How does Foreign Direct Investment affect the Malaysia economy

How does unusual Direct coronation take up the Malaysia prudenceII. Literature ReviewFDI in Private Sector (Private investment funds) frugal report (2010/2011) indicates that the semi toffee-nosed investment was rebound from -17.2% in year 2009 to 15.2% in year 2010 and in year 2011, private investment exit stcapable in 10.2%. Department of Statistics, Malaysia (DOSM) (2010) indicates that in first half of 2010 the private welkin great(p) grew by 46.6%. The largest contribution in private investment is services sector 47.2%, spargon-time activity mining and electrimetropolis sector and manufacturing sector which is 25.4% and 21.1% (Economic Report, 2010/2011). In the first seven months of 2010, Malaysian Industrial festering Authority (MIDA) approved 545 investment projects which ar tot completelyy RM16.6 billion to improving domestic economy and FDI (Economic Report, 2010/2011). The trinity main largest contrary purpose investment countries from Singapore, Japan, an d United States and in term of location in Malaysia, the responsibility of Selangor, Johor, and Penang was become the largest approved investment (Economic Report, 2010/2011). Economic Report (2010/2011) alike indicate that FDI fall from USD7.3 billion in year 2008 to USD1.4 billion in year 2009 which is drop by 81.1%. Economic Report (2010/2011) point divulge Malaysia brass should more chargeing on more sizable and high-impart investment, campaign private sector-led branch and as facilitator to raise private investment and attract more domestic and hostile investments. FDI inf wiped out(p)s are projected to attach because supported by government which government provided a conductive task environment and gradual revitalisation of capital expenditure. (Economic Report, 2010/2011). Most foreign company are making profits because Malaysias investments is broad-based which largely in manufacturing, agriculture, cover and gas, and services (Economic Report, 2010/2011).Am Research Sdn Bhd senior economist, Manokaran Mottain said that if want attract more foreign investors to emend FDI, the Malaysia government pass on introduce public-private sector partnership as role in business (Tan, The Star, 2010). In Najib Tun Abdul Razak (2010) 2011 budget speech, one and only(a) of the st rungical to improve the private investment is Reinvigorating Private enthronization. In reinvigorating private investment strategic got roughly 20 divergent sub-strategic, different strategic leave alone enhance in different aspects in private investment. So, the main strategic to improve the whole private investment is public-private partnership initiatives, high impart strategic let onment, and revitalizing capital grocery (2011 Budget Speech, 2010).In public-private partnership (PPP) initiatives, Najib Tun Abdul Razak (2010) indicates that The government pass on provide allocation as a tipping point for infrastructure support to ensure viability of private secto r-led projects. All the PPP projects place in 10th Malaysia aim give enhance the private sector investment, for example, construction of highway, construction of a 300-megawatt combined-cycle gas power plan, and development projects like hospital. The total private investment will be utilize in 2011 is RM12.5 billion.In high impact strategic development, 1Malaysia Development Berhad (1MDB) agree to develop the Kuala Lumpur International financial District (KLIFD) which will commencing in 2011 and the value of KLIFD will be reach at RM26 billion. The distinguished of develop KLIFD is strength Malaysias position as the premier international Islamic financial hub and government is consider to raise excess incentive packages to attract foreign investor to KLIFD. Another project in this strategic are the good deal Rapid Transit (MRT) in Greater KL, estimate of RM40 billion in private investment Malaysian Rubber Board land in Sungai Buloh, estimate of RM10 billion in private inve stment and in addition Petronas Twin Tower, estimate of RM5 billion in private investment.Malaysia government will implement seven measures to enhance the cooperation with foreign bourses which is first, divest their shareholdings in major companies by government-linked investment companies (GLICs) wink, for better return to foreign investors, GLICs allowed to extend investment in overseas market third, certain listing company will offer higher(prenominal) public shareholding like Petronas Chemicals Sdn. Bhd. forth, launch sukuk and conventional bond by Bursa Malaysia and the last one is Securities Commission (SC) will offer three new melody broking licenses, increase the summate of Proprietary Day Traders, and facilitate border and procedures for listing companies.Foreign direct investment (FDI) and Economic growth in MalaysiaA large number of studies was suggest that foreign direct investment (FDI) is an important source to the stinting growth in Malaysia, the FDI stupefy i n the capital investment, technology, create new job opportunity for economic growth. FDI not only brace the economic growth but also stimulate the growth of industrial sector and transform the Malaysia economic structure from agricultural into major producer and exporter of manufactured goods (Jajri, 2009).Karimi and Yusop (2009) examine that causal relationship between foreign direct investment (FDI) and economic growth in Malaysia. Karimi and Yusop (2009) suggest that FDI has indirect effect on economic growth in Malaysia. The Toda-Yamamoto causality test done by Karimi and Yusop (2009) suggest that there is no blotto enough evidence of a bi-directional causality between FDI and economic growth. Karimi and Yusop (2009) indicate that two variables such as technology transfer and productivity have indirect relationship in FDI and growth of economic and the approximately important mention by them is the performance of one variable does contribute to