This article first appeared in The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024

MALAYSIA has always prided itself on being one of the top destinations in Southeast Asia for foreign direct investment (FDI), especially in manufacturing, predicated on its abundant land bank, readily available infrastructure and skilled workforce. Consequently, the country has over the past few decades accumulated manufacturing businesses of various kinds in the value-add chain, including some it would not have courted in this day and age.

However, given the goal of moving up the value-add chain in manufacturing, although on limited financial resources, the government needs to rethink and prioritise its incentive allocation.

In a recent interview, Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz says there is a need to be strategic in the fiscal support given to FDI, focusing on only the key sectors identified.

“I’ll be very unpopular. But I think that moving forward, we will have to choose. There is only so much money [available], and if we choose properly, then the Ministry of Investment, Trade and Industry (Miti) can get the Ministry of Finance to agree to give more support to the strategic industries. Our policy has to differentiate sectors,” he says.

“There is this thinking that just because I [Miti] give [incentive] to this sector, all sectors must get the same … we somehow have to educate that it cannot be the case.”

Zafrul highlights that Malaysia needs to push for carbon tax as a way of attracting the right FDI and disincentivising heavy polluting and low value-add industries from investing in the country. He rationalises that the carbon tax collected from such industries can then be used to provide incentives to strategic industries, such as green industries.

“We will over time talk about the key industries we want to focus on and people are going to complain once we take out the incentives. We have to. It’s just like the targeted subsidy for fuel. We also need to be more targeted in incentives for the right sectors,” he says.

One country in the region that has successfully implemented carbon tax is Singapore, Zafrul observes.

Singapore is the first country in Southeast Asia to introduce a carbon price. The tax is currently set at S$25/tCO2e for 2024 and 2025 and it will be subsequently increased to S$45/tCO2e in 2026 and 2027. The carbon tax currently covers 80% of Singapore’s total greenhouse gas (GHG) emissions from 50 facilities in the manufacturing, power, waste and water sectors.

“So, carbon tax tak kena rakyat lah,” Zafrul quips.

He emphasises that the country has to move away from the mentality of looking at just the value of the investment, but also see the quality of the investment. He is also cognisant that the proposed direction for investments would change the dynamics that are deeply entrenched in the system and that change may not be easy.

“It’s about political will. But maybe industries might be easier [to convince] than the rakyat since there is less emotion attached to it. At the same time, there are stronger lobbyists, so I really don’t know,” he says.

The minister is aware that by moving in this direction, Malaysia’s competitiveness, versus that of other countries in the region that are competing for FDI, will be reduced. Nonetheless, he emphasises that all the more so, the country needs to choose the right sectors to support.

This year, announcements of potential FDIs flocking to Malaysia have been prolific, with name dropping that would be the envy of competing countries. Names such as Google and Microsoft have been bandied about, with hints of more to come.

As at end-March, Miti had recorded a potential investment value of RM76.13 billion from countries such as Singapore, Italy, the UAE, Australia, Germany and France. But the ministry has yet to announce the value of approved FDIs.

In 2023, the total value of approved FDIs amounted to RM188.4 billion, up 15.3% from RM163.3 billion in 2022. According to Zafrul, a senator, the realisation rate of Malaysia’s FDI is about 75%.

Zafrul, who took up the role of investment, trade and industry minister in December 2022, candidly acknowledges that his role is akin to being a “marketing man” for Malaysia. As a marketer of Malaysia, he has taken on a different approach, including reaching out to shareholders directly.

“It’s not enough to just go to the company. We have to go to the shareholders to sell the story on Malaysia so that they can get the companies in their portfolio to look at Malaysia [as an investment destination],” he says.

Miti has also taken it upon itself to map every company into a matrix in order to identify gaps in the ecosystem, which helps to identify the right investments needed to fill the space. It is unprecedented but also a painstaking process, says Zafrul.

In the ministry’s efforts to court the right FDI, it has enlisted the help of large companies.

“All the big companies will have to share their supply chain with us and tell us which companies they can help bring to Malaysia. It helps us and them to build the ecosystem locally,” he says.

“However, we need to be careful. This is where the mapping is useful, to make sure that what the companies suggest bringing in, there are no Malaysian companies doing the same thing.”

There is a two-pronged approach to FDI that Miti goes by. One of which is to focus on increasing investments in high value-added manufacturing activities that will help increase trade value with high value-added exports.

“Some 40% of the total exports [by value] come from our E&E (electrical and electronics) sector. But once we move up the value chain, it can go up to 60% because the value of exports will increase. The multiplier effect is much higher,” Zafrul explains.

The other approach focuses on the spillover effects on the country. One of the main purposes of FDI is to drive economic growth by way of higher skilled jobs and better pay. Hence, focusing on FDI that has the right spillover effects is crucial for the country.

“So when I say ‘right spillover’, I’m referring to whether the local companies will benefit from the investment and whether locals will get higher paying jobs. If they don’t, then we have to stop,” he says.

With artificial intelligence (AI) dubbed as the future of technology, the importance of data centres has come into the spotlight.

Malaysia has enjoyed a slew of proposed investments in data centres, from Nvidia’s tie up with YTL Power International Bhd (KL:YTLPOWR) to NTT’s new data centre in Cyberjaya. Investments in data centre-related projects in the country have exceeded RM110 billion to date.

While critics say foreign data centre providers are only here for the cheap land and abundant power supply, Zafrul maintains that data centres are enablers of FDI, describing them as a “highway” or “transmission line”.

Just as the number of persons managing a transmission line may be few, direct employment by data centres is also minimal, but the argument is that it consists of high-level employment for those who manage the centres.

Data centres are also a more efficient allocation of a company’s resources compared to having multiple servers, he says. For companies that want to meet their clean energy target, data centres would make sense as it would negate the need for a local server in the company.

“When you look at the data centres, you need to look at them as enablers of FDI. A data centre is like a highway. So now, if you build a good highway, everybody is going to come here. Our competitive advantage is availability of energy. And now, with third-party access coming in, the data centres can do a deal with any power player and supply it B2B (business to business) because third-party access allows companies and any power producers to have access to the grid,” says Zafrul.

He is quick to highlight that data centres are more than just data storage as it is also about data processing, where those at the higher end of the technology spectrum would need to be close to the data centre for decreased latency.

Another reason why data centres can be seen as enablers of FDI is because of supply chain management. Some companies may find it easier to obtain graphic processing units (GPUs) and other chips in Malaysia compared with China, Zafrul explains, thus serving as an incentive for them to invest in Malaysia to be near the ecosystem.

So, how easy is it to court FDI? Easier in some ways, but not easy, he says.

“It is not easy to get FDI. But I must say that it’s easier than before in some ways because of the supply chain realignment. Geopolitics has helped Asean … global FDI is down, but it has increased for Asean,” he adds.

“I can’t claim all the credit. Factors like the China-plus-one strategy have helped. The Ukraine-Russia war has increased the cost of doing business in Europe. Then US and European companies are also looking at de-risking from China. We also see more Taiwanese companies now due to the geopolitical tensions and, they say, natural disasters.” 

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