Fdi Decrease In Malaysia Essay

3439 words - 14 pages

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 ...view middle of the document...

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...

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