Malaysian Economic Policy and FDI.

BACKGROUND AND COUNTRY ATTRACTIVENESS.

Malaysia is the second fastest growing economy in the South East Asian region with an average Gross National Product (GNP) growth of eight-plus percent per year in the last seven years. Since independence in 1957, Malaysia has moved from an agriculturally based economy to a more diversified and export oriented one. The Malaysian market is fairly openly oriented, with tariffs only averaging approximately fifteen percent and almost non-existent non-tariff barriers and foreign exchange controls. The open trade based economy is supported by the fact that the total two way trade almost amounts to 120 percent of the GNP (1994). Together with a stable political environment, increasing per capita income, and the potential for regional integration throughout the Association of South East Asian Nations (ASEAN), Malaysia is an attractive prospect for FDI (refer to Tables 1, 2, 3 and Graph 1 for relevant economic indicators).


Until 1993, foreign investment contributed 60% of all investment in Malaysia. FDI grew strongly in the late 1980s to reach a peak of RM17.7 billion in 1992. This was followed by a sharp drop to RM6 billion in 1993 due to the world rececession, but rose again to RM15.2 billion in 1994. Malaysia is among the top five recipients of foreign direct investment in the world and while in recent years it has come mainly from other Asian countries, 1993 saw the US as the biggest inward investor with RM1.7 billion. Japan and Taiwan are clearly the largest overall investors with the US third, followed by France, Singapore and the UK (McLeman 1994, 19).


The rationale of this report is not to promote Malaysia as an attractive destination for multinational entities, but rather to analyze how Malaysia\'s economic policy impacts upon FDI. Malaysia, perhaps, represents one of the most successful developing nations that has been able to effectively incorporate economic policy objectives with foreign funds, knowledge and networking throughout FDI (refer appendix 5). FDI in Malaysia is an important catalytic factor, increasing exports, knowledge and provides an economic vehicle towards the Malaysian 2020 vision.


THE MALAYSIA PLAN AND THE NEW ECONOMIC POLICY FRAMEWORK


The Malaysian government uses economic planning to achieve economic and socio-economic goals in close coherence with the New Economic Policy (NEP) and the National Development Policy (NDP). The Fifth Malaysia plan and the Long-term Industrial Master Plan Malaysia, in particular, indicate specific future objectives and economic trends.


Objectives.


The Malaysian economic policy framework is based upon the NEP, which was launched in 1974. The political and economic objectives of the NEP is to reduce poverty by increasing income levels for all Malaysians and to restructure the Malaysian society in order to erase all racial identification in economic terms. In other words, the NEP calls for a financial redistribution from the minority of wealthy non-Bumiputra (native Malaysians also known as "Princes of the Soil") racial groups to the Bumiputras (Goldsworthy 1991: 51). The goal is to achieve corporate equity of 30 percent Bumiputra, 30 percent foreign and 40 percent other-Malaysians (Onn 1988: 8). This goal can only be facilitated with an expanding economy, so that no racial group should suffer from economic or social deprivation. Other specific economic goals include; maintain high sustainable growth, low unemployment rates and ensure the stability of economic factors such as inflation. Under the NEP, FDI incentives were d!
esigned to achieve social rather than economic objectives (Goldsworthy 1991:53). According to the Malaysian Industrial Development Agency (MIDA), "Malaysia received political stability from the NEP. Racial turmoil attracts neither foreign nor local investments."(Appelbaum et Al: 1993, 180)


The National Development Policy (NDP) replaced the NEP when it expired in 1990. This new policy can be considered an add-on document to the NEP, the objectives of which were not achieved in 1990. Furthermore, it provides a framework towards Dr. Mahathir\'s new vision 2020 plan symbolizing "the way forward" policy towards a "developed" nation in 2020. This will require the nation to maintain a 7-plus percent growth rates for the next 25 years. Prime Minister Mahathir believes raising workforce quality and developing expertise in sophisticated industries are decisive elements in the country\'s road to economic success and development (Brown 1993: 43). In order to facilitate these growth requirements, the NDP has relaxed many