Edge Article April 2022. Published on 11th April 2022.
It is often said that the word for ‘crisis’ in Mandarin is written by using the characters for ‘danger’ and ‘opportunity’ together. The CoVid-19 pandemic since 2019 was indeed a global crisis; in order to halt the spread of the deadly virus, the entire world had to be brought into lockdowns of their countries, and consequently, their economies, that is in greater or smaller degree is still on today.
With the lockdowns came businesses shuttering, and the global supply transport infrastructure stood still. It sent authorities into panic mode to save their economies; most resorted to opening the monetary taps to keep economies breathing and people out of starvation.
Much was ‘disrupted’, to use a wholly inadequate term, most importantly the Global Supply Chain (GSC) which Malaysia’s economy is very dependent upon.
Indeed, Malaysia has built its economy to be dependent on Foreign Direct Investment (FDI) and being part of the GSC, ignoring conventional, centuries-old wisdom of building up a country’s industries with its own final products and brand names. The result? Malaysia is stuck in the Middle-Income Trap and the goal of being a High-Income Nation appears further than ever. With the World Bank recently raising the bar for High-Income Nations to US$12,695 a year in Gross National Income (GNI) from US$12,535 a year previously, Malaysia, whose GNI in 2020 was lower at US$10,570 from US$11,260 in 2019, it appears a daunting, if not impossible task (see our recent paper “Strengthening the Main Economic Aspect of Keluarga Malaysia”).
There are several aspects of following this strategy that is troubling. Any trainer will tell you that in order to inculcate good new habits into someone, the bad old ones need to be exorcised. Let’s look at 3 reasons why the FDI and GSC strategy is flawed:
The first is that, where Malaysia’s FDIs and GSC participation is concerned, they are mainly of the intermediate goods type, instead of the “whole value chain final products manufactured” type. This means thin margins and value-add to the domestic economy.
A very popular article in 2012 highlights the thinness of margins obtained by intermediate goods’ manufacturers. The article, penned by Matthew Yglesias (“FoxConn Getting By On $8 per iPhone”) noted that FoxConn which assembled all the iPhone 5 units in the world in 2012, made only US$8 each, while an unlocked iPhone 5 unit retailed for US$849 for the 64GB model. In other words, it made less than 1%.
This thinness filters upwards towards the value add to GDP (Gross Domestic Product). We compare intermediate goods producer Malaysia to South Korea, which has plenty of final products and brand names:
Table 1 Malaysia’s Foreign Sector Addition to GDP
Table 2 South Korea’s Foreign Sector Addition to GDP
It clearly shows that Korea gets a higher contribution to GDP from its foreign sector (C/A over GDP), never mind its far larger GDP figures.
The second reason is that technological trickle down to the domestic economy from FDIs cannot be assured. Years of academic research on it is at best inconclusive as to whether FDI does spark such trickle downs and worse, most research does not make the critical difference between their samples being the FDI type that produces the whole chain that ends with a final product or whether they are the “stick part A to part B” type of intermediate goods production. Some examples below:
A study by Elvisa Torlak in 2004 on technology transfer in the transition countries of Hungary, Poland, Romania, Bulgaria, and the Czech Republic corroborated the theory that technology is transferred internationally through multinational firms within itself but provides no evidence of diffusion of technology from foreign to domestic firms. This means that XYZ in the US will transfer technology to its XYZ plant in Malaysia, but not to unconnected Pak Ali Satay and Microchips Sdn. Bhd. in Ulu Sembelit.
Lichtenberg and de la Potterie in their 2001 paper, “Does Foreign Direct Investment Transfer Technology Across Borders?” noted that:
“The data indicates that FDI transfers technology only in one direction: a country’s productivity is increased if it invests in R&D-intensive foreign countries…. But not if foreign R&D-intensive countries invest in it.”
The third reason is that Malaysia has performed abysmally in attracting FDI, coming in last in 2018, and is next to Korea in a sample of Asian countries per the chart below. Korea honestly does not need that much incoming FDI as an already Developed Country. The chart below from our previous paper “Foreign Direct Investments in Malaysia, Part 1 – Has Malaysia Fallen Off the Beauty Parade?” with Malaysia right at the bottom in 2018 says it all:
Chart 1 Comparison of NET FDI Inflows Into Selected Asian Countries
Source: World Bank
The forecast for economic growth post the CoVid-19 pandemic is one of economic re-emergence for all countries. This is where each country will have to look after its own. Hence, while producers outside of the countries of origin will have a greater amount of orders from companies domiciled in their respective originating country (already evident recently), it is unlikely that new FDIs will come out. Rather, the movement, under US President Trump’s days was that of calling back US companies to produce within its borders. There is scant evidence that current President Biden has totally reversed that, given the benefits to the US’ own economy. China has turned inward, looking for its domestic economy to fuel its economic growth. Russia’s attack on Ukraine now adds the spectre of not only higher oil & gas prices, but also commodities, with Ukraine being huge global producers of wheat, corn, and sunflower oil. One doubts that with a war on, Ukrainian farmers can sow their crops in late Spring; this year’s harvest will likely be a poor one, driving up food prices globally.
The setting for more FDIs globally is in poor light with tentative economic recoveries and global inflation on the near horizon; far better will it be to have local industries making final products for the needs of the people.
The case for de-emphasizing the current growth strategy for Malaysia of FDIs & GSC participation cannot be stronger. Time to emphasize local final products and brand names as a national economic strategy.
Huzaime Hamid is Chairman & CEO of Ingenium Advisors, Malaysia’s financial macroeconomics advisory.