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"China’s Investment in Malaysian Manufacturing in 2017" by Tham Siew Yean

2018/41, 13 April 2018

Malaysian Investment Development Authority (MIDA) recently reported a total of RM197.1 billion of approved investments in the manufacturing, services and primary sectors for the year 2017. Foreign direct investments (FDI) contributed RM54.7 billion, or 27.8% of the total. China continued to be the top FDI source for the second year in a row. However, the value of China’s investments has dropped by 18.7% from RM4.8 billion in 2016 to RM3.9 billion in 2017. China's investments have also diversified to include non-metallic mineral products, transport equipment, rubber products and E&E products.

In what ways does this follow the trend of China’s outward investment? China’s outward non-financial investment in 2017 has reportedly fallen amidst greater government restrictions on “irrational” or speculative investments abroad. This has not restrained outward investment in manufacturing and the information sector. Empirical studies on China’s investment in Africa indicate an increasing number of profit-driven small and medium private enterprises in services and manufacturing. Increasing manufacturing costs, excess production capacity as well as growing pressures on environmental control in China will continue to support the outward movement of indigenous manufacturing firms, just as in previous waves of outward investment from other North-East Asian countries. Choosing Malaysia as a host economy is aided by the relative openness of the country’s manufacturing sector, ease of doing business, good infrastructure, fiscal incentives as well as socio-cultural proximity with bilingual or trilingual Malaysian-Chinese workers.

However, what are the implications on Malaysia’s economic development? Malaysia’s manufacturing development has been on the decline since 2000, as measured by the respective share of manufacturing in the country’s GDP and employment. In addition, the inability of the manufacturing sector to further deepen its development is related to the country’s struggle to develop a talent pool that can support an innovation-based manufacturing development. This in turn can be attributed to the politicization of the education sector, continued use of low-skilled foreign workers coupled with the migration of skilled workers to greener pastures outside the country. Malaysia is therefore unable to make the leap towards the level of manufacturing development as seen in North-East Asia, including China. Government policies tacitly recognise this failure under the guise of a shift towards a service-led economy as the latter is supposedly more befitting for the stage of development of an upper middle income country like Malaysia. It is telling that the shift to services has not produced export competitive services as Malaysia’s exports continue to depend on commodities and manufactured goods.

China’s investments are in the low and medium-technology manufacturing sub-sectors, which make use of the availability of land and labour in Malaysia. Projected employment gains may not materialize for the Malaysian-born, given the current employment pattern in the manufacturing sector and flexible foreign workers’ policy. Technology-transfer depends greatly on the absorptive capacity of the locals. It would therefore appear that these investments will at best stall a further shrinking of the manufacturing sector but they will not facilitate a shift towards a more innovation-based economy. More importantly, some of China’s manufacturing investments include pollution-intensive sectors such as steel and textile manufacturing. China’s manufacturing investments may end up for Malaysia, as a trade-off between potential short-term gains and unquestionable long-term losses, if there are not enough checks and balances in place to mitigate the negative environmental impact of these investments.

Tham Siew Yean is Senior Fellow at ISEAS-Yusof Ishak Institute.

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS-Yusof Ishak Institute.  No part of this publication may be reproduced in any form without permission.