Outward Foreign Direct Investment: The Malaysian

Experience

Emeritus Prof. Dr. Mohamed Ariff

and Greg Lopez

Malaysian Institute of Economic Research

MIER 2

Presentation Outline

• Key OFDI Trends

• Key Factors– Push Factors– Pull Factors – Strategic Reasons

• Conclusion

MIER 3

OFDI as a % of South, East and SE. Asia Total FDI Stock

1

20

38

64

56

90

66

50

4 5 4 5

1317

9

12

12

11

21

1 7

4 6

13

0

10

20

30

40

50

60

70

80

90

1980 1985 1990 1995 2000 2005

Hong Kong Taiwan Malaysia Singapore

Source: UNCTAD

MIER 4

OFDI as % of GDP

1

56

235

265

42

61

94

612

2534

7

1619

2822

16

2131

7

21

541

0

50

100

150

200

250

1980 1985 1990 1995 2000 2005

Hong Kong Taiwan Singapore Malaysia

Source: UNCTAD

MIER 5

OFDI Flows 1980 - 1992

201

293

260

226

242

210

249

214

198

273

129

175

115

100

150

200

250

300

350

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Source: UNCTAD

US million

MIER 6

OFDI Flows 1993 - 2005

1,063

2,3292,488

3,768

2,675

863

1,422

2,026

267

1,905

1,370

2,061

2,971

100

600

1,100

1,600

2,100

2,600

3,100

3,600

4,100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: UNCTAD

US million

MIER 7

OFDI - Top Ten Locations (1993 -2005)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Labu

an IO

FC USA

Sing

apor

e

Indo

nesi

a

UK

Hon

g K

ong,

SAR

Cay

men

Isla

nds

Bel

gium

Chi

na, P

R

Net

herl

ands

Mau

ritiu

s

Source: BNM, various years

RM million

MIER 8

Trends - Destination (1999 - 2005)

ASEAN - ex Singapore

13%

Other Asia4%

Industrialised countries

34%

IOFC26%

Asian NIEs18%

African countries5%

Source: BNM 2006

MIER 9

Trends - Sectors

Manufacturing30%

Oil and Gas19%

Agriculture5%

Others (mainly construction)

3%

Services43%

Source: BNM 2006

MIER 10

Trends - Investment Type

• Malaysian controlled companies (GLCs & RCCs) - 61% of OFDI (1999 - 2005)

• Mainly through equity & joint ventures

• Funded internally (62%)

MIER 11

Trends - Investment Type

• OFDI by NRCCs - 39% (1999 - 2005)

• NRCCs investment were essentially extension of inter - company loans to related companies abroad (91%)

MIER 12

Structural Push Factors

• Economic growth - RGDP grew at 6.5% on average from 1957 - 2005

• GDP per capita (at current prices) grew on average at 7.0% (1957 - 2005)

• Gross domestic savings increased from 29% of GDP in 1981 to 43% in 2005.

MIER 13

Push Factors - Tight Labour Market

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Nambiar 2007

Unemployment

MIER 14

Push Factors - Private Sector Development

• No. of listed companies on the MSE grew at an average of 5.6% per annum (1981 - 2001).

• KLCI grew at an average of 3.1% per annum (1981 - 2001)

• Prior to crisis, MSE was the 4th largest in Asia (market capitalisation)

MIER 15

Cyclical Push Factor

• Recession of 1985 and Financial Crisis of 1998

• Market saturation in certain sectors

MIER 16

Institutional Push Factors

• Government policies

– Economic Nationalism and affirmative action (1970 - 1980s)

– Tax exemption, tax incentives & special funds (1991 - present)

MIER 17

Key Determinants • Rising cost of labour especially in

relation to the cost of labour in the region

• Wealth accumulation (individuals & companies)

• Raise capital cheaply in the MSE

MIER 18

Structural Pull Factors• Low cost of factor (labour, raw material)

prices in the region (labour intensive companies - manufacturing & textiles);

• Markets;

• Resource seeking (PETRONAS, plantation companies

MIER 19

Institutional Pull Factors

• Investment and Trade Agreements– Investment Guarantee Agreements;– ASEAN Free Trade Agreement;– The WTO Agreement;

• Institutions– MIDA, MATRADE and EXIM Bank– MASSA & MASSCORP

MIER 20

Strategic Pull Reasons

• South - south co-operation– Diversifying markets (moving away from

the U.S., E.U. and Japan)

• Access to resources (oil & gas)

MIER 21

Findings• No conclusion can be made as the nature of the

study is limited• Two trends can be identified

– State led– NRCCs (inter - company loans)

• State involvement in OFDI significant– GLCs are significant players– Other push and pull factors similar to general reasons

for OFDI

• More in depth research using firm level data is needed.