Foreign direct investment (FDI) occurs when a firm invests funds in business activities out of its country of origin. In order for a firm to become involved in FDI, three conditions of Dunning’s Eclectic Theory (1993); (1) ownership, that is a company possessing an advantage which gives them a competitive edge in the international market as compared to its domestic market, (2) location, where the country a company intends to invest in must have the right pull factors which will be in favour of the investing company, and (3) internalisation, that is transferring the company’s ownership advantage is more beneficial than selling it off, must be satisfied. Emerging countries focus and rely heavily on FDI as it is a vital element which assists in boosting the country’s development and economic growth. Like other developing countries, Malaysia too depended on FDI and benefitted greatly from the strong inflow (Shahrudin, Yusof, & Satar, 2010) and transformed from an agriculture-based economy to an industrial economy (Wong, 2005). Despite being an attractive FDI destination, as well as an eminent host country to foreign investors, Malaysia has seen an 11% decline in FDI inflow (U.N. Conference on Trade and Development, 2015). A country’s rise or fall in FDI is affected by several determinants such as the market factor, trade barriers, costs, and investment climate (Hill, Cronk, & Wickramasekera, 2014). This essay will serve to discuss both domestic and global factors influencing Malaysia’s decreasing FDI inflow during 2014 and 2015, followed by a firm exiting the country due to domestic factors affecting its performance, and lastly, a conclusion to summarize the main points and supporting arguments. First and foremost, a country’s political stability is an important factor to assess when deciding which country to invest in. According to Azzimonti and Sarte (2007), investments in a politically unstable country become less attractive as expropriation is more likely to occur, thus, its stability must be highly prioritised (Z. Karim, Zaidi, Ismail, & B. Karim, 2011). Malaysia has consistently been an attractive destination for foreign investors as measures to ensure they are protected against expropriation have been taken (Economic Transformation Programme, n.d.), however, the current issue regarding Malaysia’s prime minister, Najib Razak, being involved in the 1 Malaysia Development Berhad (1MDB) scandal has raised concerns in foreign investors as 1MDB was set up by the government to foster strategic global partnerships and promote FDI in Malaysia (1MDB, n.d.). The changing of the chief prosecutor, who was leading the investigation on corruption allegations involving the prime minster and 1MDB, as well as the removal of the deputy prime minister and other ministers, who raised questions regarding the investigation, have further increased worries in the country’s political stability (Malay Mail Online, 2015). Due to the domestic political issue, foreign investors’ receptiveness towards Malaysian assets has been tainted and they remain doubtful even though it is cheap to invest in Malaysia (Shaffer, 2015). As most of these investors rely on their local partners’ or agents’ political associates, this has definitely dampened their confidence on the government’s capabilities to govern efficiently (Zino, 2015). According to Chen (2015), 1MDB’s credentials and transparency drew criticisms resulting in foreign investors removing funds and the Malaysian stocks being sold at the fastest rate in any Asian economy by foreign investors. A country with low cost of labour also plays a role in influencing a foreign investors’ decision on an investment location as it reduces operating costs (Vestring, Rouse, Reinert, & Varma, 2005). Malaysia, predominantly an agriculture economy, was highly attractive for its low labour cost, however, the country’s determination to position its attractiveness as a more high-technology country would create more highly-skilled job opportunities which then results in an increased cost of labour. This transformation affected Malaysia’s FDI, causing it to drop by 17.4% (Malaysian Investment Development Authority (MIDA), 2013). Minimum wage was increased to RM900 per month (Fong, 2014) and a new policy in the cost of foreign labour with the aim of encouraging local employment and the usage of technology (Sukumaran, 2015) was implemented. The annual income of each individual foreign labour is estimated to increase by 11 to 25% (The Star Online, 2016) and this would cause existing foreign investors to relocate their production factories, while potential investors would look into countries with more low-skilled workers such as Myanmar, Vietnam and Cambodia. The amount of FDI flowing into and out of a country is also influenced by the fluctuation of currencies. Udomkerdmongkol, Görg, & Morrisey (2006) found that an unstable exchange rate as well as the expectation in the depreciation of local currency reduces the inflow of FDI. Malaysia, whose one-thirds of income derives from oil revenue, was greatly impacted in end-2014 by the constant drop in oil price (Shanghai Daily, 2015). The strong interconnection between ringgit and price of Brent crude, which plummeted unexpectedly, caused the ringgit value to depreciate significantly, at RM4.46 per USD (Hill, 2015), putting it amongst the worst-performing currencies worldwide (Liau, 2015). During an interview with BERNAMA, the governor of Malaysia’s central bank, Tan Sri Dato’ Sri Dr. Zeti Akhtar Aziz, stated that a country with a depreciating currency would have to bear an increase in their foreign debts (Bank Negara Malaysia, 2001). As at end-2015, Malaysia had an increase in external debt by 11.53% as compared to its previous end year (The Star Online, 2015) as approximately 60% of the foreign debt was denominated in foreign currencies (The Sun Daily, 2015). The increase in external debts would negatively impact foreign investors’ perceptions on the country’s economic