The purpose of this report is to examine the political economy, economic growth and foreign direct investment of Malaysia. This report aims to provide an understanding of Malaysia’s previous and current economic system.
Malaysia is made up of 13 states, and has 3 main ethnicities consisting of Malays, Chinese and Indians. Malays and other indigenous people (called Bumiputra) make up the majority of the population. Malaysia has a population of 31.19 million as of 2016 (World Bank, 2016). Malaysia grants freedom of religion to all, however Islam has been established as the official religion of the federation. Those who practices Islam or Muslims are under the Shariah law where they have to go to the Shariah Courts in matter regarding religion. The official language of Malaysia is Bahasa Malaysia (meaning the language of Malaysia) or more commonly known as Malay. However, English is also commonly used and is considered an official language in some states of Malaysia (Department for International Trade, 2015). Malaysia is currently under Prime Minister Najib Razak where he has been in rule since 2009.
Malaysia is blessed with an abundance of natural resources in areas such as agriculture, minerals and forestry. Their main export is petroleum; however, Malaysia is also a leading exporter of palm oil (Hossein et al, 2015). However, nowadays Malaysia has put more emphasis into their service sector. Just in 2010, the service sector was responsible for 49.3% of Malaysia’s GDP. The most significant contributor to the service sector is the financing industry, particularly in Islamic banking (EconomyWatch, 2010).
The political economy is made up of 3 things; political system, economic system and legal system. A political system has 2 dimensions; collectivism against individualism and democracy or totalitarianism. Collectivism refers to a system that emphasizes on collective goals rather than individual goals. This means that a society will prioritize their collective needs rather than the needs of an individual. On the other end, we have individualism where it is the complete opposite. It is focused on the interests of an individual. In the second dimension, we have democracy versus totalitarianism. A democracy is a political system where the government is elected by the people whereas totalitarianism is a single person exercising absolute control over the government and prohibits other parties that opposes him (Hill and Hult, 2017).
An economic system consists of 3 types of economy; market, command and mixed economy. In a command economy, it is the state who takes control of planning authority. The government took control over what was produced and the quantity of the products. The interest of individuals was not taken into consideration. Market economy is the complete opposite of command economy. In a pure market economy, all production would be privately owned. The goods and services produced would be catered to the interests of the individuals. Products and services would rely on the interaction between demand and supply. Lastly, mixed economy would be a mix of both market and command economy. Certain sectors are controlled by the government while other sectors are owned by private individuals (Hill, 2010).
The legal system of a country refers to the rules that regulate behavior along with processes that enforces these rules. The legal system is exceptionally important for international businesses because if a country does not have a strong legal system, it will be hard for a business to do well. There are 3 basic systems of law: civil law, common law, and theocratic law. Civil law or code law is a compilation of laws set in a listing called a code. There are currently more than 80 countries operating with this system. Common law is a system of laws that relies on the rulings of the previous cases, common usage, and customs as the basis for court decisions. Lastly, theocratic law is based on the teachings of religion. Islamic law is the most practiced theocratic legal system in the world (Czinkota et al., 2000).
Every country has a legal system around property rights and corruption. Intellectual property refers to the product of intellectual activity and to protect this, patents, copyrights and trademarks were established. Product safety laws are also set to make companies adhere to certain safety standards (Hill and Hult, 2017).
Malaysia is considered a democratic country as they have held regular elections since 1969. However, it is more complicated than that as Malaysia has cherished an electoral authoritarianism where it may look like the ruling coalition seems to be holding multi-party elections regularly, but in reality, they are restricting competitiveness so they can stay in power. Therefore, Malaysia is described as ‘semi-democratic’ (Parnini et al, 2014). Corruption is also very evident in Malaysia, as seen in the 2013 elections where there was a blackout while volunteers were counting votes. It is said that during the blackout, many of the votes were switched so Prime Minister Najib can stay in power.
Malaysia is a mixed economy with more emphasis on the public sector. 68% of enterprises are owned by the state as of 2013 with 8 out of the top 10 owned by the government (B?ge et al., 2013). However, we can start seeing a change in the past years. One notable company is Petronas, the only company to be in Fortunes 500 (Petronas Global). Proton which is an automobile company was originally owned by DRB-HICOM which is a Malaysian Corporation but had 49.9% of their stakes acquired by Hong Kong based automobile company (Reuters, 2017). This shows that Malaysia is moving slowly towards a more balanced mix economy with the privatization of the state-owned companies.
The legal system in Malaysia is rather similar to the UK’s legal system as it is largely based on the British Common Law system due to the colonization by Britain. Malaysia practices a dual court structure which consists of civil and Syariah courts. Malaysia’s civil courts are similar to the structure of common law jurisdictions with the Federal court being the highest. The Syariah courts have jurisdiction over Islamic law as Malaysia’s official religion is Islam. The Syariah court affects only Muslims in Malaysia (Tew, 2011).
