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Example research essay topic: Malaysian Economic Policy And Fdi - 1,781 words

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... n recent years, this has put much pressure on companies in increasing the portion of Bumiputra's in managerial and in professional positions (Hiebert 1995: 42). Foreign investors are allowed to have expatriate personnel, but are encouraged to attract local personnel for these positions. Improvement in the quality of education and training form a crucial part of the nation's industrial development strategy (Brown 1993: 47).

EXCHANGE REGULATIONS. The Exchange rate policy is an important component in the Malaysian FDI promoting framework and in general economic policy. In recent years, Malaysia has substantially opened-up its foreign exchange regime and can now be considered fairly liberal. Bank Negara does not officially peg the Ringit to certain currencies and the currency floats. However, the bank does intervene in the foreign exchange market in order to avoid rapid fluctuations in coherence with its policy to maintain a stable value of the Ringit. This is achieved by comparing the market value to a unknown trade-weighted basket of currencies (Bureau Of Economic Analysis 1993: 2).

Bank Negara has been accused of depreciating the value of the Ringit in order to promote exports. For instance, in 1993, the bank bought large amounts of US dollars causing the Ringit to depreciate (Cooke 1994: 3). As a result, In 1993 alone, the national bank declared a loss of over 2. 3 billion US dollars in foreign exchange (Economist: 19! 94 98). Naturally, the stability of the Ringit facilitated throughout government intervention has improved the overall climate for FDI and in particular, export oriented such.

Liberalization of Foreign Exchange Regulation As noted by the World Bank, export oriented FDI provides the foreign exchange required to develop a nation without incurring huge debts. Malaysian economic policy has promoted a favorable climate for FDI, resulting in rapid industrial development and influx in foreign exchange that can promote new development projects. Bank Negara is presently deregulating the financial industry, a move which may erase the distinction between local and foreign institutions (Astbury, 1995: 13). Currently, specific permission from the Controller of Foreign Exchange is required for the operation and maintenance of a foreign currency account. A relaxation in that policy is proposed that will make it possible for exporters to maintain foreign currency accounts of a portion of their proceeds from exports. Furthermore, non-resident controlled companies will enjoy relaxation in the gearing ratio / capital structure of foreign entities by increasing the domestic debt to eligible capital funds ratio from 2: 1 to 3: 1 (Budget 1995: 25).

INVESTMENT REGULATIONS AND POLICY FRAMEWORK. Government Policy on Investment Despite of the fact that the NEP goal of 30 percent foreign ownership was not reached in 1990, The Malaysian government encourages FDI in most industrial areas. This is particularly true when opportunities for Bumiputra's are enhanced. Moreover, export enhancing FDI has been denoted as the "engine to growth" in the private sector (Jayasankaran 1995: 44). Major Investment Incentives Malaysian FDI incentives are in close coherence with the economic policy framework and can be considered competitive in comparison to other nations.

The liberalization processes in foreign exchange controls and in trade together with stable political and economic conditions, serve as major incentives to FDI. In addition, there are major tax incentives through the Pioneer Status and Investment Tax Allowance. The Pioneer Status, gives a foreign investor 100 percent tax relief on Malaysian income tax over the first 5 years and the possibility to get it extended an additional 5 years if certain industry specific conditions are met (US Department of Commerce 1993: 12). In order to get Pioneer Status, such an investor must show the potential for increasing Malaysian Exports employing new technologically advanced processes in production. Thus, in the agricultural sector, Pioneer Status can only be granted to the processing portion of investment. Investment Tax Allowance is similar to the Pioneer Status, but the tax-free rate on income is negotiated on a case by case basis as a percentage of capital expenditure over the first 5 years (US Department of Commerce 1993: 12).

Furthermore, tariff protection can be enforced for competing overseas products and exemptions from custom duties on machinery, equipment and raw materials are available to most industry and agricultural sectors. The nine FTZs together with double taxation deductions on insurance premiums for exports also provide an incentive for exported oriented FDI. Also, the Malaysian government has progressively reduced the corporate income tax rate in order to improve the investment climate (Budget 1995: 19). In addition, FDI Incentives benefiting the development of human knowledge and education in Malaysia include 100 percent tax allowances on technical or vocational training for up to ten years (Budget 1995: 16).

Investment Regulations. Regulations of FDI tend to be concentrated in the financial service rather than in the manufacturing sectors. However, equity formulation, licensing and local capital accumulation are regulated. In particular, FDI in the financial service sector has been discouraged up to now. Foreign ownership is limited to 30 percent of any financial institution, and foreign banks are not allowed full access to electronic fund transfer channels. Also, all Fdi's have been asked to restructure their equity formulation in compliance with the NEP objectives of increasing the capital share of Bumiputra's.

