FDI AND EXPORT COMPETITIVENESS IN MALAYSIA

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FDI AND EXPORT COMPETITIVENESS IN MALAYSIA
Asian Regional Seminar on Export Competitiveness
and the Role of FDI Enhancing Local Firms
Competitiveness through Linkages with
Transnational Corporations (TNCs) 11-13 December
2001 Tianjin, China
By Kee Kerng Cheng Deputy Director, Planning and
Research Division Malaysian Industrial
Development Authority (MIDA) MALAYSIA
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Malaysian Industrial Development Authority (MIDA)

• Established in 1967 under Act of Parliament,
  1965
• The principal Malaysian Government agency
  responsible for the promotion and coordination of
  industrial development in the country

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Development Plans
1986 1991 1995 2000 2005 2010 2015
2020
Vision 2020
Second Outline
Perspective Plan
Third Outline
Perspective Plan
Fifth Malaysia Plan
Sixth Malaysia Plan
Seventh Malaysia Plan
Eighth Malaysia Plan
IMP (1986 - 1995)
Completion of first
half of Vision 2020
IMP2 (1996 - 2005)
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Third Outline Perspective Plan
(2001-2010)

• Embodies National Vision Policy

• The objective is to build a resilient and
  competitive nation.

• Maintains the key strategies of
• the New Economic Policy (eradicating poverty
  and restructuring
• of society) and
• the National Development Policy
• (balanced development)
• with new dimensions

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Eighth Malaysia Plan
(2001-2005)
Industrial Development Thrusts

• Strengthening the manufacturing base by
  developing strong industrial clusters
• Sustaining the momentum of growth by
  strengthening manufacturing-related services
• Enhancing the local production of capital and
  intermediate goods to reduce import and foster
  industrial development
• Enhancing competitiveness through productivity
  improvements
• Developing resilient small and medium-sized
  industries (SMI)
• Increasing the use of ICT

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Second Industrial Master Plan (1996-2005) Main
Focus

• Manufacturing Plus Plus Orientation
• Cluster Based Industrial Development

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Manufacturing Plus Plus Orientation
Design and
Basic
Distribution
Prototyping
Processes
and Logistics
Research and
Product
Conventional
Marketing
Development
Development
Assembly
MANUFACTURING


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The Value Chain

• Move along the value chain towards higher
  value-added activities-
• RD and Product design emphasis
• Support services, distribution and marketing
  emphasis

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The Value Chain
Value-Added Per Employee
PLUS
PLUS
Malaysias emphasis today
Product
Distribution
Assembly and Production
RD
Design
Marketing

• Move along the value chain towards higher
  value-added activities-
• RD and Product design emphasis
• Support services, distribution and marketing
  emphasis

Shift the whole value- chain to a higher level
through productivity- driven growth
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Cluster-Based Industrial Development

• Based on the IMP2 Study Report, 22 potential
  industry clusters have initially been identified.
• These identified clusters are classified
• into 3 broad types
• Internationally Linked
• Policy Driven
• Resource Based

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Internationally Linked Clusters
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Policy - Driven Clusters
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Resource-Based Clusters
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Performance Of The Manufacturing Sector
GDP and Manufacturing Growth (1995-2001)

Forecast
Source Bank Negara Report, Economic Report
2001/2002
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Contribution of the Manufacturing Sector to GDP
and Total Exports

Source Bank Negara Report, Economic Report
2001/2002
Estimate
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Exports of Manufactured Goods
Cont
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Source Department of Statistics
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Investment Trends of Approved Projects
Source MIDA
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Domestic and Foreign Investments in Approved
Projects, 1996- Oct 2001
Foreign (US 23.9 billion)
56.8
43.2
Domestic (US 18.2 billion)
Total Capital Investment US 42.1 billion
Source MIDA
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Sources of FDI (Top 5 Countries)1996-Oct 2001
Source MIDA
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Foreign Investments in Approved Projects By
Major Industries 1996-Oct 2001
Total Foreign Investment US 23.9 billion
US billion
Source MIDA
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Policy Guidelines On Investment Incentives
Guidelines on Foreign Equity Participation
For projects exporting less than 80, foreign
equity ownership allowed depends on-

• Level of technology
• Size of Investment
• Value-added

• Spin-off effects
• Location
• Utilisation of raw materials

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Liberalisation of the Equity Policy In
The Manufacturing Sector

• All applications for new/expansion/
  diversification projects received before 31
  December 2003 will be exempted from equity and
  export conditions, with the exception of the
  following activities and products-
• Paper Packaging
• Plastic Packaging (Bottles, Films, Sheets and
  Bags)
• Plastic Injection Moulded Components
• Metal Stamping and Metal Fabrication
• Wire Harness
• Printing
• Steel Service Centre
• Bakery Products

Cont.
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• All projects approved under the liberalisation
  policy will not be required to restructure their
  equity after the period.
• The Government will review this policy after 31
  December 2003.

