Malaysia’s economic sphere of influence has been constantly growing on the

world market and has attracted a lot of attention in the past years as a rapidly

developing country in a very dynamic region. This can be shown with the amount of

Foreign Direct Investments (FDI) Malaysia receives and has received throughout the

years even within a context of a worldwide recession and a global economic crisis.

Firstly, I will explain more in detail what an FDI is, the trend it has been following in

Malaysia and the way it has been growing on the time span of 1990 to 2010. Secondly,

I will mention the rate of growth in Malaysia’s economy by analyzing its Gross Domestic

Product and its economic growth in general and finally I will try to find a link between

this trend that FDIs are following in Malaysia and how the Malaysian society is evolving

in terms of transfer of technology, employment, income distribution and poverty and

environment.

A Foreign Direct Investment is an “overseas equity investment by a private

multinational corporations” according to Todaro and Smith’s Economic development.

Almost every country in the world has been known to emit FDIs as well as receive them.

Malaysia is no different, especially being in such a dynamic region, Southeast Asia , it

has attracted a lot of foreign businesses and continues to attract them as we will show

later on in the paper. The reason Malaysia attracts foreign firms is not only its cheap

labor and relatively abundant resources as the government also has a role to play in it.

For example, although a bit earlier than the time period we are analyzing, in 1986, the

Promotion of Investment Act, which introduced more “liberal incentives” for foreign firms

such as a “larger percentage of foreign equity ownership”,was promulgated. However,

like in every country there have been ups and downs in terms of how much Foreign

Direct Investments have been received and we can note that there has generally been

an increase in that time period in Malaysia. The time frame we have chosen shows two

periods which were marked especially by the Asian financial crisis. The first period sees

a big increase of FDIs received up until 1997. In 1995, Malaysia was ranked 6th largest

destination receiving FDIs according to UN data. This golden period however was

followed by a huge decrease in 1997 and then a slow recovery with another year in

which there was big decrease of FDIs in 2001. Lately however, Malaysia has seen yet

another rise in its FDI shares but once again, it has not been without its ups and

downs .For example, according to the Vale Columbia Center, there has been an

increase from 53 billion US dollars in 2000 to 75 billion US dollars in 2009, a huge sum

even if there has been a decrease in 2001 as well as in 2008. Similarly, in 2009, the FDI

stock decreased sharply because exports contracted sharply which led Malaysia to fall

out of the top ten FDI destinations in Asia. According to the Vale Columbia Center, this

is due to two main reasons. Firstly, FDIs have not been transferred to higher value

service sectors rather than the traditional industrial and manufacturing sectors. And

secondly, the competition among Asian countries in the region has increased and

intensified with the FDI stock in Malaysia growing less rapidly in Malaysia than in

Singapore, Indonesia or Thailand who, apart from Singapore, have also acquired the

status of developing nations. Another reason that can be invoked could be the fact that

as we have mentioned before, Malaysia has undergone an economic transformation

from a capital-intensive to a knowledge-based industry.

Of course, in Malaysia, manufacturing, services and industries in oil and gas are still the

ones receiving the most FDIs and in particular the manufacturing sector. The service

sector, however, only started gaining some importance recently and more and more

FDIs have been directed towards it in the period from 2006 to 2010, which shows the

change in the economic structure of Malaysia and the fact that it is developing clearly,

as all economies first start off with a more primary sector, agriculture, followed by a

secondary sector, industry, and then a tertiary sector which comprises all services.

In 2000, most FDI flows came mainly from North American economies, Japan, Germany

as well as Northeast Asia. The highest inflows were of course from the United States,

Japan, Germany and Hong Kong. A startling example of an FDI is also that of a Saudi

Arabian firm that acquired 25 % of the shares of Rashid Hussain Bank (RHB) in 2008,

an important purchase for a national bank. But there has been a big increase in FDIs

directed from one Asian country to another due to bilateral trade agreements such as

the bilateral free trade agreement with Pakistan that has been in effect officially since

around 2005 or the free trade agreement signed with New Zealand around the same

period.

