Malaysian ambitions fade as investors turn away By Anil Netto

Concern is rising in Malaysia about a fall in foreign direct investment and negative perceptions about the country as investors turn increasingly to Northeast Asia, while other Southeast Asian nations such as Thailand and Singapore provide stiff competition.

Analysts have expressed worry about the slow pace of corporate reform in Malaysia and the penchant for mega-projects. Certain connected individuals and favored firms have been bailed out, often with public funds especially from the national petroleum corporation, Petronas.

In surprisingly candid remarks earlier this week, Malaysian Deputy Prime Minister Abdullah Badawi admitted to shortcomings in the government's handling of the economy. Abdullah said he is aware that Malaysians, and not just the foreign media and foreign analysts, have criticized the government for continuing to protect those who blatantly mismanage their corporate empires and repeatedly cry for help. "The government may not be able to afford another round of rescues," said Abdullah.

During the boom era, in the heyday of privatization, Abdullah said reckless investment decisions were made and managerial incompetence was abundant. "It is a fact that both you and I know that the government engaged in many rescue operations during the crisis. More laissez-faire government would have allowed many of the companies to sink."

Foreign funds have also continued to stay away from the Kuala Lumpur Stock Exchange. Many analysts blame the lack of interest in the local bourse on the 10 percent levy on the repatriation of profits and the administrative hassle it entails.

But that does not explain the fall in foreign direct investment in the manufacturing sector. Approved FDI for the seven months to July 2000 was only 4.1 billion ringgit, which means Malaysia will be hard-pressed to match the 12.3 billion ringgit in FDI posted for the whole of last year. Approved FDI from the United States alone for the first seven months stood at 266 million ringgit, well off course from the 5.2 billion ringgit recorded for the whole of last year. Approved FDI in the electrical and electronics sector has slumped to only 1 billion ringgit compared to 5.9 billion ringgit for the whole of 1999.

So other factors besides capital controls are obviously deterring foreign investors. Often unmentioned is the perception that the political risk of investing in Malaysia has climbed a notch or two after the 15-year prison term imposed on ousted deputy premier Anwar Ibrahim, which prompted widespread criticism. Elaborate security precautions were in place during the Independence Day parade and festivities in Kuala Lumpur Thursday.

Concerns about the credibility of Malaysia's system of administration of justice could also be putting off investors. What's more, Prime Minister Mahathir Mohamad's frequent attacks against the West may have discouraged some investors who would rather take their money elsewhere.

"There still exist issues related to image, policy and enforcement which have not encouraged that beeline [by investors] to this country," said an item in couched language posted on the Malaysian International Chamber of Commerce's website. "For example, there is still a lack of consistency in projecting Malaysia's friendly image to foreign investors. There is a major concern over increasing violations of intellectual property rights which has to be seriously attended to if the Multimedia Super Corridor is to develop satisfactorily. Foreign investors have to feel comfortable with the legal environment. After-care service is as important as initial service to a foreign investor."

Endemic corruption, and a seeming inability to wipe it out, could also be keeping away investors, some of whom see it as an additional cost of doing business in the country. Last week, for instance, the Anti-Corruption Agency (ACA) broke a syndicate and arrested 21 people, including road transport department officers, driving school instructors and a doctor, for issuing driving licenses to 100,000 motorists without carrying out the necessary tests. The licenses were obtained by bribing road transport department officers. But a lack of independence appears to have hampered the ACA's efforts to nail bigger culprits. The agency comes under the Prime Minister's Department.

In June, the president of the Malaysian International Chamber of Commerce, Philip Dingle, urged individual companies that are members of the chamber to join and support Transparency International's Malaysian chapter in its efforts to curb corruption in both the public and private sectors. "This is an issue the chamber keeps on raising, as it is the perception of both large- and small-scale corruption that is hurting Malaysia's standing in the eyes of foreign investors," said Dingle.

More selfish motives may explain the drop in foreign investment in the electronics sector, the cornerstone of the Malaysian economy. Since the 1970s, multinational corporations have enjoyed pioneer status with huge tax breaks, low labor costs kept down by banning a national union for electronic workers, and subsidized amenities. Not content, the multinationals are asking for more, and a few have already relocated to other countries in the region.

Although the electronics industry is poised to grow by 22 percent annually over the next three years, new direct investment into the sector from the United States has completely dried up. Blue-chip foreign electronics giants already in Malaysia, however, have planned 7 billion ringgit worth of additional investment.

"Other countries have already matched the incentives provided by Malaysia - the competition is very stiff now," Teh Chin Bin, chairman of the Malaysia-American Electronics Industry, is quoted as saying.

Among the problems faced are pricing pressures, rising operating costs, the fast erosion of the low-end labor-intensive niche and rising negative perceptions. Nicholas Zefferys, president of the American Malaysian Chamber of Commerce, said: "The worldwide investment pool has shrunk somewhat in the past few years and it is getting more competitive nowadays to attract capital."

Although higher local investment has compensated for much of the drop in FDI, an official monitoring these investments says he is concerned about the "lack of quality" of some of them. Investments in the petroleum and gas sectors have also saved the day for Malaysia.

But despite gross capital investment for the first seven months to July 2000 of 12.1 billion ringgit being still on track to surpass last year's total of 17 billion ringgit, the drop in FDI remains a serious concern. Lower foreign interest in the country will jeopardize the transfer of technology, without which Malaysia's ambitions of charging into the Information Age and the ranks of developed nations will fade.