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The Impact On Malaysia When Local Enterprises Invest Abroad
Malaysia Perspective | 22 February 2012
By:

Yang Ming Wan

With waning domestic consumption and the uncertainties enshrouding other economies, the Malaysian Government needs to rely on domestic investments in order to sustain the continued growth of our domestic demands and achieve its economic growth target.

In the face of the growing importance of domestic investments, the Government was urged to pay attention to the growth of our manufacturing industry and take concrete measures as soon as possible to keep the running cost of the industry low, in order to retain our local enterprises and to prevent divestments.

Over recent years, the amount of overseas investments by our local enterprises has been consistently higher than the amount of foreign investments flowing into Malaysia.

These overseas investments were later officially classified as outward expansion investments by our local businesses, which, in the long run, will have a certain degree of positive impact on our own economy. However, this phenomenon of high out-bound investments may in fact be a form of divestment in disguise, and that would indeed hurt our domestic economy.

Net Expansion Capital Outflow Reaches Tens Of Billion Ringgit

Overseas expansion capital outflow data released by Bank Negara shows that during the financial tsunami triggered by the United States in 2008, Malaysia’s foreign expansion funds back-flow was nearly RM 22.1 billion, whereas out-going direct investments amounted to over RM 72 billion, which translated into a net capital outflow in excess of RM 49.9 billion.

In the aftermath of the financial tsunami, the back-flow of overseas expansion capital in 2009 was down slightly to nearly RM 20 billion, while direct investment outflow slowed to around RM 47.9 billion, still registering a net outflow of more than RM 27.9 billion. Overseas expansion of local enterprises resumed with gusto in 2010, notching nearly RM 66.1 billion in capital outflow, while back-flow of funds was RM 23.1 billion, yet another net outflow of more than RM 42.9 billion.

In the first three quarters this year, although capital back-flow reached an impressive RM 29 billion, outward-bound direct expansion investment capital was similarly higher at nearly RM 59.9 billion, and the net capital outflow stood at nearly RM 30.9 billion.

Deficit In Balance Of Payments

These so-called overseas expansion capital had consistently exceeded foreign direct investments into Malaysia in recent years, resulting in successive deficits in our international balance of payments accounts in terms of the amount of direct investments: negative RM 26 billion in 2008, negative RM 22.9 billion in 2009, negative RM 13.6 billion the year before, and negative RM 4.5 billion for the first three quarters of last year.

Over these last 3-4 years, Malaysia’s economy has been kept buoyant by strong domestic consumption and decent export figures, while domestic investment has not played as significant a role to the economy. This explains why these outward-looking companies could afford to put down long-term investment foundations in oversea economies, with the hope of reaping long-term benefits in the future.

However, with a weakening domestic consumption this year, domestic demands need to look for an alternative source of support in the form of direct funding to keep our economy growing. Thus, local enterprises decided to look beyond our own shores to park their investments. This development bodes ill for our domestic economy.

Expansion Projects Outweigh Divestments

Among the businesses that expanded overseas, those that most likely divested their capital investments purely due to changes in the domestic environment would be the manufacturing industry, and industries like agriculture, mining and stone quarrying that went abroad apparently due to the need for land for expansion. For the construction industry, it is due to the lack of domestic infrastructure projects since Abdullah became prime minister. Construction companies were forced to expand abroad, and these constituted part of the pool of proactive overseas expansion funds.

Services such as wholesale and sales, information and communications, and financial and insurance industries, also form part of this pool of proactive out-flowing funds as they follow the overseas expansion trend of exports and sales.

Finally, the industry that would most likely add the element of divestment to the out-flowing mix of funds is manufacturing. For the past four years, the outflow of expansion investments for manufacturing activities had been contracting: from over RM 4.5 billion in 2008 to over RM 1.8 billion in 2009, followed by a sharp increase to more than RM 4.9 billion the year before. Things were looking good over the first three quarters of last year, when we saw that, for the manufacturing industry, the back-flow of overseas investments by local companies outpaced the amount of out-flowing expansion investment funds for the first time, yielding a net overseas expansion plow back of more than RM 1.2 billion.

Early Fruits Of The Overseas Expansion Venture By The Manufacturing Sector

This is the first time Malaysian enterprises are reaping profits from their overseas expansion, and also the first sector to register a net positive return, even though such a large back-flow of capital may also be due to other factors. Nevertheless, this development is a shot in the arm for the enterprises themselves.

However, when we look at this figure from a negative point of view, if these investments flow-back are the result of conscious, proactive factors, it would mean that overseas investment would prove more lucrative for the manufacturing industry than investing at home, which will then result in a massive divestment exercise by local manufacturers.

The Government needs to conduct a review of the domestic manufacturing investment environment, work harder to retain the funds of our local companies, and ensure that domestic investments can indeed promote our country’s economic development.


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