The global financial crisis, although it did not affect Malaysia as much as it did other

countries in Asia still left its marks as there was still a huge decrease in FDIs and

Malaysia had to seek FDIs from other countries, such as countries in the Middle Eastern

region or the Asian giants: India and China, something it did not do fondly. Furthermore,

in order to ensure that FDIs would still be generated to the region, the Malaysian

economic board implemented two stimulus packages in 2009 and 2010 to make sure

that foreign firms would still see it as profitable to invest in Malaysia as they did in the

late 1980s after the Promotion of Investment Act.

In terms of growth, Malaysia has been pretty inconsistent in the time frame of

1990 to 2010. While the growth rate per year was usually around 5 %, it diminished

greatly in 1998, after the financial crisis, losing 15 percentage points in a year as the

GDP per capita growth rate in 1998 was recorded of - 10 %, a huge low for the

Malaysian economy which was usually growing very fast. Although, the Malaysian

economy recovered quickly to its normal state in 2000; in 2001, it reached yet another

low as the economy was once again in recession. Finally, it remained relatively stable

with a few increases in the annual growth rate until it reached yet another low in 2009

as an aftermath of the global economic crisis. However, the Malaysian economy, once

again, quickly recovered partly because of the stimulus packages implemented by the

government and partly because it was relatively less affected by the world crisis

because of it’s less integrated position in the world market at the time.

We can now ask ourselves if we can find a link between FDIs and the rate of growth

per capita and if one leads to the other or if it goes the other way round using data

we have acquired from the Worldbank databank. There are different theories as to

whether it is the FDIs that generate a country’s growth or if it is the contrary: when

a country has positive economic growth, it will give an incentive for foreign firms to

invest in a country. If we compare graph 1 and graph 2 that are in the appendix, we

can notice that they generally follow the same trend therefore making it appropriate

to say that a link definitely exists between FDI inflows in a country and its economic

growth. However, as is often the case in economics, different theories have claimed

different causality links. For example, neoclassical theorists such as those who follow

the Solow type growth model believe that it is the rise in FDIs that will induce a growth

in the economy. Nonetheless, according to the Solow model when a country has grown

enough, it will reach a steady state thereby making FDIs not as important as they could

be and placing as much importance in FDIs as in domestic investments. On the other

hand, in endogenous growth models such as the Romer model for instance, FDIs are

responsible for innovation within the production process as they are considered to be

highly important and therefore countries will change their technology and increase their

Research and Development costs in order to attract FDIs and ensure growth. Here

they see FDIs as having long-term benefits as technology spillovers will eventually be

reached.

One could say that the relationship between FDI and growth is a circular and positive

relationship being that once the Malaysian firms acquire FDIs, it will enhance economic

growth and the growth of the GDP per capita which will then further encourage other

foreign firms to invest in the Malaysian firms, therefore making it a virtuous cycle.

Similarly, once the economy starts receding, foreign firms fear that the economy is not

dynamic enough and stop investing, until the government takes over,as we have shown

before, and the economy starts growing again. Nonetheless, it is clear that FDIs had a

huge impact on the malaysian economy in terms of its diversification and has made the

manufacturing sector much more important in some sense than the agricultural sector

which was predominant in the Malaysian economy for a long while.

Now that we have established that there is a link between the FDI inflow and the

rate of growth that it has on the economy, one can analyze the effect it has on society in

terms of poverty alleviation, unemployment, the environment and income distribution. In

terms of poverty alleviation, one can note that the population below the poverty line has

steadily decreased in Malaysia in the period of 1990-2010, reaching only 3.8 % of the

total population in 2008 compared to 6.5 % in 1990 therefore making a decrease of

approximatively 60 %, and alleviating more than half of the population that was

considered under the poverty line.This was done by the creation of new jobs and

positions in firms in part as a result of FDIs. A correlation can therefore be established

between the rise of GDP per capita and the level of poverty as it has not ceased to

decrease in time.