Licensing regulations are being liberalized, but investments are still regulated to a high degree. Any manufacturing company, local and foreign, needs a license specifying the nature of the business, production quantities, and performance expectations. Certain equity restriction are also imposed upon FDI. Foreign investors have the opportunity to hold 100 percent of equity. However, when the investor does not, the Malaysian equity will be distributed accordingly to the NEP distribution policy. The first 30 percent of equity not held by the foreign investor will be reserved for Bumiputra's, and the rest to other Malaysians (US Department of Commerce 1993: 14).

THE OVERALL ECONOMIC CLIMATE OF FDI. The sixth Malaysian Plan, notes that incentives will be "rationalized further to ensure that they are consistent with the overriding policy of encouraging private sector growth and foreign investment" (Brown 1993: 44). Furthermore, Brown notes that "private-sector led growth has pushed Malaysia to higher level of economic success and will be entrusted with a much bigger role in generating growth" (1990: 45 - 46). Economic Stability The Sixth Malaysia Plan places great emphasis upon providing stable macroeconomic conditions that are necessary for providing growth of private investment and the encouragement of FDI. The Plan states that "fiscal and monetary policies will be directed toward maintaining stable prices, favorable exchange rates and a healthy balance of payments position" (Brown 1993: 49).

Brown also argues that "macroeconomic policy has followed a constant path in recent years" (1993: 49). Empirical evidence proves that economic growth in the past six years has been stable at above 7 percent per year, the inflation rate has been kept below the targeted 4 percent level, balance of payments have been stable, the unemployment rate has decreased and interest rates have been adjusted in order to safeguard against "overheating" the economy. The Malaysian Budget outlines four major strategic goals; (1) Sustaining strong growth, (2) Reducing inflation, (3) Developing skilled manpower, and (4) Building a progressive and balanced society (1995: 1). These objectives certainly correspond to the historic strategies of the NEP, the current sixth Malaysia plan and Vision 2020.

Low Inflation Policy The estimated inflation rate for 1994 was 3. 8 percent and Bank Negara estimates that this rate will be further reduced in 1995 (Budget 1995: 17). The commitment to ensure the stability of the economy is shown in a fairly conservative monetary policy, which has in recent years increased the required reserve requirements for banks to control monetary supply. Inflationary pressures will be more severe due to increased domestic demand and shortage of labor which may trigger a wage explosion. State Intervention Even though the Malaysian economy is extremely open-oriented, there is a large degree of state intervention in the economy. Critics argue that significant bank Negara expenditures in rural development schemes, heavy industries, Bumiputras loans, and in maintaining national agencies have not produced the desired outcomes.

The NEP goal of achieving social equality has not been realized. "The Malays still control the state apparatus and the Chinese still, even after 20 years of the NEP, dominate the domestic commercial and manufacturing sector" (Appelbaum et Al 1993, 184). In comparison to its Asian neighbors, Bank Negara's expenditures, which amounts to more than half of GDP are extremely high (Refer Appendix 7). Appelbaum further argues that if the cost of state intervention is higher than the relative gain from export enhancing FDI and if there are no potential synergy effects from such intervention (such as social policy framework of promoting the Bumiputras), there might be a! negative effect on economic growth (1993, 183).

Malaysia is now reconsidering its inward investment policies, and will put greater emphasis on improving the infrastructure, rather than promoting these regions through financial incentives. Especially the power supply problem should receive more attention. Traffic jams and congested ports are another source of concern (Mc Leman 1994, 16). CONCLUSION.

Malaysia's focus on FDI, enhancing exports, has served it well and contributed to its eight years of over eight percent growth (Jayasankaran 1995: 44). The primary success factor is that promotion of FDI is supported throughout the Malaysian economic policy framework. Careful economic five year planning in close cooperation with the NEP framework ensures coherence in policy making leading to economic stability. Petri argue that a stable macroeconomic environment conductive to investment and enterprise is a critical dimension of the successful implementation of FDI (1992: ix). In addition, Malaysia has identified a reachable vision, identical to that Michael Porter stresses is a crucial component to the success of an organization.

Dr. Mahathir himself talks about "Malaysia Inc" (Woronoff 1992: 353). The Malaysian vision 2020 provides such a vision, which not only provides coherent direction in all policy areas, but also provides people with the desire of continuous improvement. ! This factor is crucial in the evolution of the private sector, which is indeed critical for achieving sustainable growth and future economic prosperity. The FDI boom in Malaysia has been supported by Malaysia's high standard of industrial infrastructure, political stability, and human capital resources. Also, Malaysia's has build and maintained a comparative advantage in its traditional raw-material and commodity exports, further boosting export enhancement strategies. Export enhancement has provided the nation with valuable foreign exchange capital used for further developing higher value added products throughout forward integrating manufacturing processes.

Export oriented FDI has indeed open-up new opportunities for Malaysia and facilitates economic growth. Low interest loans, increasing access to foreign exchange, and other incentives have contributed the massive influx in the number of FDI's in Malaysia.


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