This article first appeared in Forum, The Edge Malaysia Weekly on July 15, 2024 - July 21, 2024

Malaysia’s recent foreign direct investment (FDI) data for 2023 reveals a significant year-on-year drop to RM40.4 billion, down from RM75.4 billion in 2022. When the news broke, I was repeatedly asked, “Is this true?” Yes, the data is accurate. This headline figure has understandably raised concerns, but the country is not facing an immediate risk of falling out of favour. It is crucial to interpret the data in context rather than be alarmed. However, alarm bells are ringing elsewhere, suggesting an urgent need to enhance the country’s competitiveness on the global stage to sustain its FDI attractiveness, especially as regional peers garner more attention from global investors.

The steep decline in FDI inflows in 2023 was primarily due to base effects. In 2022, we saw record-breaking inflows driven by a large, one-off wave of investments in the manufacturing sector. This coincides with the significant capacity building in the electrical and electronics (E&E) sector and a surge in foreign interest in Malaysia as a site for expansion. This rush was fuelled by global technology trends and increased demand for information technology products, making 2022 an outlier in terms of FDI. Comparing 2023 to such a high base inevitably results in a sharp percentage drop, masking the underlying strength of our FDI environment. When compared with pre-pandemic levels, which averaged around RM38 billion between 2015 and 2019, the figures for 2023 do not indicate Malaysia is struggling to attract FDI.

On the contrary, data on FDI approvals continues to show a strong pipeline of projects coming into the country, suggesting that foreign investor interest remains robust. Total foreign investments approved rose to RM188.4 billion in 2023 from RM163.3 billion in 2022, and significantly exceeded the average pre-pandemic approval amount of RM62.5 billion annually from 2015 to 2019. These committed investments will continue to bolster FDI inflows over the next one to two years.

While the FDI performance remains robust, the country cannot afford to be complacent as there are no guarantees that Malaysia will forever be the first choice among foreign investors. Regional competitors such as Indonesia, Thailand and Vietnam have been particularly aggressive in attracting FDI and securing major projects that could have otherwise come to Malaysia, making them formidable rivals.

The recent fall by seven spots to 34th out of 67 countries in the latest International Institute for Management Development (IMD) World Competitiveness Ranking is one of the early warning signals. Furthermore, Malaysia now ranks below Indonesia and Thailand in this index for the first time. This is a concerning trend and may suggest an erosion in competitiveness with our regional peers.

To remain competitive, the issues highlighted must be tackled head-on.

Malaysia’s decline was evident across nearly all factors assessed by IMD, with the drop most apparent in government efficiency and business efficiency. Our ranking across these two metrics fell four and eight spots respectively, to 33rd and 40th place. The decline in rankings calls for targeted interventions.

One strategic step is to further enhance the existing regulatory framework. Investors seek clarity and efficiency, and reducing bureaucratic hurdles can significantly enhance Malaysia’s attractiveness and improve the ease of doing business. This could involve simplifying business registration procedures, enhancing transparency and ensuring consistent enforcement of regulations. Implementing digital governance solutions can also make bureaucratic processes more efficient and investor-friendly.

Furthermore, investing in research and development (R&D) and fostering innovation is critical for attracting high-value FDI. Incentivising R&D investments, supporting start-ups and small and medium enterprises, and strengthening academia-industry collaborations will enhance business productivity and efficiency in the long term.

The competition for FDI is fierce, and regional peers are rapidly advancing. Policymakers should not find excuses or explanations to window dress where Malaysia falls short when compared with regional and global rivals. While robust FDI inflows are encouraging, in order to maintain its position as a preferred investment destination, Malaysia must undertake strategic reforms to enhance its competitiveness and secure sustainable growth in the years to come.

Woon Khai Jhek, CFA is a senior economist and head of the Economic Research department at RAM Rating Services Bhd

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