International Business: Decline in Malaysian Fdi

INTRODUCTION:

A domestic firm venturing into a foreign country to expand its business either via a green-field investment, acquisition and/or expansion of an existing foreign facility is known as a foreign direct investment or FDI (Al-Sadiq, 2013). Malaysia has been hit by various issues in the last few years. These global and domestic issues have negatively impacted FDI flows and forced firms to either stop investing or reduce their investments. This essay discusses and analyses these factors and their impact on FDI. This essay would also take a firm, JVC Kenwood, and discuss firm-specific reasons that led to the firm pulling their investments out of Malaysia to better understand the outflows.

1. Political instability:

Political instability is one of the causes for the decline of FDI as it paves way for the existence of uncertainties in the business environment and increases costs and risks of operating (OBwona, 2003).

Government has an essential role in maintaining political stability, as potential investors have to strategize in accordance with the policies, taxes and incentives provided by them. The long term political stability goes a long way in instilling confidence in foreign investors and making them believe that their business will succeed and provide profits to all stakeholders involved.

During 2014 and 2015, the political situation in Malaysia has been unappealing due to various questions raised against the ruling party, allegations of corruption, questionable events etc. which have greatly harmed the image of Malaysia in the eyes of investors around the world.

This has led many experts to predict the downfall of the current government.

This affects FDI inflows as investors feel that it would prove to be too costly for a business to gain the government’s approval and begin investing, only for the present government to step down and the next heads of government to potentially cancel the project.

Governments are also responsible for encouraging FDI by good promotion, attractive trade policies and reasonable taxes. An Unstable government would equate to unstable policies and tax laws.

Firms must assess risks before investing or deciding to stop inflows. One of the major risks assessed are political risks. So, these political factors and the fact that the image of the country has been harmed shows that it is easier for foreign investors to be discouraged from taking part in FDIs.

1. Decline in oil prices  

There has been a sharp fall in the prices of oil in the last few years, greatly impacting economies worldwide. The factors that led to this development have been identified as the decline of demand in several countries because of their respective stalling economic growth, and the increase in USA’s domestic production, which has approximately doubled over the last couple of years. This has led to decrease in imports for oil in the US forcing Saudi, Algeria and Nigeria (main exporters of oil to US) to compete in the Asian market where the producers are forced to drop prices.