Are we losing our charm with foreign investors?

One of the major problems with foreign direct investment is not whether the government is doing enough to lure investors into the country but the uncertainty surrounding the amount of investments expected to flow into the global economy.

Global foreign direct investment (FDI) in 2009 has fallen to US$1 trillion (RM3.39 trillion) as compared to the US$1.7 trillion (RM5.76 trillion) recorded in 2008 and US$1.8 trillion (RM6.10 trillion) in 2007 according to the UN Conference Trade and Development report published by the Global and Regional Trends in 2009.

FDI inflows to South and South East Asia have fallen by 32.1 per cent. Almost every Asean country recorded a sharp decline on its year-to-end change of FDI with Singapore leading the pact at -27.7 per cent followed by Malaysia with -12.9 per cent and Thailand -12.5 per cent.

Last year, Indonesia's foreign investment stood at US$10.8 billion (RM36.61 billion), Vietnam at US$9.8 (RM33.22 billion) and Malaysia's first three quarters stood at US$3.6 billion (RM12.20 billion), a pale comparison to the US$22.1 billion (RM74.91 billion) recorded in 2008.

Nonetheless, optimism on the region remains high. Goldman Sachs has recently announced its long-term growth projection of Asian economies, excluding Japan, at 7.25 per cent per year over the next 10 years - reaffirming Asia's status as the fastest growing region in the world.

Malaysia's economy remains fundamentally strong but not vigorous. Malaysia's export for the month of December 2009 grew by double digit, the highest since 2008.

There seems to be an increasing foreign participation in Malaysia's capital market and real GDP growth is expected to rebound by 4.5 per cent this year, driven mostly by an increase in consumer spending, recovering exports and a broad-scale growth in all economic sectors.

Inflation remains low, fiscal positions are strong and overdependence on short-term capital inflows appears to have been reduced drastically, an apparent lesson from the 1997 Asian financial crisis. The government has succeeded to create a stable financial environment which is crucial to attract foreign investments.

Now what remains is to adopt the right policy to lure foreign investments. Given the declining volume of global investments, competition among Asean countries is expected to be extremely rigorous.

The rule of competition knows no limit with every economy vying for a slice of a shrinking cake. Vietnam and Indonesia have started to adopt serious measures by promising investors access to their natural resources, huge domestic market and low-cost labour.

Both countries have pledged to offer attractive financial concessions like free-tax status, cash grants and specific subsidies.

Malaysia, on the other hand, is focusing on trying to improve its infrastructure by reducing administrative and bureaucratic red tapes.

But are the recent measures in Malaysia enough to lure investors into putting their money in the country?

Malaysia should be judged on its own merits based on its economic strength and the government's pro-business stance towards industrial development. The demands have changed and so does Malaysia's economic strength that is now blessed with better-educated workforce and improved infrastructure.

It is time for Malaysia to re-strategise itself by moving away from an economy that offers low operational cost and cheap labour, and begin harnessing its strength by embracing the values of enhancing high labour productivity to accommodate to the needs of high-value added sectors. Attracting foreign firms to invest on these high value-added technologies requires a different set of needs and demands.

Production technologies should now be dissected to identify phases in which Malaysia can offer its best expertise based on its quality of workforce rather than competing against countries with low-cost labour.

In addition, the rise of globalisation has added an increasing pressure for Malaysia to develop world-class communication technologies and logistics administration to facilitate the exports needs of foreign investors.

To gain a more competitive advantage, there is a need to set a high benchmark aimed at increasing the country's investment potential.

For example, one of the most worrying trends is the increasing government deficit that stood at an estimated 7.9 per cent in 2009.

Malaysia had suffered 11 years of continued deficit that is until last year when it unveiled several measures to trim the operating expenditures and widened its revenue based.

For the first time in more than a decade, the government has set a benchmark of reducing the deficit to 5.6 per cent in 2010.

Similarly, benchmarks can also be set for other figures such as inflation rates, GDP-by-sector growth, productivity level output and monthly export performance.

Reduction in budget deficit and setting benchmark figures, however, are not the only factors that will appeal to foreign investors.

Other actions such as liberalising the economy through gradual market reforms, a well-regulated banking system, quality workforce to fulfill the growth of selected sectors and access to domestic markets are all the basic recipes needed to sustain the country's competitiveness and foreign investments appeal.

The ultimate attraction whether foreign investors will choose Malaysia as their choice of investment lays with the policy makers that shaped the investment climate of the country.

One of the most important prerequisites is to understand the rule of engaging these investors by establishing a high benchmark on all economic activities and engaging in long-term economic reforms. These are challenges that demand tough decisions which will eventually determine Malaysia's ability to sustain itself as one of Asia's favourite destination for foreign investors.

The writer is an associate professor with the Graduate School of Business at Universiti Sains Malaysia.

The opinions and views expressed in this column are those of the authors and not of the Universiti Sains Malaysia, the Graduate School of Business or the New Straits Times.