactions in the local economy. The vital rationale is that FDI is crucial as it creates more job opportunities and increase the employment rate of the country to lower down the inflation rate in the country. 

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