In terms of unemployment, one can notice that unemployment has not been following

too much the growth rate of GDP or as a matter of fact the FDI inflows at the exception

0f 2001, where we had noted a decrease in FDI and an increase of unemployment of

1 percentage point, rising from 3 % of the total labor force being unemployed in 2000

to 4 % in 2001. It reached 3 % once again in 2006, before rising to 4 % yet again in

2009 as an aftermath of the global economic crisis. A link between unemployment and

FDI can therefore be made, yet it seems clear that the sharp decline in FDIs did not

necessarily have such a big impact on the labor force in Malaysia as although being a

very open economy, there is still a lot of internal investments within the nation; and the

government ensures a relatively good macroeconomic stability.

In terms of the income distribution, we can use the Gini coefficient as a way to measure

it. The way the Gini coefficient works is that the lower it is, the more equal the country

is. While in 1997, the Gini coefficient in Malaysia was of 49.2; it declined to 46.2 in

2009. Compared to other countries in the region such as Cambodia and even Thailand,

the fall was of the Gini Index was particularly important in Malaysia. Furthermore, in

Malaysia, contrary to other countries in the Southeast Asian region, the rate of increase

of the richest quintile did not exceed that of the lowest quintile.Inequality has therefore

decreased in Malaysia with the rise of GDP per capita and the increase of FDI inflows.

In terms of the link between environment, GDP and FDI, we can notice according to the

World Bank Data, that CO2 emissions have definitely increased: while in 1990, CO2

emissions from solid fuel consumption only constituted 10 % of the total CO2 emissions,

it started rising more significantly in 2003, where it reached 13 % , reaching an all- time high in 2004 with 21 %. Here we can notice that the big rise in the CO2 emissions

comes at the same time as the recovery from the drop in FDIs in 2001. In terms of

population density, the density has not ceased from increasing. While the population

density was of 54 people per square kilometre of land area. This greatly increased

as it reached 86 people per square kilometre of land area in 2010, something which

might not be good for sanitary reasons and might put a strain on the way resources are

used in the urban areas, even if the government has been adamant in providing all its

habitants the basic and necessary sanitary needs.

In conclusion therefore, we can say that FDIs have generally had a positive

effect on Malaysia’s population by alleviating poverty, increasing job opportunities and

reducing income inequality. Its effects on the environment in a country with such a

difficult climate remain to be seen. Nonetheless, it is clear that FDIs will continue to flow

in Malaysia and that the Malaysian economy will not cease from growing, gaining even

more influence in the area and maybe even receiving more FDIs than its Southeast

Asian counterparts.

APPENDIX

Graph 1: GDP per capita growth rate (1990-2010)

Source: databank.worldbank.org

Graph 2: FDI inflow in Malaysia

Source: databank.worldbank.org

Graph 3: Population below the poverty line

Source: http://www.indexmundi.com/g/g.aspx?c=my&v=69

Graph 4: Trends in income GIni indices in East and Southeast

Graph 5: Changes in Gini coefficients in Selected Asian economies, expenditure and

income distributions (1990s-2000s)

Graph 6: Changes in per capita expenditures, bottom and top quintils, (1990s-2000s)

Graph 7: CO2 emissions from solid fuel consumption (% of total) in Malaysia 1990-

Graph 8: Population density ( people per sq. km of land area)in Malaysia, 1990-

Graph 9: Foreign direct investment, net inflows (% of GDP) in Malaysia,1990-2010

Graph 10: Unemployment, total (% total labor force) in Malaysia, 1990-

Sources

http://www.vcc.columbia.edu/files/vale/documents/

Malaysia_IFDI_Profile_FINAL_FOR_WEBSITE.pdf

http://mpra.ub.uni-muenchen.de/14999/1/MPRA_paper_14999.pdf

http://databank.worldbank.org

https://www.cia.gov/library/publications/the-world-factbook/geos/my.html

http://www.indexmundi.com/malaysia/distribution_of_family_income_gini_index.html

http://hdr.undp.org/en/reports/global/hdr2010/papers/HDRP_2010_17.pdf

http://econ.upm.edu.my/iaeml/vol1no1/bab08.pdf