Malaysia is a member of the World Intellectual Property Organization (WIPO) and is also a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) signed under the auspices of the World Trade Organization (WTO) (Malaysian Investment Development Authority). Malaysia has strong protection on property rights. They are currently ranked 32nd out of 127 countries and is currently ranked 7th in Asia in protection of property rights (International Property Rights, 2017).
Economic growth is as sustained increase in the country’s total value of domestic production or Gross Domestic Product (GDP). The 3 main drivers behind economic growth is labor, capital and technological advancement. The engines behind long-term economic growth are innovation and entrepreneurship. Innovation does not include only new products but also new processes, new management practices and strategies. With the help of entrepreneurs who commercializes these new innovative products and processes, economic activity will rise. With the economy stimulated, there will be an increase in productivity of labor and capital. However, innovation and entrepreneurship require a market economy as there is a motive to earn money by engaging in entrepreneur activity.
Malaysia has had a relatively stable growth in the last 5 years. Malaysia’s economic growth as of 2016 is 4.2% which a significant decrease from 2010 where they recorded a growth of almost 7% (WorldBank). The innovation performance in Malaysia is relatively high compared to other Southeast countries. Malaysia ranks at 48th on the World Bank’s Knowledge Economy Index which measures the ability to produce knowledge and use it effectively (Ngoc, 2015). Entrepreneurship also plays a part in their economic growth. Malaysia’s small and medium enterprises are responsible for nearly 39% of Malaysia’s GDP. Malaysia aims to push SME’s contribution to 41% in 2020 (WorldBank, 2016).
Foreign direct investment (FDI) is a direct investment made by company or an individual into another country. For the investment to be considered direct, the company or individual who has invested must have at least 10% of ownership of the foreign entity. Investors can choose to invest in the foreign market by creating a new business (known as Greenfield entry) or they can invest in existing businesses in the target country (Hill and Hult, 2017). However, it is usually developing countries that tend to receive more FDI than developed countries as FDI became the largest source of capital inflow to developing countries in 1993 (Riggs, 2016)
Businesses experience a number of benefits and limitations from investing in foreign countries. By investing into a foreign country, the business may be able to avoid certain barriers of trade such as tariffs and tax. Furthermore, by establishing a base in the host country, a business may be able to reduce administrative costs that may have risen from organizing foreign operations from the home base. One significant limitation of FDI is the financial burden of it. There is usually a huge financial cost of setting up a business and running a business in a foreign country (Bennett, 1999).
It is not only businesses who experiences benefits and drawbacks of FDI; the country receiving FDI also experiences it. FDI is especially beneficial to countries with limited resources and does not have the means to raise funds in the world’s capital markets. FDI is also seen as technology transfer where it does not also include technology but also the skills and techniques needed to operate it. One significant part of technology transfer is managerial skills, which are the most important labor component of foreign direct investment (Czinkota et al,2000). This implies that the domestic labor may be trained for these managerial jobs.
Malaysia has a fluctuating amount of FDI inflow from the last 10 years. We can see in the graph that they were a significant decrease in the year 2010 and a steep increase from the year 2011 until 2012 where it began to decrease. After the year 2013, changes were not as volatile as the earlier years (TradingEconomics). Malaysia has recorded a net inflow of RM47.2 billion in the year 2016 where the flows were mainly contributed by equity and investment fund shares (Department of Statistics Malaysia, 2016).
FDI in Malaysia has definitely had a significant impact over the past 10 years. As stated, one of benefits of FDI would be an increase in employment opportunities. Malaysia had received tremendous amount of FDI during the 1980s into their manufacturing sector (Okamoto, 1994). This increase in activity caused for an increase need for local manpower for the projects to work.
Malaysia had received a huge amount of FDI being received during the 1980s and 1990s, which caused them to have one of the highest growth rate in the 1970s to 1990s amongst the ASEAN countries (Chandran and Krishnan, 2008). Thanks to this inflow of FDI, Malaysia had developed a rather sophisticated manufacturing sector. Due to this, the Malaysia government has been focusing on developing their service sector. During 2011 to 2015, the service sector was the largest contributor to the Malaysian GDP with a percentage of 53.8% in 2015 (theStar, 2017).
However, Malaysia has also suffered from foreign direct investments. Perhaps one of the more significant impact would be the employment of foreign labor. With the expansion of the manufacturing and service sector, more and more of Malaysia’s labor force were being trained. This led to a shortage of unskilled labor as Malaysia’s labor force was small. This problem was solved by hiring foreign workers, mainly from Indonesia and Bangladesh (Doraisami, 2007). This has led to a huge inflow of foreign workers, many of whom are in Malaysia without an official working permit. It is reported there are roughly 1.9 million undocumented workers (themalaymailonline, 2017).
We can see from economic growth and foreign direct investment that Malaysia has developed at a faster pace compared to other Southeast countries. Thanks to an early development of their manufacturing sector, Malaysia is currently moving towards a high-income country where they are supporting other countries, instead of being supported. Malaysia is a country where investors can feel safe in doing business with due to their strong property laws. Malaysia is also seeing a strong performance in their economic growth and this is predicted to remain stable or increase in the coming years. In conclusion, Malaysia is slowly but surely changing their economic structure.