Malaysian Economic Policy and FDI. Essay Example

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 of the FDI restrictions imposed by the NEP such as equity and licensing requirements and procedures.

The Fifth and the Sixth Malaysia plans (1986-1997) place great emphasis upon the privatization process of certain government owned industries and utilities. For instance, the major motor-highways now belong to "Plus", a privately owned entity which is responsible for the construction of such transportation infrastructure. According to Dr. Mahathir, "The Malaysia Incorporated concept requires the private and public sectors see themselves as sharing the same fate and destiny as partners, shareholders and workers within the same 'Corporation', which in this case is the nation..."(Huq 1994: 189). The overall objective of this policy is rationalization of the government sector and to foster more initiatives from the private sector. The private sector is the driving force to economic prosperity and the government will provide the needed support. In close cooperation with the NDP, the Sixth Malaysia plan is the driving motivation for development.
The purpose of the Industrial Master Plan which was formulated by the United Nations Industrial Development Organization (UNIDO) is to focus private and government agencies on core competencies and

develop industries with great export potentials in the next 15 years (Please refer to Appendix 3 for such industries).
Export Facilitation.
In the South East Asian region, most of the incoming FDI has been exported oriented rather than intended for domestic sales (World bank 1993: 318). Presently, Malaysia has one of the world's highest export to GDP ratios (Petri 1994: 11). The economic rationale of Malaysia to promote exports provides the nation with three important advantages. First, it generates foreign-exchange that can reduce the amount of foreign debt needed to fund development. Second, it contributes to developing a competitive industry infrastructure from learning from investors- a move that brings technological excellence leading to higher value-added exports. By the promotion of specific industries, such as the semi-conductor industry, has speeded technology acquisition and enhanced the nation's competitive Worldwide positioning. Finally, FDI provides employment in the industry sector, which to a large extent is attracted from the agricultural sector.
Critics argue that Malaysia has become largely dependent on foreign technology and failed to develop its own technology base (Goldsworthy 1991: 58). For instance, it is true that Malaysia is the world's largest manufacturer of Air conditioners, but it is also true that Japanese companies account for 90 percent of all exports. In this relationship, Malaysia is "sitting between Japanese capital and these sorts of exports"(Goldsworthy 1991: 58) If Malaysia cannot develop its own competitive industry with a solid technological base, it may be difficult for the nation to achieve its 2020 vision.

In the case of Malaysia, the critical success factors of FDI lay in the economic policy. FDI incentives such as taxable income deductions linked to domestic performance and local

content, other tax allowances, location incentives, double deduction for promotion of exports and political and economic stability have all contributed to the massive influx of FDI and increase of exports (Carrol, Errion 1991 21). In addition, nine Free Trade Zones (FTZ) provides tax-free areas with liberal custom controls for manufacturers that assemble at least 80 percent of their products.

Economic development in Malaysia was first built on the basis of Import Substitution, indicated by the large shift of GNP distribution from agricultural sectors to manufacturing sectors. Import substitution has increased in mainly three areas, transport equipment, Industrial chemicals and fertilizers and in Industrial machinery (Onn 1988: 28). However, exports constitutes the main source of growth in the manufacturing sector from 1970-1990 (refer to appendix 6). This trend can be explained by economic policy that places great emphasis on improving industrial competitiveness as a vehicle towards vision 2020.

According to Richards, "Malaysia has benefited considerably from its liberal trade policy" (1993: 29). Such policy has increased worldwide competitiveness through strategic exposure and promoted economic growth. Presently, Malaysia has one of the most liberal trade policies in the East Asian region.

The nation's policy of liberalizing trade is not only incorporated with the WTO and AFTA objectives, but also micro-economic objectives. Reducing tariff levels will not only decrease inflationary pressures in the expanding economy but also increase the competitiveness of Malaysian industry throughout strategic exposure. Liberalization can also enhance export incentives from FDI's as seen in the nine FTZs.

In line with microeconomic change, trade restrictions have been aligned with development strategies which are often based upon the notation of comparative advantage. Selective protection promotes the development of industrial subsectors that

have the potential to produce high value added products, which are intended "to replace light manufacturing activities as the main exporters" (Brown 1993: 45).

As a link to the policy of maintaining a stable economy with past budget strategies of controlling inflation, there have been major reductions and abolition of import duties on goods and services. The 1995 budget proposes a reduction of tariffs imposed on over 2,600 items of which a majority are food items (Budget 1995: 22). Also, tariffs on building materials and household appliances have been reduced. These measures will not only control inflation, but also enhance the quality of life and favor the over all climate for investments. However, Ad Valorem taxes are imposed on imported goods and services (refer to Appendix 4).

Strategic exposure represents a crucial component in Strategic Trade Theory. The rationale behind lowering barriers to trade and exposing local industry to foreign competition is to create a more competitive domestic industry (Hamilton 1989: 4). Such a Level Playing Field policy will force local firms to increase their competitiveness to survive.

Strategic exposure represents a direct link to becoming an industrialized nation by 2020 and the realization of economic goals. Incorporating FDI as a strategic measure to enhance technological know-how can reduce domestic learning and experience curves in selected industries. By giving foreign investors considerable tax deductible incentives in areas such as training of local employees, research and development and in promotion of exports Malaysia has been able to increase World wide competitiveness as demonstrated by increasing exports and GDP (Carrol, Errion 1991: 21). Malaysia aims for the year 2000 to have at least 1.6% of GDP spent on R&D and

is predicting that at least 40% will come from the private sector.