Not all states are benefiting from FDI

Efforts must be made to woo investment to states that are lagging behind, including those under Perikatan Nasional.

Murray Hunter

There is a major imbalance in direct investment in Malaysia and, if not addressed, can lead to a similar disparity in development.

Penang, Kuala Lumpur and to a lesser extent Kedah are soaking up most of the foreign direct investments (FDIs) but Sabah and Sarawak are not doing as well in that area.

Pahang, Melaka, Kelantan and Perlis, too, have failed to attract substantial FDI.

On assuming office, Prime Minister Anwar Ibrahim heralded a drive for more FDI as the government’s priority and, within the first six months, announced that he had secured no less than a RM170 billion investment pledge from companies in China during a visit there.

Similar announcements were made after further trips abroad. For instance, he said he had clinched RM45.5 billion in investment commitments from German companies during a trip there in March.

Anwar publicised his discussions with Elon Musk about Telsa EV investing in Malaysia and other government leaders also spoke about investments worth billions coming in from Amazon, Google and Microsoft.

According to the Malaysian Industrial Development Authority (Mida), committed foreign direct investment in 2023 was 6% higher than in 2022.

A total of RM188.365 billion was committed in 2023, up from RM163.335 billion in 2022. Given the depreciation of the ringgit over 2022-2023, and inflation, there really isn’t much difference.

However, there are some success stories here.

Penang recorded a massive increase in committed FDI from RM10.157 billion in 2022 to RM61.665 billion in 2023.

Other states that saw equally significant uptrends over the same period were Kuala Lumpur, from RM9.635 billion to RM30.559 billion and Kedah, from RM11.147 billion to RM31.002 billion.

Increases were also seen in Terengganu (RM28 million to RM2.907 billion) and Pahang (RM31.3 million to RM888 million).

This is great. It shows that these states are performing well.

With the exception of Pahang, increases in FDIs in these states are matched with corresponding rises in domestic investments.

On aggregate, domestic investment in Malaysia accounted for 44.1% of total investment in industries, balancing out any over-reliance on foreign investment for growth.

That is healthy.

Success is only half the story

With the good news come some worrying aspects to Malaysia’s investment efforts.

From 2022 to 2023, committed FDIs to Selangor fell from RM33.030 billion to RM17.337 billion.

Similar drops were seen over the same period in Johor (RM58.786 billion to RM31.002 billion), Sarawak (RM12.398 billion to RM7.8 billion), Sabah (RM9.171 billion to RM132 million), Melaka (RM6.536 billion to RM2.767 billion) and Kelantan (RM918 million to almost zero).

While domestic investment in Perlis more than doubled to RM188 million over the two years, it failed to get any FDI.

Each state has its own issues with regards to investments.

For instance, Selangor almost never allows foreign contractors into its construction sector while Sarawak depends principally on state investment.

Domestic investment in Perak is rising but still not at a rate the government would hope for, while a RM1 billion increase in private investment has partly compensated for the drop in FDI in Melaka.

The substantial drop in domestic private investment in Sabah, Kelantan and Pahang should also be a cause for concern.

The Sarawak economy also appears to be slowing down. Domestic private investment in 2023 has declined by RM3 billion compared with the previous year.

All these states have a higher propensity for poverty than the national average.

What can be done?

Typically, in a developing country, investment is a means to alleviate poverty.

Malaysia offers generous incentives for industries such as aerospace, communications and semiconductors under its Industry 4.0 initiative.

This kind of focus will attract investments to the intended sectors but once critical mass has been achieved, the government will have to move on and design new and attractive investment packages for other areas.

There must also be a push for rural-based innovation through investment to help states that are lagging behind to catch up.

Sabah and Sarawak are strong in sustainable farming and so should focus on products from this area for export.

For example, fresh produce and seafood can be air freighted daily from the two states to China.

This will require government-to-government support for an air-link supply chain.

The ministry of international trade and investment must resume efforts to organise focused trade missions for SMEs from states that are lagging behind to enable entrepreneurs to visit rural regions in other countries to woo investment to rural areas in Malaysia.

The federal government can even engage the SG4, the bloc comprising the four Perikatan Nasional states of Perlis, Kedah, Kelantan and Terengganu, to assist them in organising such missions if political differences can be set aside.

Such rural transformation must be supported by agro- and rural-based technical and vocational-based education and training in the targeted areas.

The government has the next budget and coming five-year plan to do this.

The recent announcement by the finance ministry that was at 76.1 billion in Q1 2024 gives some optimism for the rest of the year, although other indicators are not so positive.

We must always look deeper into the figures to see the real situation, and find other potential investment seeking strategies.