Factors Affecting FDI In Malaysia: Impact Of Political And Legal System

The Political and Legal System of Malaysia

The essay brings out the effect of certain environmental macro factors that affect the cost of establishing FDI Malaysia. A framework of macro-environment factors includes political system, economic system, social system, technological system, and environmental system. However, the requirement wants to focus on political system including the legal system and its influence on economic system of the country. Although, it is important to consider both macro and micro environmental analysis of the Malaysia before planning for FDI (Foreign direct Investment) in the country. The Malaysian government has been promoting a favourable environment that can promote FDI (Foreign direct investment) (Nazeer & Masih, 2018).

Political system of a country influences the existence of a business to greater extent especially when an international organisation decides to establish in Malaysia. Moreover, political instability is considered as a harmful reason to economic performance. Political instability is understood as inclination of collapse of legal system of country when the laws keep changing. This instability occurs due to conflict between different political parties. Malaysia follows a particular government type named as federal parliamentary constitutional monarchy. Many peninsular Malaysian colonies have rulers as sultans. To get approval for bill from the parliament, it requires two-third majority of votes from the members of the parliaments. Moreover, Malaysian government is a multi-party democratic nation. As per the corruption perception Index, Transparency international marked Malaysia as 47^th position among 180 countries (Dezan Shira & Associates, 2017).

Recently, BMI ranked Malaysia as 12^th in Asia and on 39^th position in the word in terms of political stability. A Malaysian legal system is a system, which is based on British common law whereas; Islamic law is applied to Muslim population. British law is seen as advantageous to organisations because it supports investments in the country (Asia Briefing, 2018). Many investigations cases regarding the political turmoil remain a regular assertion of fraud funded by the Prime Minister named “Najib Razak.” A negative result of these investigations can lead to negative impact on the state and can leave the country in the state of political turmoil (Dezan Shira & Associates, 2017). After looking at the neighbours who are highly growing, Malaysia tried to maintain a pace where it has started adopting FDI friendly economy. The government has established Malaysian Investment Development Authority (MIDA) to delegate approximately 144 incentives to the foreign investors. These incentives can be either tax or non-tax related. MIDA has tried to make it clear that there is no intention to withdraw these incentives or make the procedures difficult that relates to FDI policy (Azudin, & Norhashim, 2017).

To accomplish the political requirement, it includes the compliance of legal at the same time. In the beginning of 2017, the Companies Act, 2016 was enforced and applied to all the corporations in Malaysia including the companies, which are foreign-owned. There are no such specific changes that are aimed only at foreign companies in the company Act, 2016. These changes in the business environment has added high value to industries and strengthened the environment in the country. Such a business environment promotes and attracts the potential entrants (Zain et al., 2018).

Malaysian Government’s Efforts to Promote FDI

Earlier, the Malaysian economy has shown a strong v-shaped recovery in 2010 (Matabadal, 2011). The fiscal positions remained weak, the government tried to focus on capital investment through fiscal deficit to achieve a developed economy. The government also strived to invest in new and ambitious development plans. The economy growth and foreign direct investment has a positive relationship that affects the economic development of the country. To fulfil these development plans, it will be risky and can become challenge if government start borrowing funds from private sector. The GDP growth ranges from nearly 4.4 percent to 4.8 percent that indicates faster growth compared to 2016. In 2016, it was GDP was expected that GDP per capita would show a significant increase in 2017 (Dezan Shira & Associates, 2017). This increase in Per capita income shows high purchasing power of the customers, the increase in disposable income, domestic income and overall average income of the population living in an area. More per capita income brings increase in consumption level of customers. This would lead to offer opportunities to FMCG companies, food service and retail outlets. The (MDEC) Malaysian Digital Economy Corporation has recognised 2017 as a year of ‘internet economy’. Malaysia provides an e-commerce platform to all the industries in 2017 (Dezan Shira & Associates, 2017). Both the authorities private as well as government players have planned to spend on digital infrastructure, which would give a boom to e-commerce market for both national and international companies (Rahman, & Ahsan, 2015).

