Experts say reforms, political stability are essential for country to narrow gap
When Amazon Web Services (AWS) announced plans this month to invest $6 billion in Malaysia over the next 14 years, the government hailed it as a win for the country.
“AWS was invited by many ASEAN countries but chose Malaysia,” national news agency Bernama quoted Prime Minister Anwar Ibrahim as saying in parliament, referring to the 10-member Association of Southeast Asian Nations. “This means it would increase the confidence [of other investors] and spur the entry of various investors from both the West and East.”
But the move by the cloud services provider came as experts say overall foreign direct investment (FDI) in Malaysia has been static for years as the country increasingly loses out to neighboring Indonesia in the race to draw capital.
“Indonesia’s vast resources, large population base, relatively stable politics and able leadership and crucially favorable investment climate and strong growth prospects are luring long-term foreign investors from across the world,” said Yeah Kim Leng, an economics professor at Malaysia’s Sunway University and a member of a newly formed advisory committee to Anwar, in comments to Nikkei Asia.
Forty years ago, Malaysia had huge ambitions in Southeast Asia. Mahathir Mohamad, who started his two decade long first stint as prime minister in 1981, set big goals, among them becoming an industrialized nation. He shifted the former British colony’s focus toward Asia under his signature Look East Policy and targeted a more than quadrupling of the population to 70 million by 2100.
Attracting FDI, especially in industry and technology, was a large part of those aspirations. The economy witnessed some notable successes, including the launch of the country’s first automobile, the Proton Saga, in cooperation with Japan’s Mitsubishi Motors.
But since 2008 the country has attracted less annual investment than Indonesia in every year except 2016, according to UNCTAD, or the United Nations Conference on Trade and Development. In 2021, Malaysia pulled in $11.6 billion more than triple that of the year before but the amount was only slightly above the figure five years before. Meanwhile, Indonesia drew $20.1 billion in 2021.
The government knows it has to jump-start FDI, saying last month it will improve procedures for doing business to cut red tape. Anwar, who serves concurrently as finance minister, said investment bodies will take the lead to speed approvals for projects with high potential, according to Bernama.
One of the biggest factors dampening investor confidence has been political instability. From 2018 to November 2022 the country saw three prime ministers appointed and ultimately ousted — including a return by Mahathir. But following the general election in November last year, which brought longtime opposition figure Anwar and his unity government to power, there are hopes for more stability.
Rais Hussin, president and CEO of Emir Research, said investors expect the new government to provide an environment and system more conducive to FDI through further market liberalization.
“They’d also hope that the new government would be stable and last the full term,” Rais said. “It’s critical also that there’re no policy flip-flops under the new government.”
But neighboring Indonesia has clearly seized the momentum. And with a population eight times larger than Malaysia’s and a gross domestic product three times bigger, some advantages are a matter of scale.
“Economically, Indonesia has a bigger potential than Malaysia,” said an Indonesia-based Malaysian businessman, who declined to be named. “Their market is bigger, they have natural resources, domestic demand is bigger, they have massive infrastructure projects … [and] moving their capital from Jakarta to Kalimantan will create new economic growth and activities.”
Indonesia is building a new capital city, Nusantara, in East Kalimantan province on Borneo — an island shared with Malaysia and Brunei — at an estimated cost of 466 trillion rupiah ($30 billion) to reduce pressure on heavily congested Jakarta, the nation’s largest city.
Among Malaysia’s biggest loss in FDI to Indonesia is in digital economy-related areas, according to Rais, who said the situation is particularly noticeable “in cloud services and data management.” Despite Alibaba Cloud in 2021 announcing the launch of a Cloud Innovation Center in Kuala Lumpur, mainly to support small and midsize enterprises and startups, Indonesia remains the fastest growing market for cloud infrastructure, he said.
“Alibaba and Tencent are already heavily invested in Indonesia,” Rais said of the Chinese companies. He also cited plans announced by AWS at the end of 2021 to invest $5 billion over 15 years in Indonesia.
But Fitch Solutions, in a commentary after the recently announced AWS investment in Malaysia, highlighted the country’s attractiveness.
“Malaysia is emerging as one of the key digital infrastructure hubs in the Asia-Pacific region,” Fitch said. “Developments are being encouraged by the government’s digitalization plans, easing regulatory landscape and technology-friendly policies.”
Even with such a vote of confidence, experts say Malaysia needs a mix of the right reforms and stable politics to help it regain momentum lost to Indonesia, something which will take time.
Carmelo Ferlito, CEO of Kuala Lumpur-based think tank Center for Market Education, said the overall FDI trend for Malaysia is irreversible in the short-to-medium term. “But in a competitive environment, there is room for structural changes that can lead to a different destiny for the next decade,” he said.
Lee Heng Guie, economist and executive director of the Socio-Economic Research Centre, also based in Kuala Lumpur, believes Malaysia still has what it takes to be an attractive investment location in Southeast Asia, and has notable advantages over Thailand, Vietnam and Indonesia in areas such as ease of doing business, competitiveness and digitalization.
But much more needs to be done, he said, including reforms in legal rights and contract enforcement.
Lee stressed that Indonesian President Joko Widodo created a new Ministry of Investment in 2021 to focus on addressing bureaucratic barriers to inward investment. And the year before Indonesia also passed the Job Creation Act, also known as the omnibus law, which amended more than 75 regulations that have been cited as hindering foreign investment.
“There have been no reforms in these areas for the last five years,” Lee said of Malaysia. “It takes 425 days to enforce a contract in Malaysia. In Indonesia, it’s been cut from 471 days to 403 days. The [Malaysian] government must commit to creating a transparent … investment climate with proper contract enforcement and safeguards [for] property rights.”
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