Malaysian Economics: Pros and Cons of FDI

6.  Explain two advantages and two disadvantages of Foreign Direct Investment in Malaysia with appropriate examples.

    Foreign Direct Investment (FDI) is a long-term investment by 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.  In Malaysia, the entry of FDI was more focused on high-tech industries with a net inflow RM24.7 billion this year.

    One of the advantages of FDI in Malaysia is FDI will spur the economic growth.  FDI can be an indicator to measure the health of one country. It is a significant contributor to Malaysia's economic change, particularly in terms of establishing new sectors, which improves capacity output, job opportunities, trade, and technological skills. For example, this year, China, the United States, Singapore, and the Netherlands have invested a total of RM109.8 billion in Malaysia's manufacturing, services, and key sectors. These investments, according to the Malaysian Investment Development Authority (MIDA), will involve 2,935 projects thus creating 64,701 jobs in Malaysia.

    Next, FDI will benefit Malaysia in technology transfer. FDI plays a vital role in national development by providing capital and technology to the host country. Through technological transfer brought by FDI, management and labour training can improve the country's skills and knowledge. The Malaysian government in collaboration with foreign companies has trained local semi -skilled and skilled workers to develop the manufacturing sector. Malaysia has received a lot of equipment such as modern machines and tools imported from developed countries such as Japan and the United States.  For instance, Malaysia received technological transfer through automotive sector, namely Honda from Japan and Siemen from Germany. In 2012, Honda Malaysia has launched its first hybrid CKD model, the Jazz Hybrid. The launch is seen as an important milestone for Honda Malaysia in its efforts to pioneer hybrid technology in Malaysia.

    However, FDI also have the disadvantages which is the risk of political changes.  Uncertain political environment in Malaysia would reduce FDI inflows. When politics is unstable, corruption can arise. If the foreign country invested in the mega projects in that country, it would inflict a loss as they will face the delayed payments and contracts being confiscated as a result of political party changes. Different political parties have different ideologies which in turn lead to policy changes in the country. For example, in comparison to five other ASEAN countries, Malaysia had a dramatic reduction in foreign direct investment (FDI) inflows for 2020, falling by 68 percent to US $ 2.5 billion due to political instability in Malaysia.

    Furthermore, FDI may also lead to the decrease in domestic investment. Due to the competitive market, domestic investment had to compete with foreign investment to grant a project from the government. However, a large entry of FDI with amount of benefits will demotivate domestic investment to invest. Furthermore, the government would concentrate only on foreign investments. In Malaysia case, according to Malaysia Investment Development Authority (MIDA), FDI amounted for 68.1 percent of total permitted investments, with domestic direct investment accounting for the remaining 31.9 percent at RM97.9 billion. Domestic direct investment (DDI) decreased 5% to RM97.9 billion in 2021, from RM103.2 in 2020. 

    To conclude, FDI comes with many advantages to the host country.  However, the government need to find the solution for the negative issues rise from FDI. The government needs to continue to stimulate economic development, making it more dynamic to cover losses and negative impacts from FDI.  


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