Jury Still Out on Kuala Lumpur’s Drive to Free Manufacturing Sector

BY fully liberalising its manufacturing sector, Malaysia has moved up one notch in the race to attract foreign direct investments, but it may not be enough to compete with its neighbours, manufacturers and economists said.

'While Malaysia has taken a big stride on the policy front, it remains for us to see responses at the industry level. As a first test, we hope ownership liberalisation in combination with previous measures should be competitive enough to hold back some multinational corporations, especially in the electrical and electronics sector, from relocating due to the huge cost differential, say, to China,' said Wong Chee Seng, senior economist at DBS Bank.

He added: 'Secondly, it remains to be seen how much of this liberalisation move would entice new inflows of foreign direct investment to Malaysia because we could expect similar responses to come from other neighbouring countries.'

He was not the only one who was cautiously optimistic on Malaysia's policy last week to abandon the bumiputra policy and the 80 per cent export requirement in the manufacturing sector.

Malaysian manufacturers yesterday took the opportunity to voice their grouses.

'As local manufacturers struggle to improve their competitiveness and assist the country in quickly recovering from the economic crisis by increasing their exports, their efforts are hindered or even negated by the rising costs of logistics in Malaysia,' said the Federation of Malaysian Manufacturers.

The umbrella organisation added: 'If this is issue is not addressed quickly, it could deter foreign direct investments by way of adding to the cost of doing business in Malaysia.'

Last week, Minister of International Trade and Industry Rafidah Aziz surprised the business community when she said foreigners will now be allowed to own 100 per cent of their new operations in the manufacturing sector.

There is no longer any need to set aside equity for the Malay, or bumiputra, community as part of the affirmative action programme, introduced after the country's bloody racial riots in 1969. And foreign manufacturers no longer have to export more than 80 per cent of their output in order to qualify for the 100-per cent ownership equity level. The policy switch took effect on June 17.

Like many countries in the region, Malaysia witnessed a sharp fall in foreign direct investments as foreign multinationals headed to booming China. Last year, Malaysia saw a 40 per cent plunge in FDIs to RM11.2 billion (S$5.1 billion). In the first three months of this year, Malaysia approved only RM2.2 billion worth of investments by foreign companies.

Economists noted that Malaysia has liberalised progressively over the last three years, especially after China's entry into the World Trade Organisation and Singapore's signing of a free trade pact with the United States earlier this year.

An analyst said Malaysia's latest liberalisation could help counter the US-Singapore Free Trade Agreement, which will help establish Singapore as the regional manufacturing base for foreign companies seeking a tariff-free gateway to the US.

Malaysia is keen to sign a free trade pact with the US as well, but American officials have warned that US-Malaysia negotiations could be more complicated than the two-year talk with Singapore.

Despite the challenges faced by Malaysia, economists said the country could still surprise in its bid to remain on foreign investors' radar screen.

'We believe the opening up of the manufacturing sector signals more liberalisation in the services sector. In this regard, Malaysia could stand to benefit much more than the rest on account of first mover's advantage,' said DBS' Mr Wong.