prospect, decreasing any potential investment activity (Ostadi, & Ashja, 2014). Furthermore, an expected increase of government debt, to its highest level since 1992, at 56% of GDP (Shaffer, 2016), would raise doubts in foreign investors on Malaysia’s ability in carrying out its obligations, and also depletes the country’s attractiveness as inflation rate will soar due to huge debt (The Borneo Post Online, 2015). The unpleasant economy outlook of the country has caused foreign funds to be withdrawn (Chi, 2015) as foreign investors have a substantial amount of share in government bonds (Kok, 2015) and the weak ringgit reduces the repatriation of funds back to their home countries. To overcome this issue, the government implemented a Goods and Services Tax (GST) of 6% on all goods as an extra source of income to the country (Malaysia Goods & Services Tax, 2013), however, it caused consumers to be more cautious on their spending, and resulting in businesses having more difficulties in generating profits (Wong, 2015). Since the 1990s, offering tax incentives has become a common approach to attract more FDI into their country (Li, 2006). Direct and indirect tax incentives are provided for value-adding sectors, especially for those in the manufacturing sector, by the Malaysian government in order to increase FDI inflow (MIDA, n.d.). Foreign subsidiaries companies in Malaysia, where the management and control is exercised in the country, however, are subjected to the corporate income tax of 25% (PrincewaterhouseCoopers, 2015). British American Tobacco (BAT) Malaysia, a subsidiary of its parent company in Europe, is fully operated in Malaysia. Being taxed at a rate of 25%, as well as the highly induced tax on tobacco, which is a strategy taken by the Malaysian government to reduce consumption of cigarettes, together with the implementation of GST, BAT had no choice but to increase its price and suffered a huge loss in revenue putting the company among the worst performers in the stock market (New Straits Time Online, 2016). TA Securities Holdings Bhd’s research unit found that BAT’s domestic volume decreased by 121million sticks per year on average, for every one sen increase per stick, concluding that the challenging atmosphere has limited BAT’s earnings (The Borneo Post, 2016). According to British American Tobacco (n.d.), implementing steep taxes on tobacco does not decrease cigarette consumption as consumers merely look for cheaper alternative, and that is to purchase illegal cigarettes from the black market. This resulted in BAT experiencing huge losses of revenue. Its factory in Petaling Jaya, Malaysia would be shut down in a restructuring of business operations due to the increasingly competitive business situation (The Sun Daily, 2016) while tobacco products from other BAT regional factories would be obtained for the Malaysian market (BAT Malaysia, 2016). Perry (2000) noted that investors from Western countries place more importance in legislations as compared to those from Asian countries, and therefore, it is essential for countries, especially Asian nations, to enforce and uphold their laws in order to attract more foreign investors. A recent study also found that a country with common law jurisdictions will be able to attract more foreign investors as it provides more efficient regulations and treaty enforcements (Lee, Biglaiser, & Staats, 2014). Malaysia’s legal system is primarily based on the common law as a result of the country being conquered by the British. Ross (2015), however, found that the country’s legal system is weak due to the lack of enforcements and high corruption, where Malaysian custom officials are frequently found to be associated in the smuggling of illicit substances into the country. The weak legislation caused further damage to BAT’s sales revenue (The Star Online, 2015). Illegal cigarettes in the market rose to 45.6% as a result of the steep increase in price of cigarettes (Malay Mail Online, 2016), jeopardising the sale of cigarette brands by BAT (Palansamy, 2016) and making Malaysia the 2nd largest illicit cigarette market in Asia (Japan Tobacco Inc Malaysia, 2014). Besides that, the Malaysian government is also in consideration of introducing a standard packaging for tobacco products as an additional method to reduce cigarette consumptions but by doing so, the government would risk violating the agreed terms in the international treaties (Malay Mail Online, 2016). According to BAT’s thoughts on the issue, generic packaging would be denying the company’s product attribute, which consumers look for during purchase, which is their trademark (BAT, n.d.). Moreover, frequent alterations in the legal system show the Malaysian government’s inconsistency in upholding their laws, and this would shun the country’s attractiveness as a FDI destination. In conclusion, FDI decrease or increase in a country is affected by both domestic and global issues. From the findings above, it is clear that amongst economies worldwide, Malaysia was affected the most, with its ringgit being the worst currency performer due to the steep drop in oil price, which was one of the country’s largest sources of income. With regards to the domestic issues affecting FDI in Malaysia, the unstable political condition caused by the 1MDB scandal involving Malaysia’s prime minister, and the high cost of labour due to the country’s transformation into a high-technology country also played a significant part in decreasing the FDI inflow. These factors toughened the business environment for firms operating in Malaysia, causing them to exit the country in order to prevent any additional losses. BAT, a renowned firm in Malaysia, is amongst the exiting firms due to huge losses in revenue caused by the combination of high corporate tax, tobacco tax, and GST imposed by the government, as well as the market-dominating illegal cigarettes as a result of weak legislations.
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