One of the main factors that attract outsider to invest in Malaysia is workforce. Workforce is very important for the manufacture process. Due to the easy access to cheap and abundant labor force, FDI firstly flow into the manufacturing sector (Sandu and Fredericks, 2005). Outsiders may choose the firm based on the presence of skilled labor or unskilled labor (Ali, Ahmad and Muhamad, 2010). According to the study by Sharma, Nayagam and Chung (2012), the results indicate that the labor force’s quality is important in attracting foreign direct investment in the long run to Malaysia.
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Over the years, Malaysia has deal with developing its workforce into a highly educated and semi-skilled labor force (Sandu and Fredericks, 2005). When the literacy rate in one country is increased, it means that there are better knowledge and skill people in the country. This can attract more inflows of foreign direct investment because better knowledge and skill people in a country can provide more experts and professional who can serve the company better (Choong and Lam, 2010). This is essential for the knowledge-intensive services sector as these sectors look for highly skilled and educated labor force, for example banking and insurance sector (Sandu and Fredericks, 2005). The presence of such workers in Malaysia at a cheaper cost compared to our competitor like Singapore is an important factor that brings foreign direct investment into the services sector (Sandu and Fredericks, 2005). A high level of skilled labor and literacy rate is important in encouraging the inward foreign direct investment (Choong and Lam, 2010). According to Choong and Lam (2010), when the multinational companies in China search for a better quality or cheaper inputs, they may look into their neighboring countries, one of it is Malaysia.
Strategies of Malaysian government’s that came up with various incentives and open door policy attract multinational companies to place their production plants in Malaysia (Sandu and Fredericks, 2005). In year 1968, government had introduced the Investment Incentive Act 1968 which promotes export-oriented foreign direct investment by introducing a number of financial incentives which include exemptions from duty on imported inputs, company tax and investment tax credit (Sharma et al., 2012). The Investment Incentives Act 1968 introduced had extended the scope of the incentives including pioneer status, export allowance, investment tax allowance and double deduction of expenses to encourage exports (Yeow and Ooi, 2009). For example, government provided pioneer status of maximum 10 years tax exemption for targeted high-tech and specialised machinery and equipment or investment tax allowance maximum of 100% for qualifying capital expenditure incurred within five years for income tax exemption (“MIDA”, 2012). Furthermore, the incentive in the form of Labour Utilisation Relief was introduced in year 1971 in order to lessen the unemployment which can catch the attention of labour-intensive industries. Labour Utilisation Relief defines the level of corporate tax exemption was associated to the number of employees (Yeow and Ooi, 2009).
In addition, in year 1971, the enactment of Free Trade Zone Act can also attract foreign direct investments. Free Trade Zone Act had been amended in year 1990. This act had bring to the establishment of some free trade zones with infrastructure that is subsidized, duty free access to imported capital goods and inputs, fast consideration of custom formalities, and exclusion of export taxes (Sharma et al., 2012). For example, Malaysia’s first free trade zone is in Bayan Lepas, Penang which aimed at attracting foreign direct investments in export-oriented industries that could create jobs to attract the high number of Malaysians that are unemployed (Yeow and Ooi, 2009). Other examples of free trade zones are Mukim of Plentong in Johor Bharu, Sama Jaya in Kuching, Mukim of Hulu Kinta in Perak and many more (“Free Trade Zones”, n.d.) According to Rasiah (1999), Free Trade Zone Act 1971 had offered incentives including pioneer status that provided full tax holidays ranging from 5-10 years. By introducing these act, it made the country more flavor to foreign investment. According to Choong and Lam (2010), multinational companies normally choose to devote or invest in the export-oriented country compared to invest in the countries which have a low level of openness.
The establishment of Malaysian Investment Development Authority (MIDA) has been helpful in transforming Malaysia a premier investment destination in the region. In year 1965, the responsibility of encourage investments was allocated to the Federal Industrial Development Authority (FIDA), predecessor of the now Malaysian Investment Development Authority (MIDA). The main responsibilities of MIDA are to promote Malaysia as an competitive and eye-catching investment destination, to give information on the opportunities for investments in Malaysia, target and attract potential investors, assist companies which on the lookout for joint venture partners, support and help investors in obtaining all necessary approvals for projects until they are operational (Mohamed, 2012).
According to Sandu and Fredericks (2005), the establishment of Multimedia Super Corridor (MSC) in year 1995 is also an important factor that brings foreign direct investment. MSC provides quite a number of incentives such as provision of government grants, tax relief and tax exemptions to catch the attention from foreign firms mainly in the information technology to set up their operations at MSC. Under the new plan MSC Malaysia 2.0, MSC Malaysia will continue to modify incentives to attract foreign direct investment (“MSC Malaysia”, 2010). MSC Malaysia decides to offer competitive financial incentives likes no income tax or investment tax allowance for up to ten years as well as no duties on the import of multimedia equipment (“MSC Malaysia Cybercities”, 2012). This can attract foreign direct investment to Malaysia.
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Moreover, after Singapore, Malaysia is the one that has the most developed infrastructures. Malaysia has built high quality infrastructure in the telecommunication, financial and transportation sector which can reduce cost of doing business (Sandu and Fredericks, 2005). Efficient and developed infrastructure is essential in attracting foreign direct investment as with high quality of infrastructure can make the business more effective and efficient. Moreover, the companies need not to invest more money to build the infrastructure. A high quality of infrastructure means that the country can stimulate economic growth, thus provide a good image to the investors.
Another factor that attracts foreigners to invest in Malaysia is the political stability. Malaysia is one of the most favorable in the Southeast Asian region due to the existing political stability guarantee that investment ventures are protected and safe (“FDI competitiveness”, 2008). According to Hamid (2012), the Sydney-based Institute for Economics and Peace had reported Malaysia is in the ranked of 19th most peaceful country in the world which is the safest in Southeast Asia and second safest in Asia last year. The ranked had been improved from the 22nd position globally in 2010 and 38th in 2008. The improved ranking reflected to the rise in political stability as the crime rate had been reduced (Hamid, 2012). According to Tan Sri Muhyiddin Yassin who is the Deputy Prime Minister, peace and security that become better has brought advantage to our country that lead to a higher confidence level among foreign investors. This can be shown through foreign investments that had been increase last year (Hamid, 2012).