Technology and digital economy to drive FDI growth in Malaysia

While most Singapore businesses have always looked to our closest neighbour to launch their regionalisation efforts, Malaysia’s attractiveness is also becoming apparent to companies from around the world.

As part of promoting Malaysia as an investment destination, the country’s government has taken an active role in creating initiatives, including competitive investment incentives and tax policies, to attract foreign direct investment (FDI) focusing on technology and the digital economy. These efforts are seeing results. Malaysia’s highly skilled workforce and well-established manufacturing sector make it an attractive investment destination within Asean. According to the Malaysian Investment Development Authority (MIDA), in the first six months of 2019, the country attracted RM45.9 billion in FDI, up 97.2% year on year.

With the Malaysian government committed to furthering economic stimulation and investments and improving human capital and productivity as part of its Budget 2020, these are the three key trends that we believe will continue to draw foreign investments to Malaysia:

1. Rise of the digital economy

Rapid technological advancements in recent years have led to the remarkable growth of the digital economy. In Malaysia, the digital economy is expected to contribute 20% to the economy by 2020, up from 17.8% in 2015. E-commerce, in particular, is expected to exceed RM110 billion by 2020, making up nearly 40% of Malaysia’s digital economy.

The optimism towards the growth of e-commerce in Malaysia is partly attributed to the Digital Free Trade Zone launched in 2017. Through the DFTZ, Malaysia wants to attract investments to help drive cross-border e-commerce and trade and growth of its logistics industry. It also wants to drive exports for small and medium enterprises by working with global and regional online marketplaces to increase demand for Malaysian goods.

A rising tide lifts all boats — the rise of the digital economy will boost businesses that offer digital logistics or warehousing solutions that help increase productivity. Singapore’s Aptiv8 Pte Ltd, which recently expanded its operations to Malaysia, is one such example. The company provides a wide range of information technology solutions in areas such as inventory, collection and delivery management.

To boost its digital economy, the Malaysian government last October announced another two initiatives to continue attracting global digital talent and investment to the country.

First, the Malaysian Digital Economy Corp (MDEC) encourages the development and testing of next-generation technologies such as financial technology and blockchain. Within fintech, digital payments, as a key pillar of the digital economy, accounted for two-thirds of the total fintech investment deals last year. This was according to a recent FinTech in Asean: From Start-up to Scale-up report by United Overseas Bank (UOB), PwC Singapore and the Singapore FinTech Association. We expect to see continued growth in this area in the coming years.

The other initiative by MDEC is a Digital Talent Development Strategy Framework that will address the growing demand for a digital-savvy workforce. As the digital skill sets of Malaysians continue to deepen, the quality of the workforce will also help sustain the country’s investment appeal.

2. Industry 4.0 Gaining ground

To increase the productivity and competitiveness of its industrial sectors, the Malaysian government is accelerating business digital transformation through the implementation of Industry 4.0 technologies such as artificial intelligence and Internet of Things. It is ­offering wide-ranging incentives, including tax breaks for the electronics sector and related intellectual property, automation equipment capital allowance for services, provision of incentives for digitalisation and innovation efforts as well as a generous RM2 billion Industry Digitalisation Transformation Fund.

This commitment by the government represents good opportunities for foreign companies that have embraced or are looking to implement Industry 4.0 technologies in their business operations. UOB is well positioned to help companies that are looking to make this leap.

3. Growing green Technology

The third trend drawing more foreign investments to Malaysia is the development of green technology. For example, the Ministry of Finance’s Green Technology Financing Scheme aims to accelerate the production and use of green technology and products in various sectors by providing financing support through financial institutions such as UOB. These sectors include energy, building, manufacturing, transport, waste management and water. As the scheme is open to Malaysian majority-owned companies, foreign investors specialising in this area can consider partnering local firms to tap the incentive for their ventures in Malaysia.

In the area of solar power, UOB offers a suite of financial solutions — through its U-Solar programme — to support the solar power value chain. This includes firms like solar project developers and engineering, procurement and construction contractors to the end users of solar power, such as consumers and companies. First launched in Malaysia last October, U-Solar is Asia’s first solar industry ecosystem to promote the development and adoption of solar energy across Southeast Asia.

With close to 70 years of history operating in Malaysia, UOB has been supporting companies’ growth and expansion to the country. Our FDI Advisory team, set up in 2013, offers companies with insights into the local business environment and industry trends. We also provide companies with access to the bank’s specialist teams for financing support and ecosystem partners such as investment agencies and law and audit firms to help them gain a better understanding of government policies and regulations. Among the companies we have helped expand to Malaysia, close to half were from Greater China and more than a quarter were from Singapore and Thailand, the two closest neighbours.

In addition, our collaboration with various government promotion agencies, such as InvestKL, the Iskandar Regional Development Authority and the East Coast Economic Region Development Council, positions us strongly to connect businesses to investment opportunities in Malaysia. We also recently signed a memorandum of understanding with MIDA to attract foreign investments in high value-added sectors such as consumer technology, electrical and electronics, machinery and equipment, medical devices, aerospace and renewable energy. The alliance supports MIDA’s efforts on driving local industry development and competitiveness through sustainable investments.

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Sam Cheong is head of Group Foreign
Direct Investment Advisory and Network Partnerships, United Overseas Bank (UOB)

Source: The Edge Markets