stability of another variab le. This meat that the performance in a sector will be affect to each other, for example, stability of manufacturing sector will enhance the private investment in private sector.Har, Teo Yee (2008) examine that the relationship between FDI and economic growth in Malaysia for the period 1970 to 2005 using the time series data. Har et al. (2008) determined that there is a incontrovertible relationship between the FDI and economic growth based on their empirical result and FDI was played an important role in Malaysias economy. To achieve economy development of Malaysia, government should concern the importance of FDI in economy growth for example, encourage more foreign direct investment to increase the employment in Malaysia and advance technology in production dirty dog increase more skilled labor to increase productivity (Har et al., 2008). Although the empirical result showed that has a positive relationship between FDI and economic growth, but it has bringing whatever negati ve effect on whatever sector, for example, domestic producer, they will facing difficulties to survive in the market because the foreign investor become monopoly and losing the market power. Therefore, Har et al. (2008) were suggesting that government should implement some policies like joint venture to retrace a win-win situation between domestic producer and foreign direct investor. Har et al. (2008) also indicate that the semipolitical stability is an important role in FDI because the new policies implemented by government will be affects the decision making of foreign direct investor.Jajri (2009) examines the submit of foreign direct investment (FDI) over the growth of the Malaysia for the period of 1970 to 2003. Based on the empirical result done by Jajri (2009), the result showed that FDI was signifi contributet influence on the growth rate of Malaysias economy and has a brawny market and macroeconomic stability to promote FDI. Jajri (2009) shown the charitable capital w as more important in FDI because it can improve the productivity, innovative capabilities, and strengthening the accompaniment industries to attract more foreign investment.Foreign Direct Investment (FDI) in manufacturing sector growthYusop and A.Ghaffar (1994) examined that some(prenominal) quantitative factor outs that was influence FDI in Malaysian manufacturing sector. In this study, Yusop and A.Ghaffar (1994) indicate that gross national product (GNP), pursuit rate, external reserve, manufacturing output, economic health, currency stability, topical anaesthetic financing, availability of adequate human and physical infrastructure are important factors to influence the FDI in manufacturing sector. Oman (1984) defined that a foreign entity own majorities of the equities in firm should be consideration involve in FDI activities. So, the purpose of Yusop and A.Ghaffar (1994) in this study is measure the company is consider as FDI company if the company has at least 50% of equ ities. After this study was done, Yusop and A.Ghaffar (1994) suggest few aspects can improve the FDI in manufacturing sector. First, the result show that between the (LMOG) and FDI have a positive relationship, that meaning human aspect and physical infrastructures are related to manufacturing sector and it is important for foreign investor (Yusop and A.Ghaffar, 1994). So, to attract the foreign direct investment in manufacturing sector, Yusop and A.Ghaffar (1994) suggest the provision of a well trained and efficient labour force, special or subsidized industrial sites, and other infrastructural facilities. Second, to increase the flow of FDI, the allocation of special fund or credit facilities for firm also important, for example, the local finance is the important consideration for foreign investor because it will affect their FDI decision (Yusop and A.Ghaffar 1994). Third, tax incentive is the important element to improve and increase the flow of FDI, the policy maker can utiliz e tax incentive to leading the FDI activities in manufacturing sector (Yusop and A.Ghaffar 1994).Chandran V.G.R (2008) found that FDI was a clincher in manufacturing sector in his empirical analysis about examines the FDI over manufacturing growth in Malaysia which is in developing country during 1970 to 2003. Chandran V.G.R (2008) suggests that to improve the FDI in manufacturing sectors, the first action is focus on improving productivity and innovative capabilities. Quality of FDI can only be attracted if the host country has the ability to improve the manufacturing outputs finished productivity gain rather than depending on the traditional factor of production (Chandran V.G.R, 2008). Chandran V.G.R (2008) also suggests that to more focus on education institution and the industrial needs to build up human capital stock and improve the level of education. In additional, the networks of foreign universities affiliation with local institution are important because those will enhan ce the competitive advantage of the manufacturing sectors. The last strategic suggest by Chandran V.G.R (2008) is the relationship between the local supplier and foreign investor must strengthened through network cohesion for many manufacturing firms. A strong supply chain must be establish so that foreign investors will realize that the local supplier in Malaysia also capable to fulfill their need in hold opening material.Incentives and maintain drawing card in Malaysia for FDIOti-Prempeh, Abenaa A. (2003) examines the concept of FDI in developing country such as Malaysia, Mexico and South Africa in his paper. Oti-Prempeh, Abenaa A. (2003) showed that there are some reasons to make the Malaysia become attractive in FDI like the Malaysia undervalue currency, low inflation rate, low cost of labor. Malaysias National Economic Program (NERP) also became a attractive for foreign investor, it is because the six accusing of the NERP enhance the confident