This article first appeared in Forum, The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

It is often said that the word for “crisis” in Mandarin is written by combining the characters for “danger” and “opportunity”. The Covid-19 pandemic since 2019 was indeed a global crisis; to halt the spread of the deadly virus, the entire world had to be brought under lockdown.

With the lockdowns, many businesses shuttered and the global supply transport infrastructure stood still. The authorities went into panic mode to save their economies; most resorted to opening the monetary taps to keep economies breathing and people out of starvation.

Much was “disrupted”, to use a wholly inadequate term — most importantly, the global supply chain (GSC), upon which Malaysia’s economy is highly dependent.

Indeed, Malaysia has built its economy to be dependent on foreign direct investment (FDI) and part of the GSC, ignoring conventional, centuries-old wisdom of building up a country’s industries with its own final products and brand names. The result? Malaysia is stuck in the middle-income trap and the goal of being a high-income nation appears further than ever. With the World Bank recently raising the bar for gross national income (GNI) in high-income nations to US$12,695 (RM53,538) a year, from US$12,535 a year previously, Malaysia — whose GNI in 2020 was US$10,570, from US$11,260 in 2019 — faces a daunting, if not impossible, task.

There are several aspects of following this strategy that are troubling. Any trainer will tell you that, to inculcate good new habits, the bad, old ones need to be exorcised. Let us look at three reasons the FDI and GSC strategy is flawed:

The first is that, where Malaysia’s FDIs and GSC participation is concerned, they are mainly of the intermediate goods type, instead of the “whole value chain final products manufactured” type. This means thin margins and value-add to the domestic economy.

A very popular article in 2012 highlights the thinness of margins obtained by intermediate goods manufacturers. The article, penned by Matthew Yglesias (“FoxConn getting by on US$8 per iPhone”), noted that FoxConn, which assembled all the iPhone 5 units in the world in 2012, made only US$8 per unit, while an unlocked iPhone 5 unit retailed for US$849 for the 64GB model. In other words, it made less than 1%.

This thinness filters upwards towards the value-add to gross domestic product (GDP). In Tables 1 and 2, we compare intermediate goods producer Malaysia to South Korea, which has plenty of final products and brand names. It clearly shows that South Korea gets a higher contribution to GDP from its foreign sector (current account over GDP), never mind its far larger GDP figures.

The second reason is that technological trickledown to the domestic economy from FDIs cannot be assured. Years of academic research is at best inconclusive as to whether FDI does spark such trickledown. Worse still, most research does not make the critical difference between their samples: whether they are the FDI type that produces the whole chain that ends with a final product or they are the “stick part A to part B” type of intermediate goods production. The following are some examples.

A study by Elvisa Torlak in 2004 on technology transfer in the transition countries of Hungary, Poland, Romania, Bulgaria and the Czech Republic corroborated the theory that technology is transferred internationally through multinational firms within themselves but provides no evidence of diffusion of technology from foreign to domestic firms. This means that XYZ in the US will transfer technology to its XYZ plant in Malaysia, but not to unconnected Pak Ali Satay and Microchips Sdn Bhd in Ulu Sembelit.

Frank Lichtenberg and Bruno van Pottelsberghe de la Potterie in their 2001 paper, “Does Foreign Direct Investment Transfer Technology Across Borders?” noted: “The data indicates that FDI transfers technology only in one direction: A country’s productivity is increased if it invests in R&D-intensive foreign countries … But not if foreign R&D-intensive countries invest in it.”

The third reason is that Malaysia has performed abysmally in attracting FDI, coming in last in 2018, and is next to South Korea in a sample of Asian countries (see chart). South Korea does not need that much incoming FDI as an already developed country. The chart, which is from our previous paper “Foreign Direct Investments in Malaysia, Part 1 — Has Malaysia Fallen Off the Beauty Parade?” with Malaysia right at the bottom in 2018, says it all: The forecast for economic growth post the pandemic is one of economic re-emergence for all countries. This is where each country will have to look after its own. 

Therefore, while producers outside of the countries of origin will have a greater amount of orders from companies domiciled in their respective originating country (already evident recently), it is unlikely that new FDIs will come out. Rather, the movement, under former US president Donald Trump’s days, was that of calling back US companies to produce within its borders. There is scant evidence that current President Joe Biden has totally reversed that, given the benefits to the US’ own economy. 

China has turned inward, looking for its domestic economy to fuel its economic growth. Russia’s attack on Ukraine now adds the spectre of not only higher oil and gas prices, but also commodities, with Ukraine being a huge global producer of wheat, corn and sunflower oil. One doubts that, with a war on, Ukrainian farmers can sow their crops in late spring; this year’s harvest is likely to be a poor one, driving up food prices globally.

The setting for more FDIs globally is in poor light, with tentative economic recoveries and global inflation on the near horizon; far better will it be to have local industries making final products for the needs of the people.

The case for de-emphasising the current growth strategy for Malaysia of FDIs and GSC participation cannot be stronger. It is time to emphasise local final products and brand names as a national economic strategy.

Huzaime Hamid is chairman and CEO of Ingenium Advisors, Malaysia’s financial macroeconomics advisory

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.