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BACKGROUND AND COUNTRY ATTRACTIVENESS. Malaysia is the second fastest growing economy in the South East Asian region with an average Gross National Product (GNP) growth of eight-plus percent per year in the last seven years. Since independence in 1957, Malaysia has moved from an agriculturally based economy to a more diversified and export oriented one. The Malaysian market is fairly openly oriented, with tariffs only averaging approximately fifteen percent and almost non-existent non-tariff barriers and foreign exchange controls. The open trade based economy is supported by the fact that the total two way trade almost amounts to 120 percent of the GNP (1994). Together with a stable political environment, increasing per capita income, and the potential for regional integration throughout the Association of South East Asian Nations (ASEAN), Malaysia is an attractive prospect for FDI (refer to Tables 1, 2, 3 and Graph 1 for relevant economic indicators).
Until 1993, foreign investment contributed 60 % of all investment in Malaysia. FDI grew strongly in the late 1980 s to reach a peak of RM 17. 7 billion in 1992. This was followed by a sharp drop to RM 6 billion in 1993 due to the world recession, but rose again to RM 15. 2 billion in 1994. Malaysia is among the top five recipients of foreign direct investment in the world and while in recent years it has come mainly from other Asian countries, 1993 saw the US as the biggest inward investor with RM 1. 7 billion. Japan and Taiwan are clearly the largest overall investors with the US third, followed by France, Singapore and the UK (Mc Leman 1994, 19). The rationale of this report is not to promote Malaysia as an attractive destination for multinational entities, but rather to analyze how Malaysia's economic policy impacts upon FDI.
Malaysia, perhaps, represents one of the most successful developing nations that has been able to effectively incorporate economic policy objectives with foreign funds, knowledge and networking throughout FDI (refer appendix 5). FDI in Malaysia is an important catalytic factor, increasing exports, knowledge and provides an economic vehicle towards the Malaysian 2020 vision. THE MALAYSIA PLAN AND THE NEW ECONOMIC POLICY FRAMEWORK The Malaysian government uses economic planning to achieve economic and socio-economic goals in close coherence with the New Economic Policy (NEP) and the National Development Policy (NDP). The Fifth Malaysia plan and the Long-term Industrial Master Plan Malaysia, in particular, indicate specific future objectives and economic trends.
Objectives. The Malaysian economic policy framework is based upon the NEP, which was launched in 1974. The political and economic objectives of the NEP is to reduce poverty by increasing income levels for all Malaysians and to restructure the Malaysian society in order to erase all racial identification in economic terms. In other words, the NEP calls for a financial redistribution from the minority of wealthy non-Bumiputra (native Malaysians also known as "Princes of the Soil") racial groups to the Bumiputra's (Goldsworthy 1991: 51). The goal is to achieve corporate equity of 30 percent Bumiputra, 30 percent foreign and 40 percent other-Malaysians (Onn 1988: 8). This goal can only be facilitated with an expanding economy, so that no racial group should suffer from economic or social deprivation.
Other specific economic goals include; maintain high sustainable growth, low unemployment rates and ensure the stability of economic factors such as inflation. Under the NEP, FDI incentives were d! e signed to achieve social rather than economic objectives (Goldsworthy 1991: 53). According to the Malaysian Industrial Development Agency (MIDA), "Malaysia received political stability from the NEP. Racial turmoil attracts neither foreign nor local investments. " (Appelbaum et Al: 1993, 180) The National Development Policy (NDP) replaced the NEP when it expired in 1990. This new policy can be considered an add-on document to the NEP, the objectives of which were not achieved in 1990.
Furthermore, it provides a framework towards Dr. Mahathir's new vision 2020 plan symbolizing "the way forward" policy towards a "developed" nation in 2020. This will require the nation to maintain a 7 -plus percent growth rates for the next 25 years. Prime Minister Mahathir believes raising workforce quality and developing expertise in sophisticated industries are decisive elements in the country's road to economic success and development (Brown 1993: 43).
In order to facilitate these growth requirements, the NDP has relaxed many of the FDI restrictions imposed by the NEP such as equity and licensing requirements and procedures. The Fifth and the Sixth Malaysia plans (1986 - 1997) place great emphasis upon the privatization process of certain government owned industries and utilities. For instance, the major motor-highways now belong to "Plus", a privately owned entity which is responsible for the construction of such transportation infrastructure. According to Dr. Mahathir, "The Malaysia Incorporated concept requires the private and public sectors see themselves as sharing the same fate and destiny as partners, shareholders and workers within the same 'Corporation', which in this case is the nation... " (Has 1994: 189). The overall objective of this policy is rationalization of the government sector and to foster more initiatives from the private sector.
The private sector is the driving force to economic prosperity and the government will provide the needed support. In close cooperation with the NDP, the Sixth Malaysia plan is the driving motivation for development. The purpose of the Industrial Master Plan which was formulated by the United Nations Industrial Development Organization (UNIDO) is to focus private and government agencies on core competencies and develop industries with great export potentials in the next 15 years (Please refer to Appendix 3 for such industries). Export Facilitation.
