VZCZCXRO3428
RR RUEHBC RUEHCHI RUEHDA RUEHDBU RUEHDE RUEHDT RUEHGI RUEHHM RUEHJS
RUEHKUK RUEHLH RUEHNH RUEHPW RUEHROV
DE RUEHKL #1641/01 3262349
ZNR UUUUU ZZH
R 222349Z NOV 07
FM AMEMBASSY KUALA LUMPUR
TO RUEHC/SECSTATE WASHDC 0277
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHDC
RUEHGV/USMISSION GENEVA 1528
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCNISL/ISLAMIC COLLECTIVE

UNCLAS SECTION 01 OF 02 KUALA LUMPUR 001641 
 
SIPDIS 
 
STATE PASS USTR - WEISEL AND JENSEN 
STATE PASS FEDERAL RESERVE AND EXIMBANK 
STATE PASS FEDERAL RESERVE SAN FRANCISCO TCURRAN 
SINGAPORE PASS TO SBAKER 
USDOC FOR 4430/MAC/EAP/J.BAKER 
TREASURY FOR OASIA AND IRS 
GENEVA FOR USTR 
 
SIPDIS 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV MY
SUBJECT: MALAYSIA CONCERNED ABOUT FOREIGN DIRECT INVESTMENT TRENDS 
 
 
¶1. (U) Summary: Malaysia's foreign direct investment flows rose 
rapidly in 2006, according to the UN Conference on Trade and 
Development (UNCTAD) World Investment Report 2007.  However, while a 
52.8% increase in inward FDI flows reversed a declining trend over 
the past five years, the bigger news was that FDI outflows rose by 
over 100 percent.  Following this very rapid rise in 2006 FDI 
outflows, Malaysia's inward and outward FDI flows were roughly in 
balance at about USD 6 billion each.  If this trend continues, 
Malaysia will be facing net FDI outflows going forward.  Not 
surprisingly, while the GOM publicly cites Malaysian FDI abroad as 
proof of success, it privately is carrying out a number of studies 
to see what can be done to improve Malaysia's ability to attract 
FDI. If Malaysia is already experiencing capital flight as some 
private sector analysts argue, the GOM's efforts to address the 
problem could be a catalyst for reform. 
 
THE GOVERNMENT'S VISION FOR THE ECONOMY 
--------------------------------------- 
 
¶2. (U) As a destination for FDI, Malaysia's attractiveness is 
narrowing as the country becomes less competitive for lower-wage 
manufacturing.  In response, the GOM is seeking to move the economy 
"up the value chain" by promoting specific sectors.  In its 
2006-2020 Third Industrial Master Plan, the GOM identified specific 
higher-tech industries it wanted to attract and develop.   In the 
manufacturing sector, these include electrical & electronics; 
medical devices; textiles & apparel; machinery & equipment; metals; 
and transportation equipment.  Investors in targeted industries 
often can negotiate favorable terms with the GOM; investors in 
non-targeted industries tend to face more bureaucratic obstacles. 
Also targeted for growth were a number of resource-based industries 
and some services sub-sectors; however, the extent to which foreign 
investors are allowed to participate in these sectors is limited. 
 
FDI INFLOWS REBOUND IN 2006 
--------------------------- 
 
¶3. (U) In October, the UN Conference on Trade and Development 
(UNCTAD) reported that FDI to Malaysia increased by 52.8% after a 
14.5% decrease in 2005.  Inflows during 2006 restored total inward 
FDI stock to 1.6% above its 2000 level after having dropped off 
measurably by 2005.   Malaysia retained its 2005 global rank of 62nd 
largest destination for FDI, keeping apace with a sharp global 
increase, but nowhere close to its status a decade ago when it 
ranked sixth in 1995. 
 
OUTFLOWS DOUBLE: BUSINESS ACUMEN OR CAPITAL FLIGHT? 
--------------------------------------------- ------ 
¶4. (U) Outward flows of FDI more than doubled in 2006 TO USD 6.04 
billion -- nearly equal to Malaysia's inward flows of USD 6.06 
billion.  The Prime Minister claims that this is a testament to the 
competitiveness of Malaysian businesses as they expand operations 
throughout the region.  In fact, the GOM encourages companies to go 
offshore and has directed some of its state-owned companies to do 
so.  Telekom Malaysia purchased businesses in India, Sri Lanka, 
Indonesia and Cambodia.  CIMB, a Malaysian bank, is purchasing 
offshore banks throughout the region.  Petronas is expanding rapidly 
across the globe as Malaysia's oil reserves begin to taper off. 
 
GOM COMMISSIONS STUDIES 
----------------------- 
 
¶5. (U) While the Government publicly claims the outflows as a 
success story, behind the scenes they are looking into the matter 
more closely.  Earlier this year, the GOM commissioned the Economic 
Research arm of Rating Agency of Malaysia (RAM) to conduct the 
study, "The Changes and Determinants of Foreign Direct Investment in 
Malaysia."  The Study included industry feedback and recommendations 
for improving the business climate. 
 
¶6. (U) In addition, the Economic Planning Unit (EPU), which reports 
to the Prime Minister, is actively soliciting feedback from the 
business community on what the GOM needs to do to attract foreign 
direct investment and promote a vibrant business sector.  On 
November 15 the EPU sent letters to businesses explaining that they 
had hired an independent consultant to conduct a market audit that 
would examine current perceptions of Malaysia as a destination for 
business and investment.  The letter requested input and feedback in 
a confidential one-on-one interview on the advantages and 
disadvantages of doing business in Malaysia, its livability, and 
recommendations for enhancing Malaysia's business competitiveness. 
 
 
KUALA LUMP 00001641  002 OF 002 
 
 
 
 
¶7. (U) Private sector analysts take a decidedly less enthusiastic 
view of the surge in outward flows.  They attribute a significant 
amount of it to the capital flight of disillusioned ethnic 
minorities who feel they are gradually being squeezed out by 
Malaysia's racial preference policies and to the frustration of 
businesses looking for less restricted markets. 
 
COMMENT 
------- 
 
¶8. (U) Comment:  The Prime Minister has been pushing state-owned 
entities to expand overseas in an effort to force them to become 
more competitive, even while he maintains the racial preference 
policies that have made them reluctant to move offshore.  At the 
same time, capital flight as a factor driving the rapid rise in FDI 
outflows cannot be denied.  If Malaysia begins to experience 
significant net FDI outflow in the coming years, it could be a 
driver for greater domestic economic reform. 
 
KEITH