The million dollar questions: Malaysia…where are we now and where are we heading?

Facets of Investment

11 August 2012 by Leave a Comment

What’s In A Name? The Many Facets of Investment: Part I

Investment covers a whole spectrum of meanings that go beyond Foreign Direct Investment (FDI) and things aren’t always what they seem. In this three part series, we take a look behind the numbers.

One of the key thrusts of the government’s transformation plan is to increase the level of investment in the Malaysian economy. From 1987 to the 1997 Asian Financial Crisis, which badly affected the Malaysian economy, the contribution of investment to GDP growth exceeded 50% in all but one year, and the ratio to GDP averaged nearly 40%.

By contrast, for the decade 2001-2010, investment only contributed 15.9% to GDP growth. There’s no doubt that a high investment ratio helped Malaysia achieve solid gains in economic and household income growth.

But investment covers a whole spectrum of meanings that go beyond this, and things aren’t always what they seem. So in this three part series, we’re going to take a look behind the numbers.

One aspect of this is what’s called FDI – foreign direct investment – where foreigners set up shop in Malaysia, and help improve the productive capacity of the country above and beyond what Malaysians can do on our own. The benefits of FDI extend beyond just the investment in capacity and employment but also include things like organizational efficiency, introducing new forms of processes, opening new markets, and the possibility of technology and skills transfers to locals. Economic research into FDI flows have shown that FDI helps to improve growth prospects. As such, there’s plenty of good reasons to want to attract greater FDI to Malaysia.

Typically, what people understand by the term investment, and particularly direct investment, is someone opening a factory or a new business. This creates new productive capacity, creates jobs for locals, and helps create even more economic activity as this new business needs supplies, raw materials, marketing and sales channels, and so on. It’s not just the ability to create more goods and services.

Unfortunately, our statistics (even based as they are on international best practice) don’t capture the phenomenon of investment very well. There’s also a number of factors, such as education (which is investment in long-term human capital), that isn’t captured by our current investment statistics at all.

Calculating the effects of FDI: More than just numbers

In Malaysia, there are a couple of main sources for investment statistics. First under the system of national accounts (of which GDP and GNI are a part), we have gross fixed capital formation, which looks at accumulation of fixed assets by firms, households and by the government, net of depreciation. Another source is the investment statistics compiled under the balance of payments, which looks at investment flows into and outside of Malaysia.

A third source which we could use locally would be the statistics of approved investment projects compiled by the Ministry of International Trade and Industry (MITI), but these look at potential investments and not investments actually spent. But taking the first two definitions of investment, they look at and measure very different things.


We’ll look at the different definitions of investment in Part 2 of this series.


The views expressed here are the personal opinion of the columnist.
**Photo credits: Flickr users Ben Heine and Josef Stuefer.

One of the main sources for measuring investment flows is the Balance of Payment statistics, which are compiled by the Department of Statistics and Bank Negara Malaysia. These generally fall under two categories – portfolio and direct investment.

It’s a Global Marketplace

For example in financial markets, investment is the term used to describe the purchase of equity or debt securities with the money going towards supporting existing businesses. If the business grows, the value of the investment grows as well. These types of investment are called portfolio investment.

While portfolio investment does fall under the ambit of investment in the classical economic sense, it has to be recognised that in financial markets these types of transactions have a dual nature – when somebody is buying, somebody is also selling. So every financial market transaction is really a matched set of an investment and a divestment with no actual net increase in investment. Portfolio investments in Malaysia are not covered under the national accounts, but are covered under the balance of payments – but only investments (and divestments) made by foreigners.

A further complication is that, above a certain ownership threshold, portfolio investment is reclassified as direct investment. Direct investments are investments in corporate entities that cover things like new factories and new businesses. But if you buy a significant stake in a company or even buy it over entirely, it is also considered a direct investment and not a portfolio investment, irrespective of whether that company is listed on the stock exchange or not.

If the investor is a foreigner, these transactions are included under the FDI statistics; all cross-border mergers and acquisitions (M&A) activity are counted in as FDI. That’s one reason why countries with a highly developed financial market – such as Singapore, Hong Kong, the UK, and the US – tend to also have high FDI.

A Numbers Game

So you could have an increase in private direct investment and FDI that really does not involve an increase in the productive capacity of the country, but only a change in ownership. Worse, if a foreign company with an existing operation in Malaysia makes a profit and opts to keep it in Malaysia, that too is counted as FDI under the balance of payments even if it does not involve expanding production capabilities.

Thus an increase or decrease in FDI actually doesn’t say very much about investment in the productive capacity of a country. The type and category of FDI actually matters, and we should care about which kind we get. A high FDI level that is mostly M&A doesn’t always help in terms of improving productive capacity, and the long term growth of the economy.

We’ll look at investment as defined under the national accounts in Part 3 of this series.

The views expressed here are the personal opinion of the columnist.

Photo credit: Flickr users Fast Company, Dave Dugdale,

The system of national accounts, which is compiled by the Department of Statistics, includes a category for gross fixed capital formation. This category covers accumulation of fixed assets by companies, households and the government, and is most closely akin to the layman’s understanding of investment. When a company or the government accumulates fixed assets, it generally means an improvement in productive capacity. For example computing equipment, factories, assembly line machines, all fall under this category.

Money, Money & More Money


While on the whole fixed asset accumulation does indeed improve long term growth, there’s lots of things counted as fixed assets that might not meet the “smell” test of improving productive capacity. For instance, buying company cars, artwork for decorating corporate headquarters, and renovating the CEO’s office all count as an increase in fixed assets, and thus an increase in fixed capital formation and GDP. Similarly, government purchases of defence equipment mostly count as public investment under the national accounts and contribute to higher GDP. I wouldn’t consider any of the above as investment in its traditional sense, though to be fair these usually don’t amount to a great portion of fixed asset accumulation.

On the other hand, every new building and road built is also an increase in fixed assets, and thus also an improvement in GDP. But these types of fixed assets do contribute directly and indirectly to greater growth potential down the road. New buildings provide space for business expansion, while new roads improve connectivity, reduce transport costs and form hubs for economic growth.

Wall Street – The Financial Hub

Some have criticised our current public and private investment programs on the basis that they are no more than “property plays”. These critics ignore the fact that on average 70% of gross fixed capital formation over the years has been investment in buildings, structures and properties, even back in the halcyon days of the 1990s. Public and private investment in buildings and structures usually form the bulk of fixed asset accumulation, not just for Malaysia but for most countries in the world. If such investments bring strong public benefits, as the MRT is likely to do, then all the better.

To sum up this series, we use the term investment to describe a wide variety of transactions, some of which don’t really involve investment in the way people take it to mean, which is improvement in productive capacity that helps boost long term growth. FDI for instance doesn’t always mean new factories or businesses, and there are some problems with relying on fixed asset accumulation as a measure of investment.

It’s a Global Marketplace

But these weaknesses shouldn’t distract from the underlying tale, which is still true – we need greater investment to improve productive capacity, to achieve sustained long term growth, and improve income levels and quality of life for Malaysians. Where we need to be cautious is in pursuing high investment growth for its own sake, without caring for type or quality.The views expressed here are the personal opinion of the columnist.

Photo credit: Flickr users James Hannan, epSos and Terra Nova.

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