Malaysia is one of third largest economy in ASEAN group. The country is rightly tracked to achieve the goals of high income by 2020 (Omran, & Leng, 2016). Malaysia has become one of the top performer especially concerning for efficiency and business rules. The country is trying to establish a competitive edge in its government reforms that could attract FDIs. However, the foreign companies can face high business costs as compared to various ASEAN countries. High cost business is due to increasing implementation of taxes and allowances. However, the companies who expand their business must be already following GST (Goods and Service Tax), those companies will not face problems rather it would add high value to the local industries (Simmons, Hicken, Kollman, & Nooruddin, 2018).    

Apart from understanding legal and political scenario of the country, it is important to certain external factors that affect the business. Despite, In order to establish and expand an organisation in Malaysia would bring understanding of those factors that would affect introduction of business in ASEAN countries. Doing business according to ASEAN 2016 hosted fundamentals of investing in 10-nation ASEAN bloc that focuses on trade, taxation, economics, and corporate establishment (Matabadal, 2011). The Malaysian government is trying to develop a country with GDP per capita that can define the country as developed. Malaysia is a middle-income country. From producer of raw material to an emerging industrial sector economy, it has transformed the country since 1970s. Malaysia is aiming to gain a high-income status by 2020 and the country wants to go up with value addition in in production chains by attracting and investing the fund into Islamic fund, medical technology, pharmacy, and high technology industries. The country is already trying to boost the domestic demand and reduce the dependency of the economy from the exports (Central Intelligence Agency, 2018).  

Conclusion:

From the above discussion, it can be concluded that Malaysia has shown interest in growing its economy by allowing FDI. It might be problematic for those country-based businesses who do not operate in GST (Goods and service taxes). However, the country has tried to simplify its business process to promote the international business in the country. As far as the politics and legal is concerned, the country has a vision to develop itself to have maximum per capita income and gross domestic product.

References: 

Asia Briefing, (2018). An Introduction to Doing Business in ASEAN 2016. Retrieved from: https://www.asiabriefing.com/store/book/an-introduction-to-doing-business-in-asean-2016-5776.html

Azudin, N., & Norhashim, M. (2017). Challenges facing Brazilian economy in the emerging market: Future trade opportunities for Malaysia. Journal of Fundamental and Applied Sciences, 9(7S), 558-570.

Central Intelligence Agency, (2018). The World Fact book. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/geos/my.html

Dezan Shira & Associates, (2017). Malaysia’s FDI Outlook for 2017: Trends and Opportunities. Retrieved from:  https://leaglobal.com/thought_leadership/Malaysia%20FDI%20Outlook%20for%202017.pdf

Matabadal, A. (2011) Country update MALAYSIA. Retrieved from:  Researchhttps://economics.rabobank.com/contentassets/03f5b8ef055246c7b13fced84166b37e/malaysiaupdate-201101_tcm64-82347.pdf

Nazeer, A., M., and Masih, M. (2018) Impact of political instability on foreign direct investment and Economic Growth: Evidence from Malaysia. Retrieved from: https://mpra.ub.uni-muenchen.de/79418/1/MPRA_paper_79418.pdf

Omran, A., & Leng, T. W. (2016). FACTORS AFFECTING THE PERFORMANCE OF CONSTRUCTION JOINT VENTURE PROJECTS IN MALAYSIA. Journal of Academic Research in Economics, 8(2).

Rahman, M. S., & Ahsan, M. A. (2015). Foreign Direct Investment as an Instrument for promoting Economic Development in Bangladesh. Asian Business Review, 3(4), 100-107. 

Shaari, M. S., N. E. Hussain, and M. S. Halim. 2012. ‘The Impact of Foreign Investment on the Unemployment Rate and Economic Growth in Malaysia.’ Journal of Applied Sciences Research 8 (9): 4900–6.

Simmons, J., Hicken, A., Kollman, K., & Nooruddin, I. (2018). Party system structure and its consequences for foreign direct investment. Party Politics, 24(2), 141-153.

Zain, Z. B. M., Samsu, K. H. B. K., Adnan, Z. H. B., Ismail, M. M. B., Khalid, N. S. B. M., & Nuruddin, S. B. M. (2018). BUREAUCRATIC POLITICS DURING THE IMPLEMENTATION OF NATIONAL HOUSING POLICY (NHP): MALAYSIA SCENARIO. politics, 23(1), 24.