Foreign Direct Investment

Foreign direct investment (FDI) has been seen as a key driver underlying the strong

growth performance experienced by the Malaysian economy. Policy reforms, including

the introduction of the Investment Incentives Act 1968, the establishment of free trade

zones in the early 1970s, and the provision of export incentives alongside the acceleration

of open policy in the 1980s, led to a surge of FDI in the late 1980s. To attract a larger

inflow of FDI, the government introduced more liberal incentives including allowing a

larger percentage of foreign equity ownership in enterprise under the Promotion of

Investment Act (PIA), 1986. This effort resulted in a large inflow of FDI after 1987(the

inflow of FDI grew at an annual average rate of 38.7 percent between 1986 and 1996).

Apart from these policy factors, it is generally believed that sound macroeconomic

management, sustained economic growth, and the presence of a well functioning

financial system have made Malaysia an attractive prospect for FDI. (Ministry of

Finance, 2001).

The major areas of investment by foreign companies are in sectors such as electronics

and electrical products, chemicals and chemical products, basic metal products, nonmetallic

mineral products, food manufacturing, plastic products, and scientific and

measuring equipment.(Ministry of Finance, 2001).

Inward FDI performance index for Malaysia is less than of Inward FDI potential index

which means in recent years Malaysia is not able to attract FDI as much as her actual

potential (Table 1)

In fact FDI flows into Malaysia had decreased steadily and Malaysia was ranked 71 in

2007(UNCTAD ranked Malaysia as the sixth largest destination for FDI in 1995).