In the South East Asian region, most of the incoming FDI has been exported oriented rather than intended for domestic sales (World bank 1993: 318). Presently, Malaysia has one of the world's highest export to GDP ratios (Petri 1994: 11). The economic rationale of Malaysia to promote exports provides the nation with three important advantages. First, it generates foreign-exchange that can reduce the amount of foreign debt needed to fund development. Second, it contributes to developing a competitive industry infrastructure from learning from investors- a move that brings technological excellence leading to higher value-added exports. By the promotion of specific industries, such as the semi-conductor industry, has speeded technology acquisition and enhanced the nation's competitive Worldwide positioning.
Finally, FDI provides employment in the industry sector, which to a large extent is attracted from the agricultural sector. Critics argue that Malaysia has become largely dependent on foreign technology and failed to develop its own technology base (Goldsworthy 1991: 58). For instance, it is true that Malaysia is the world's largest manufacturer of Air conditioners, but it is also true that Japanese companies account for 90 percent of all exports. In this relationship, Malaysia is "sitting between Japanese capital and these sorts of exports" (Goldsworthy 1991: 58) If Malaysia cannot develop its own competitive industry with a solid technological base, it may be difficult for the nation to achieve its 2020 vision.
In the case of Malaysia, the critical success factors of FDI lay in the economic policy. FDI incentives such as taxable income deductions linked to domestic performance and local content, other tax allowances, location incentives, double deduction for promotion of exports and political and economic stability have all contributed to the massive influx of FDI and increase of exports (Carrol, Errion 1991 21). In addition, nine Free Trade Zones (FTZ) provides tax-free areas with liberal custom controls for manufacturers that assemble at least 80 percent of their products. Import Substitution. Economic development in Malaysia was first built on the basis of Import Substitution, indicated by the large shift of GNP distribution from agricultural sectors to manufacturing sectors. Import substitution has increased in mainly three areas, transport equipment, Industrial chemicals and fertilizers and in Industrial machinery (Onn 1988: 28).
However, exports constitutes the main source of growth in the manufacturing sector from 1970 - 1990 (refer to appendix 6). This trend can be explained by economic policy that places great emphasis on improving industrial competitiveness as a vehicle towards vision 2020. TRADE RESTRICTIONS. According to Richards, "Malaysia has benefited considerably from its liberal trade policy" (1993: 29). Such policy has increased worldwide competitiveness through strategic exposure and promoted economic growth. Presently, Malaysia has one of the most liberal trade policies in the East Asian region.
The nation's policy of liberalizing trade is not only incorporated with the WTO and AFTA objectives, but also micro-economic objectives. Reducing tariff levels will not only decrease inflationary pressures in the expanding economy but also increase the competitiveness of Malaysian industry throughout strategic exposure. Liberalization can also enhance export incentives from FDI's as seen in the nine FTZs. In line with microeconomic change, trade restrictions have been aligned with development strategies which are often based upon the notation of comparative advantage. Selective protection promotes the development of industrial subsectors that have the potential to produce high value added products, which are intended "to replace light manufacturing activities as the main exporters" (Brown 1993: 45).
Tariff Structure As a link to the policy of maintaining a stable economy with past budget strategies of controlling inflation, there have been major reductions and abolition of import duties on goods and services. The 1995 budget proposes a reduction of tariffs imposed on over 2, 600 items of which a majority are food items (Budget 1995: 22). Also, tariffs on building materials and household appliances have been reduced. These measures will not only control inflation, but also enhance the quality of life and favor the over all climate for investments. However, Ad Valorem taxes are imposed on imported goods and services (refer to Appendix 4).
Strategic Exposure Strategic exposure represents a crucial component in Strategic Trade Theory. The rationale behind lowering barriers to trade and exposing local industry to foreign competition is to create a more competitive domestic industry (Hamilton 1989: 4). Such a Level Playing Field policy will force local firms to increase their competitiveness to survive. Strategic exposure represents a direct link to becoming an industrialized nation by 2020 and the realization of economic goals.
Incorporating FDI as a strategic measure to enhance technological know-how can reduce domestic learning and experience curves in selected industries. By giving foreign investors considerable tax deductible incentives in areas such as training of local employees, research and development and in promotion of exports Malaysia has been able to increase World wide competitiveness as demonstrated by increasing exports and GDP (Carrol, Errion 1991: 21). Malaysia aims for the year 2000 to have at least 1. 6 % of GDP spent on R&D and is predicting that at least 40 % will come from the private sector. Furthermore, all firms operating in Malaysia are expected to employ and train Malaysian and Bumiputra personnel so that the over-all employment represents the ethnic break-down of the nation (30: 40: 30). I...
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Research essay sample on Malaysian Economic Policy And Fdi
