Academic journal article Journal of Southeast Asian Economies

Outward Foreign Direct Investment from Malaysia

Academic journal article Journal of Southeast Asian Economies

Outward Foreign Direct Investment from Malaysia

Article excerpt

1. Introduction

Outward foreign direct investment (OFDI) from developing countries has progressively attracted research attention due to its increasing share in world outward flows. According to UNCTAD (2006a), only six developing and transition economies reported outward stocks of more than US$5 billion in 1990. By 2005, twenty-five developing and transition economies have exceeded that threshold, while contributing to 17 per cent of world outward flows. Malaysia is one of the contributors to this phenomenon. In 1980, Malaysia was ranked eleven in the top fifteen developing and transition economies in terms of stocks of OFDI, but it moved up to the tenth position by 2013 (UNCTADSTAT 2014). OFDI in terms of flows surpassed inward flows after 2007 and Malaysia became a net capital exporter.

These changes inevitably lead to comparisons between OFDI from developed and developing economies. Based on the investment development path (IDP) theory, there are five stages of development whereby a country transits from being a net recipient of investment flows to becoming a net source of foreign direct investment (FDI). The first stage is characterized by little inflows and outflows as the country may not have acquired the necessary location-specific advantages to attract inflows, except for given endowments such as natural resources. The firms in the country are also at a nascent stage of development and therefore do not have as yet the firm-specific advantages and resources for investing abroad. In the second stage, inflows start to emerge with the development of location-specific advantages such as increases in per capita income. By the third stage, however, inward flows may start to decline due to erosion of some location-specific advantages such as low labour costs and the increasing competitiveness of local firms as they move up their learning path and acquire firm-specific advantages. Outward stock of FDI may equal or exceed inward stock by the fourth stage, while in the fifth stage, the net investment position hovers around zero with inward and outward stocks tending to be of the same magnitude. The increasing importance of OFDI from developing and transition economies, however, seems to deviate from the IDP theory in that transnationals in developing countries appear to be investing overseas at an earlier stage than the pattern outlined in the IDP theory. This in turn is attributed to the development of certain unique advantages of firms from developing countries such as expertise and technology, access to resources and activities and production and service capabilities (UNCTAD 2006a).

Given the importance of Malaysia as a supplier of OFDI, this paper seeks to examine the pattern of OFDI from the country, key motivations and some of its impact. The pattern of OFDI and some of its known impact is discussed in section 2 while the main drivers are identified in section 3. The conclusion in section 4 provides the key findings of this paper and discusses some policy implications.

2. Pattern of OFDI from Malaysia

The overall pattern of OFDI from Malaysia indicates increasing participation in global outflows of FDI, especially to Southeast Asia. Malaysia's share as a percentage of total OFDI in Southeast Asia increased from 8 per cent in 1990 to 19 per cent in 2013 (UNCTADSTAT 2014). In fact, Malaysia is the second most active investor in Southeast Asia, after Singapore.

Figure 1 indicates that in terms of flows, OFDI increased perceptibly from 2004 to 2008. The sudden jump in 2004 is attributed to the increasing importance of Labuan as a destination country. Since Labuan is an offshore financial centre, there is no data to indicate whether Labuan is the "ultimate" destination of these capital flows (Tham 2007). As offshore financial centres are also major sources of FDI, there may be "round-trip" capital involved, or capital that flows into Labuan and back again to Malaysia as FDI inflows. …

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