This article first appeared in Forum, The Edge Malaysia Weekly on April 22, 2019 - April 28, 2019

From China to Singapore, foreign direct investment (FDI) has shown itself a strong force in economic development. Along with infusing a domestic economy with capital, FDI can provide access to overseas markets, technology and expertise. To reap these benefits, Malaysia could consider re-examining its approach to overseas investors.

Based on the UNCTAD World Investment Report, FDI growth into Malaysia over the past decade has been weaker compared with that of its many neighbours. FDI growth into Singapore grew at about 18% a year since 2008, reaching US$62 billion in 2017; Indonesia, at 9% a year, reaching US$23 billion; and Vietnam at 4% a year, reaching US$14 billion. Meanwhile, foreign investment into Malaysia during the period grew just 3% annually, reaching US$9.5 billion. Recently released figures from the Department of Statistics Malaysia indicate that FDI decelerated to US$8 billion last year, however, we see promising signs in the increase in approved investments more recently.

Undoubtedly, trends such as the slowing global FDI flows and greater global uncertainty play a role in Malaysia’s poor growth rate. But the country’s relative performance compared with other Southeast Asian countries suggests intrinsic challenges that should be addressed if it is to compete more effectively for investment inflows.

Bank Negara Malaysia has outlined several fundamental concerns surrounding the country’s traditional approach to FDI. The central bank’s 2017 annual report highlighted indications that the net economic benefits of FDI to Malaysia may be diminishing, particularly in light of slower growth of domestic content in exports and lower research and development spending by foreign firms in the country.

The central bank added that the effectiveness of Malaysia’s policies to attract foreign investment is unclear. Broad-based investment incentives represent up to 9% of total tax revenue, yet a mismatch appears to be developing between the investments the country is receiving and industries it has targeted for growth. For example, FDI in the real estate and construction sector has tripled in terms of share between 2010 and 2017. However, these investments are channelled mainly to the higher-end segment, with limited spillover effects into the broader economy.

FDI should be encouraged for prospective investments that deepen linkages in the domestic supply chain and build new growth clusters. Targeted investments should, for instance, help create high-skilled jobs and expand knowledge transfer and product sophistication.

Drawing from observations and studies in economic development and FDI globally, McKinsey’s experience and research suggest four promising policy imperatives that could be powerful in accelerating FDI growth and capturing greater benefits for Malaysia:

(i) Reassess FDI strategy and priority sectors. The government could rethink its FDI strategy and chart a deliberate path for long-term benefits. The strategy should focus on sectors with strong growth and employment prospects that exploit Malaysia’s natural strengths and promise demonstrable economic benefits, such as technological adoption. Singapore’s evolving yet explicit focus over the past decades is an example of how this strategy can be set, executed and refreshed over time; export-oriented industries in the 1970s, technology intensive manufacturing in the 1980s, knowledge-based manufacturing and services in the 1990s and pivoting to innovation-driven enterprises now.

(ii) Build unique deal-focused value propositions. Companies invest in “deals”, not in countries. Beyond typical incentives, the government should present a strong value proposition to targeted investors. The proposition needs to include infrastructure and access to readily available talent and supply chain ecosystems that meet with the investor’s specific requirements. Essentially, each investment prospect should be treated as a deal, with concessions tailored to the targeted investor’s needs. This does not mean a higher quantum of incentives, instead, it means taking a long-term view in designing incentives in a way that ensures the long-term benefits largely compensate for the cost and impact of profit repatriation.

(iii) Focus investment promotion activities. A more proactive approach can increase the impact of agencies tasked with promoting FDI. High-calibre officers at these agencies must be able to build and maintain a list of targeted investors, monitor relevant sectors and gather the intelligence needed to understand when and how to approach individual companies. Agencies must also foster clear ownership and accountability for attracting targeted companies. In practice, shifting to much more of a “B2B sales approach”.

(iv) Ensure end-to-end support for committed investments. Globally, more than half of approved investment projects are abandoned, and this tendency is likely echoed in Malaysia. To help bring more investment plans to fruition, it is important to provide support throughout the project. End-to-end support would include investor relationship management, help in navigating regulatory procedures and assistance in securing land, among other activities. In addition, unsuccessful deals should be routinely analysed to understand how they were derailed and how to mitigate problems.

Countries are competing for a finite pool of foreign investment. In recent years, Malaysia has been struggling amid this crowd as it sought to boost FDI growth. A new supply-

focused policy framework that provides tailored support for targeted companies and sectors can help lift the country above this crowd.

Ee Huei Koh is a partner, Kenneth Koh is a consultant and Nimal Manuel is the managing partner at McKinsey, based in Kuala Lumpur

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