MALAYSIA CONCERNED ABOUT FOREIGN DIRECT INVESTMENT TRENDS

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001641

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TAGS: ECON EFIN EINV MY
SUBJECT: MALAYSIA CONCERNED ABOUT FOREIGN DIRECT INVESTMENT TRENDS



1. (U) Summary: Malaysia's foreign direct investment flows rose
rapidly in 2006, according to the UN Conference on Trade and
Development (UNCTAD) World Investment Report 2007. However, while a
52.8% increase in inward FDI flows reversed a declining trend over
the past five years, the bigger news was that FDI outflows rose by
over 100 percent. Following this very rapid rise in 2006 FDI
outflows, Malaysia's inward and outward FDI flows were roughly in
balance at about USD 6 billion each. If this trend continues,
Malaysia will be facing net FDI outflows going forward. Not
surprisingly, while the GOM publicly cites Malaysian FDI abroad as
proof of success, it privately is carrying out a number of studies
to see what can be done to improve Malaysia's ability to attract
FDI. If Malaysia is already experiencing capital flight as some
private sector analysts argue, the GOM's efforts to address the
problem could be a catalyst for reform.

THE GOVERNMENT'S VISION FOR THE ECONOMY
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2. (U) As a destination for FDI, Malaysia's attractiveness is
narrowing as the country becomes less competitive for lower-wage
manufacturing. In response, the GOM is seeking to move the economy
"up the value chain" by promoting specific sectors. In its
2006-2020 Third Industrial Master Plan, the GOM identified specific
higher-tech industries it wanted to attract and develop. In the
manufacturing sector, these include electrical & electronics;
medical devices; textiles & apparel; machinery & equipment; metals;
and transportation equipment. Investors in targeted industries
often can negotiate favorable terms with the GOM; investors in
non-targeted industries tend to face more bureaucratic obstacles.
Also targeted for growth were a number of resource-based industries
and some services sub-sectors; however, the extent to which foreign
investors are allowed to participate in these sectors is limited.

FDI INFLOWS REBOUND IN 2006
--------------


3. (U) In October, the UN Conference on Trade and Development
(UNCTAD) reported that FDI to Malaysia increased by 52.8% after a
14.5% decrease in 2005. Inflows during 2006 restored total inward
FDI stock to 1.6% above its 2000 level after having dropped off
measurably by 2005. Malaysia retained its 2005 global rank of 62nd
largest destination for FDI, keeping apace with a sharp global
increase, but nowhere close to its status a decade ago when it
ranked sixth in 1995.

OUTFLOWS DOUBLE: BUSINESS ACUMEN OR CAPITAL FLIGHT?
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4. (U) Outward flows of FDI more than doubled in 2006 TO USD 6.04
billion -- nearly equal to Malaysia's inward flows of USD 6.06
billion. The Prime Minister claims that this is a testament to the
competitiveness of Malaysian businesses as they expand operations
throughout the region. In fact, the GOM encourages companies to go
offshore and has directed some of its state-owned companies to do
so. Telekom Malaysia purchased businesses in India, Sri Lanka,
Indonesia and Cambodia. CIMB, a Malaysian bank, is purchasing
offshore banks throughout the region. Petronas is expanding rapidly
across the globe as Malaysia's oil reserves begin to taper off.

GOM COMMISSIONS STUDIES
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5. (U) While the Government publicly claims the outflows as a
success story, behind the scenes they are looking into the matter
more closely. Earlier this year, the GOM commissioned the Economic
Research arm of Rating Agency of Malaysia (RAM) to conduct the
study, "The Changes and Determinants of Foreign Direct Investment in
Malaysia." The Study included industry feedback and recommendations
for improving the business climate.


6. (U) In addition, the Economic Planning Unit (EPU),which reports
to the Prime Minister, is actively soliciting feedback from the
business community on what the GOM needs to do to attract foreign
direct investment and promote a vibrant business sector. On
November 15 the EPU sent letters to businesses explaining that they
had hired an independent consultant to conduct a market audit that
would examine current perceptions of Malaysia as a destination for
business and investment. The letter requested input and feedback in
a confidential one-on-one interview on the advantages and
disadvantages of doing business in Malaysia, its livability, and
recommendations for enhancing Malaysia's business competitiveness.


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7. (U) Private sector analysts take a decidedly less enthusiastic
view of the surge in outward flows. They attribute a significant
amount of it to the capital flight of disillusioned ethnic
minorities who feel they are gradually being squeezed out by
Malaysia's racial preference policies and to the frustration of
businesses looking for less restricted markets.

COMMENT
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8. (U) Comment: The Prime Minister has been pushing state-owned
entities to expand overseas in an effort to force them to become
more competitive, even while he maintains the racial preference
policies that have made them reluctant to move offshore. At the
same time, capital flight as a factor driving the rapid rise in FDI
outflows cannot be denied. If Malaysia begins to experience
significant net FDI outflow in the coming years, it could be a
driver for greater domestic economic reform.

KEITH