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Investment Incentives

• Pioneer Status
• Investment Tax Allowance
• Reinvestment Allowance
• Incentives for High-Tech and Strategic projects
• Incentives for RD
• Incentives for Industrial Training
• Pre-packaged Incentives

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Industrial Linkage Programme (ILP)

• Administered by the Small and Medium Industries
  Development Corporation (SMIDEC) which provides
  technical support and advisory services for the
  enhancement of SMIs including seeking
  opportunities for industrial linkages within the
  various clusters.
• Through the ILP, local SMIs will be further
  promoted and nurtured to become reliable and
  competitive manufacturers and suppliers of parts
  and components and services to the larger
  companies or MNCs.

Cont.
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• Priority areas of ILP
• Electrical and Electronics
• Machinery and Engineering
• Resource Based

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• Incentives to strengthen ILP

• To encourage large companies to participate in an
  ILP and to ensure the quality of vendors
  product, the following expenses are allowed as
  deductions in the computation of income tax-
• training of employees
• products development and testing, and
• factory auditing

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Global Supplier Programme (GSP)

• GSP, which represents the next phase of the ILP,
  aims at strengthening further the industry
  linkages developed under the ILP through two main
  initiatives-
• training in critical skills and
• linkage with large corporations
• The GSP is a proactive measure to enhance the
  capacity and capabilities of SMEs to provide
  world-class services and products to large
  corporations, and in their operations world-wide.

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• Advantages accruing from the GSP
• Provides SMEs with the opportunity to benchmark
  and adopt international best practices
• Offers a platform for SMEs to interact and
  network with MNCs
• Reducing import dependency of MNC and expanding
  export markets for SMEs
• Strengthens and add depth to the industrial
  structure and
• Provides an effective means for SMEs to integrate
  knowledge into their production processes

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Role of FDI

• Malaysias rapid industrialisation is the result
  of the country opening itself early to FDI.
• Manufacturing sector is the engine of growth of
  the economy, assisted by steady growth of new
  investments and re-investments by MNCs and local
  companies.

Cont.
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• FDI in the manufacturing sector has brought
  tremendous benefits in terms of
• Investments (equity financing, inter-company
  loans, retained earnings)
• To-date, FDI totals US14 billion, constituting
  47.6 of total investment of projects in
  operation.
• Multinational corporations (MNCs) from more than
  40 countries have invested in over 3,000 projects
  in Malaysias manufacturing sector, including
  leading companies such as Matsushita, Motorola,
  Sony, BP Amoco, Acer, BASF, Idemitsu, Ericsson,
  etc.

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• Employment Creation
• Foreign owned manufacturing companies have in
  their employ 557,828 persons, constituting 54.7
  of total employment in the manufacturing sector.

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• Exports
• Manufactured goods accounted for the bulk of
  Malaysias total exports, with a share of 85.3
  in 2000.
• EE products, which has the largest concentration
  of FDI, formed the single largest export item,
  valued at RM60.6 billion or 59 of total exports.

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• Access to new markets
• Given the large presence of MNCs in the
  manufacturing sector and their extensive
  international networks, Malaysia is able to
  penetrate new markets.

• Transfer of Technology and Expertise
• FDI brings with it new technology and expertise.
  To-date, a total of 639 technical agreements have
  been approved, with 1,715 joint venture projects
  in operation.

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• Development of skills
• FDI has assisted the move towards high value
  added and high technology projects involving the
  development or employment of highly skilled
  manpower. This is reflected in the
  capital-intensity (as measured by the capital
  investment per employee) of manufacturing
  projects which has shown an increasing trend over
  the years.

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• Development of the ancillary and supporting
  industries
• FDI has assisted the development of local
  vendors,global suppliers and contract
  manufacturers, e.g., there are 4 large
  Malaysian contract manufacturers in the
  semiconductor industry, i.e. Carsem, Unisem,
  Globetronics and AIC
• MNCs have also created sizeable local market for
  components and supporting industries,e.g.
• More than 200 tool and die companies
• More than 400 plastic moulding companies
• Many supporting industries such as stamped and
  machine parts, electroplating, packaging and
  printing

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• Spin-offs and Linkages Created with other
  Sectors of the Economy
• Development of the manufacturing related services
  such as logistics (warehousing, distribution,
  packaging), specialised services centres, product
  testing, central utility facilities and
  integrated market support services.
• Development of professional services
• Usage of ports, utilities, infrastructure,
  banking facilities, etc.

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Factors That Contributed Towards High Level of
FDI

• Stable political and economic environment
• Open, market-oriented economy
• Business-oriented and business-friendly
  environment
• Transparent and predictable investment policies
• Liberal Government policies on investments in the
  manufacturing sector
• Foreign equity ownership
• Expatriate posts

Cont.
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• Selective Exchange Control Measures
• Stabilising the ringgit
• Restoring market confidence
• Maintaining financial market stability
• Freedom of repatriation of capital, profits,
  dividend and interest.
• Well-developed financial and banking sector.

Cont.
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• Wide range of investment incentives
• Educated and productive workforce
• Investments facilitation at Federal and State
  levels.

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• For further information please visit the
  following websites
• http//www.mida.gov.my
• http//www.smidec.gov.my

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Thank You