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88 Outward Foreign Direct Investment by Small and Medium-sized Enterprises from Malaysia the Exchange Control Act, 1953. The Central Bank does not restrict OFDI but investors have to comply with prudential regulations which come under the Exchange Central Act, 1953. Over the period September 1998 – July 2005, Malaysian OFDI was governed by a regime of capital controls, where the local currency was pegged to RM3.80 to a US dollar. 64 The focus of the capital controls were on short-term capital flows. Of special interest to Malaysian OFDI are the regulations that cover export proceeds and investment abroad by residents. Prior to de-pegging the currency, the Central Bank liberalized further its control on overseas investment by easing further regulations. Unit trust funds, insurance companies and individuals are now permitted to use a sizable amount of their financial resources for overseas investment. Liberal foreign exchange control has also encouraged Malaysian OFDI. Institutional support. A number of institutions provide support and assistance to OFDI. These support measures include information provision, outward investment missions, facilitating meetings and interaction, private sector networking and financial facilities. Some of the institutions and their support programmes are summarized below. • Export-Import (EXIM) Bank of Malaysia supports Malaysian companies investing overseas. It provides financial facilities, investment information and advisory services. Its overseas project financing facility supports Malaysian investors undertaking projects • overseas in manufacturing, infrastructure and other developmental projects. Malaysian Export Credit Insurance Berhad (MECIB) provides export credit insurance services to Malaysian exporters of goods and services, Malaysian corporations for outbound investments as well as Malaysian companies, mainly SMEs involved in exporting. It provides various facilities and services to cater for both SMEs and large corporations that plan to internationalize. Its overseas investment insurance scheme offers insurance facilities to Malaysian companies to protect their overseas investment and profits against transfer restriction, expropriation, war and civil disturbance, and breach of contract. • Malaysia South-South Association through its investment arm, the Malaysian South- South Corporation Berhad (MASSCORP) plays an important role in supporting the internationalization of Malaysian companies. It promotes bilateral trade and investment ties with South-South countries by serving as a platform 64 The ringgit was depegged from the US dollar on 21 July 2005. and link between Malaysian businesses and South countries. MASSCORP is a consortium comprising 85 Malaysian (companies) • shareholders from various industries. Ministry of International Trade and Industry (MITI) encourages Malaysian investments in both domestic and international businesses. MITI is responsible for the planning and formulation of industrial and investment policies, both promoting and safeguarding Malaysian industrial interests at home and abroad. The Ministry also monitors policies relating to enhancing the competitiveness of the manufacturing and services related sectors and creating conducive business and investment environment. MITI organizes trade and investment missions to explore business and investment opportunities in selected countries, and maintains offices overseas to assist Malaysian investors in host countries. • Malaysian Trade Development Corporation provides market intelligence information, databases and organizes training programmes to improve Malaysian international marketing skills while enhancing and protecting Malaysia’s international trade and investments abroad. It offers financial assistance, including grants. • Small and Medium Industries Development Corporation promotes the development of small and medium industries (SMIs) in the manufacturing sector through the provision of such services as advisory, fiscal and financial assistance. It provides financial assistance and development programmes to SMIs on accessing new markets, financing, technological capabilities, information and communications technologies, and skills training. • Malaysian Industrial Development Authority also extends services and facilities supporting Malaysian cross-border investment. Some of the facilities include enterprise connect, which helps Malaysian firms seek investment opportunities abroad and support business linkages between Malaysian firms and foreign investors in the country. The Malaysia-Singapore Third Country Business Development Fund 65 supports Malaysian and Singapore enterprises to cooperate and to jointly identify investment and business opportunities in “third countries”. • Inland Revenue Board (IRB) offers such incentives as Double Deduction for Promotion 65 See http://www.mida.gov.my/beta/news/print_news.php?id=979
of Malaysian Brands and Incentives to Acquire a Foreign Company. One of the most important supports for OFDI is that income remitted to Malaysia by resident companies, non-resident companies and non-resident individuals (other than companies in the banking, insurance, air and sea transportation sector)is exempted from tax. IRB does not enforce any kind of outward remittance tax. This greatly simplifies the process of operating and controlling international subsidiaries, relative to countries which have some form of remittance tax system. Under the agreements for the Avoidance of Double Taxation, income such as business profits, dividends, interest and royalties that are derived in one country and remitted to another country is taxed in one country only. Malaysia has double taxation agreements with 55 countries. F. Conclusion Malaysia is a growing source of FDI to many developing countries, particularly in Asia and Africa. The prospects for further increase in OFDI is promising in light of industrial development and structural changes in Malaysia’s economy, including growing competition from inside and outside the country that will push more Malaysian firms to invest abroad. As Malaysian firms in the manufacturing industries move up the value chain and become more skill and technology-intensive, firms in the labour intensive and lower end of the production value chain will increasingly find the need to establish productive capacities in low cost location to improve or maintain competitiveness. For these firms, investing abroad is crucial for their survival. The support of the Government and the institutional facilities provided by the various specialized agencies will give the added impetus for enterprise internationalization. Greater economic integration within ASEAN will encourage Malaysian enterprise to regionalize as will the establishments of the various free-trade area arrangements with partner countries. The improved policy environment and the increase capacity and capability of Malaysian firms to internationalize will play a significant role in this regard. Relatively few Malaysian SMEs invest overseas because of constraints including the lack of managerial capacity, higher risks and access to finance. In particular, they often lack the knowledge on overseas markets, legislations and policies on FDI in the host countries. They also lack capacity and understanding on international business activities and risks associated with FDI. Their limited financial resources also restrict their ability to venture abroad. Most SMEs need fiscal incentives and other CHAPTER VII 89 assistances to venture abroad, including advice and coaching. Larger firms on the other hand are relatively less constrained by finance. They have the advantage of the backing and support of the Government in their overseas ventures, particularly the GLCs. While there are success stories of Malaysian enterprise internationalization through OFDI there are also stories of failures. The success stories of Malaysian SMEs such as Top Glove, Ingress and Munchy Food Industries that grew from small entities to large enterprises has shown that OFDI can increase competitiveness. The lack of capacity, information and appropriate approaches in managing risks of internationalization, including “impulse drive” to go abroad had contributed to internationalization failures by Malaysian enterprises. It is important that these limitations be addressed to facilitate and ensure more successes of Malaysian enterprise internationalization. The Government could consider adopting measures to increase the pool of efficient and competitive SMEs capable of producing goods and services demanded internationally and in supporting business linkages at home. Through institutional support and capacity building, these homegrown competitive Malaysian SMEs should then be encouraged to internationalize through OFDI. While policies can influence the nature and scope of Malaysian OFDI, a clear distinction should be made between State-owned and private firms. A number of distinct policy issues need to be considered and assessed. For private firms, the attractiveness of different policies can differ. Interviews conducted by the author suggest that for some private firms, fiscal/tax incentives for OFDI are not important and the benefits are often applicable only in the short-term. Some companies are of the view that grants and soft loans are move attractive than other incentives to facilitate investing overseas. Apparel manufacturers and enterprises in the wood products industry expressed the view that both soft loans and incentives can assist their internationalization. A few consumer electronics companies with trading offices in China, Hong Kong (China) and Thailand, indicated that grants would be very important to assist them set up overseas operations, especially for building brands. Government assistance in the form of fostering government-to-government relationship was considered important for investors in the automotive components and parts industry. Companies in the rubber products and packaging industries consider that government-to-government negotiations for favourable investment policies and trade agreements
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United Nations Conference on Trade
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Preface The landscape of internatio
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Acknowledgements This publication i
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