Malaysia’s Investment Malaise: What Happened and Can It Be Fixed?
Asian Development Bank; Asian Development Bank Institute
August 1, 2012
Asian Development Bank Economics Working Paper Series No. 312
Private investment in Malaysia has never fully recovered from the impact of the Asian financial crisis (AFC). Both domestic and foreign investment have remained lackluster post-AFC; while foreigners continue to shun Malaysia, it seems even domestic investors are fleeing as well, with Malaysia having become a net exporter of capital since 2005. The crucial questions are: what happened and can it be fixed? We argue that the investment malaise can be attributed to two interrelated factors: (i) distortions introduced by the New Economic Policy (NEP) and its reincarnates, and (ii) the widespread presence and overbearing influence of government-linked corporations (GLCs) that deter new investment. While the impacts of both factors may have been masked during the heady days leading up to the AFC, this is no longer the case in the current competitive environment where residency options for both capital and skilled labor are much greater. Fixing the problem requires addressing the distortions of the NEP and curtailing the influence of the GLCs. Although there have been a few recent moves to dilute the NEP, some of these measures have already been reversed. Similarly, while there has been an active program of divestment from GLCs, there have also been GLC acquisitions in new sectors, making it more of a diversification than a divestment program. Malaysia’s investment malaise can be fixed, but not in this way.
Number of Pages in PDF File: 33
Keywords: Malaysia, private investment, foreign direct investment, capital outflows, middle income trap, new economic policy, government-linked corporations
JEL Classification: E22, F20, F21, J78, O53
Date posted: August 2, 2012