of the foreign investor and Mal aysia plans to become industrialized nation by year 2020 (Oti-Prempeh, Abenaa A., 2003). Oti-Prempeh, Abenaa A. (2003) indicate that the Labuan is the city with tax haven, free regulation and law, and full natural resources like oil and gas to attract foreign investor to invest in Malaysia. The Malaysias investment policy provides incentive to foreign investor such as Promotion of Investment Act 1986 and the Income Tax Act 1967. This Act provides incentive in many sector so that foreign investor can enjoy the advantages like full or partial exemption from income tax, for example, Malaysia current income tax rate was 30%. Consequences, foreign investor can get higher rate of return on their investment (Oti-Prempeh, Abenaa A., 2003). Duasa, J (2007) also indicate that Malaysia has attract a large portion of FDI inflow after Malaysia introduce the Investment Incentive Act 1968 and the Free Trade Zone during the second Malaysia Plan (1971-1975).In Chandran V.G.R (2008) opinion, the Mala ysia can maintaining their attractiveness for FDI is because of moderate overall cost, political stability, and good infrastructure. In the other hand, FDI liberalization in Malaysia also provide incentives to foreign investor, Chandran V.G.R (2008) suggest that Malaysia should focus on providing labor force and complementary asset in the tenacious run to maintaining the attractiveness of Malaysia.In manufacturing and agricultural sectors, Malaysia was providing incentives to let the foreign company or investor to enjoy different advantages when they invest in Malaysia. The two major incentives provide by Malaysia government are pioneer billet and investment tax allowance (ITA). In Pioneer Status, A company grated Pioneer Status enjoys a 5-years partial exemption from the payment of income tax and it pays tax on 30% of its statutory income. (MIDA, 2010). In addition, Malaysia also provides the promoted area to encourage foreign direct investment. Invest in promoted area such as Sa rawak, Perlis, Sabah and some certain area can enjoying a 100% tax exemption on statutory income during in 5 years exemption period (MIDA, 2010). In investment tax allowance (ITA), a company can apply ITA to grant an allowance of 60% on qualifying capital expenditure at bottom 5 years. In the other hand, for each year of assessment, a company may be able to offset this allowance to against 70% of its statutory income and the rest of 30% will be taxed at the familiar company tax rate (MIDA, 2010). The Malaysia also provides promoted area in ITA incentive which is if any company invests in the promoted area a company can enjoy 100% allowance on qualifying capital expenditure in 5 years. In addition, for each year of assessment in promoted area, the allowance can be utilized to offset against 100% of the statutory income. Different additional incentives also provided by government in many sectors, here just discuss one major of additional incentive for all sectors which is Reinvestme nt Allowance (RA). From the MIDA website, reinvestment allowance is given if a company involves in manufacturing or agricultural activities, operation at least 36 months from year assessment 2009, and purposely reinvest in expansion, automation, modernization or diversification business (MIDA, 2010). Reinvestment allowance is given 60% on the qualifying capital expenditure, 15 consecutive years, can be offset against 70% of statutory income and can fully against of statutory income if a company invest in promoted area or attain productivity level exceeding the level determined by Ministry of Finance.(Tenth Malaysia Plan (10MP), 2010, Chap. 3, pp. 39-41) indicated Malaysia annual FDI inflow has grown by only 1% CAGR from the period of 1991 2000 to 2001 2007. The FDI performance is worst in past 20 years, so, Malaysia must improve its performance by using some initiatives which is Benchmarking Malaysias attractiveness, Empowering Malaysian Investment Development Authority (MIDA) to attract investment, and Investing in talent recruitment (10MP, 2010, Chap. 3, pp. 39-41).In benchmarking Malaysias attractiveness, Malaysia will position the key factor of the understanding of the foreign investor by conduct an annual survey (10MP, 2010, Chap. 3, pp. 39-41). The key factor will affect the Governments policy decision making to make out some adjustment to ensure Malaysia can compete for capital and increasing the FDI attractiveness, for example, reducing the corporate and personal income tax rates is a type of factor can improve the attractiveness of FDI inflow in Malaysia (10MP, 2010, Chap. 3, pp. 39-41).In empowering MIDA to attract investment, MIDA will more focus in few sectors those can support innovation and productivity growth and will focus on caliber of investment rather than quantity (10MP, 2010, Chap. 3, pp. 39-41). Several change will do by MIDA to attract FDI which is given the authority to negotiate directly with investors for target projects, enhance the coordination and cohesion among the relevant investment promotion bodies in the country, and enable the necessary organizational flexibility to attract and retain the talent it needs to be internationally competitive (10MP, 2010, Chap. 3, pp. 39-41).In investing in talent recruitment, liberalization, good quality of life, and better compensation package will increase the number of worker flow into our country (10MP, 2010, Chap. 3, pp. 39-41). Malaysia also introduces the Talent Corporation (TC) which is under the Prime Ministers Department to improve our FDI. TC has three key roles to improve the inflow FDI, the first is catalyst lead and drive innovative national talent management initiatives. The second key role is as a facilitator and creating and motivating for private sector. The third key role is deliver major national initiatives on talent across the human capital development pipeline (10MP, 2010, Chap. 3, pp. 39-41).