The broad objective of this study is to examine the nature and the role of foreign capital in Malaysia.
British investments dated back to pre-independent period, but were mainly concentrated in the traditional extractive industries. In the first part of this study, we examine the rationale of mobilising foreign capital in Malaysia, especially in the manufacturing sector. Secondly, an attempt is made to measure the foreign capital requirements for 1975-1985, by applying a synthetic model based on the Chenery- Strout Two-Gap Model and D.Avramovic's External Debt Model. The importance of external debt services in LDCs in recent years necessitates particular attention to this problem.
The first part of the study contributes to existing literature in the following way. It supplements similar studies by H.B.Chenery and A.M.Strout,"Foreign Assistance and Economic Development"', and S.Yokio and Hishamura, Foreign Aid and Economic Growth of Developing Asian Countries. The use of the synthetic model incorporates another important variable of external debt services, which are ommitted by the previous writers. Furthermore, the study is more comprehensive in that an attempt is made to discuss each magnitude used in the model: gross national product, savings, investments, imports, exports and debt services.
The second part of the study attempts to look at the relevant issues related to foreign capital in Malaysia. In this context, the roles of both private foreign investments and foreign aid have been investigated. Particular attention is focussed on the Malaysian Government's policies (investment incentive schemes) regarding private foreign investments. The impact of private foreign investments in the economic development of Malaysia has also been examined in terms of the macro-economic implications on variables such as gross national product and savings. Further repercussions of foreign investments on the transfer of technology and the balance of payments in Malaysia are also briefly examined.
With regard to private foreign investments, the Malaysian Government's policy has been to provide a conducive investment climate so as to encourage the inflow of foreign capital, mainly by offering various tax incentives. However, there has not been a serious effort to find out the cost of these schemes to Malaysia, and also how far the anticipated benefits really accrue from private foreign investments. Furthermore, has the policy towards private foreign investments been effective to regulate their flow and functioning in comformity with the national interests? This is an important question for the rationale of a policy, which encourages the inflow of private foreign investment for capital and technology. An objective evaluation of the nature and behaviour of private foreign investment in Malaysia, with a view of assessing their efficacy and contribution to Malaysia's economic development is the aim of this study.
The main conclusion from the study is that, while foreign investments have made some positive contributions in increasing industrial output and employment, they have been much below the expected targets. Private foreign investment is found to be capital-intensive and they tend to concentrate in the more developed areas. The study also shows that the technology imported through private foreign investments is often inappropriate and they have done relatively little to transmit the technical knowledge to Malaysian nationals. Furthermore, Malaysian balance of payment problems are exacerbated due to repatriation of capital and profits. On the other hand, the costs of private foreign investments to Malaysia have been substantial, in terms of revenue loss due to tax exemption policies and payments for patents and licences for the technology.
The study also suggests that the question of foreign aid is mainly a function of policy issues of developed donor countries rather than of recipient countries like Malaysia. The experience of the 1960's of Malaysia's First Malaysia Plan based on foreign aid expectations and the recent hardening of the terms and conditions of aid in the international scene have made foreign-aid an unreliable source of foreign capital. In the future, Malaysia will have to rely more on private foreign investments and foreign borrowings for her foreign capital needs. It is suggested, however, that there must be some policy re-evaluation to improve the regulation and control of private foreign investments in Malaysia according to the national objectives. In the long-term, it is suggested that the investment incentive scheme, which is the main plank of the Government's industrial policy, be phased out, as is already done by some other developing countries. Instead, Malaysia should endeavour to form a more cohesive regional body within ASEAN in order to safegaurd the potential regional market and also to strengthen the bargaining power, vis-a-vis the mechanism, of the multinational companies. Secondly, it is suggested that the policy of joint-ventures or collaboration be emphasised much more than what is done today in order to encourage progressive 'Malaysianisation".
The study is based on data published by Bank Negara Malaysia and the Federal Industrial Development Authority and the Census and Surveys of Manufacturing Industries ,West Malaysia. The study on private foreign investments is based on the Census and Surveys of manufacturing Industries, up to 1970.