Moving in the true spirit of growth with equity

WHEN the Foreign Investment Committee Guidelines (FIC) were unveiled in 1974, the Malaysian economy was vastly different from what it is today. The overwhelming dominance of foreign ownership and control of the major sectors of the domestic economy, a direct consequence of Malaysia's historical past, needed to be addressed.

By [email protected] (NST)

It was felt that the imbalances, if left unchecked, would be further accentuated and nullify the government's efforts for balanced development.

In 1970, about 60 per cent of the share capital of limited companies was owned by foreigners. It was as high as 75 per cent in agriculture and fisheries, and 72 per cent in mining and quarrying. In commerce, foreign ownership was 63 per cent and in manufacturing, it amounted to 59 per cent of the total share.

"It is against this background that the government has decided to regulate the acquisition of certain assets, or interests and mergers and takeovers of companies and businesses in Malaysia," said Tun Abdul Razak Hussein, then prime minister, when announcing the FIC guidelines.

"For this purpose, guidelines have been prepared and they will apply equally to acquisitions, mergers and takeovers by foreign or Malaysian interests."

The FIC guidelines, as introduced then, reflected the underlying philosophy of growth with equity. The principle applied was that the government would not undertake expropriation to achieve equity — there would be no "taking from Peter to give to Paul". Equity would be achieved through distribution of an expanding pie. Therefore, without high economic growth, we would not be able to achieve greater equity.

After 35 years, the global and domestic economic environment poses new challenges in sustaining high economic growth. The changed economic and social environment calls for new thinking and appropriate policies and initiatives.

Malaysia needs to respond to the advent of globalisation, increased openness of countries and intense competition from other emerging economies. Thirty-five years ago, most countries in this region, including China, India and Vietnam, were relatively closed economies and not actively courting foreign investment.

Business-as-usual and failure to adjust to new realities will result in an inevitable decline for our nation. Thus, the need for the country to adjust its approach and policy instruments to meet the new challenges and realities. The major changes to the FIC guidelines to be announced by Prime Minister Datuk Seri Najib Razak on Tuesday will be closely followed by many, including those concerned that a major pillar of the New Economic Policy and a key instrument to achieve growth with equity is being undermined.

Contrary to these concerns, in the current economic environment, the essence of growth with equity can only be maintained through transformational change.

With the current global economic crisis, which has been described as the worst since World War 2, the challenges are even greater and the funds available for investment abroad are even lower.

According to the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) flows dropped by double digits last year, and a further decrease could be expected this year as the consequences of the crisis on transnational corporations' (TNCs) investment expenditure continued to unfold.

Global FDI flows are expected to drop by 50 to 60 per cent this year, after a 21 per cent drop last year.

"The fall in global FDI in 2008 and 2009 is the result of two major factors affecting domestic as well as international investment," says UNCTAD.

"First, the capability of firms to invest has been reduced by a reduction in access to financial resources, both internally, due to a decline in corporate profits, and externally, due to lower availability and higher costs of finance.

"Second, the propensity to invest has been diminished by negative economic prospects, especially in developed countries hit by the most severe recession of the post-war era."

Malaysia cannot afford impediments and bottlenecks to investment and economic activity, particularly as the current economic crisis has resulted in global companies rationalising and consolidating the number of countries in which they operate.

It is critical that the investment environment is enhanced so that Malaysia does not lose out but benefits from such consolidation.

It is important that efforts are made to strengthen the domestic economy together with structural change so that Malaysia will be well placed to rebound as the global economy recovers. It is important and indeed necessary for Malaysia to remain ahead of the curve and not miss the opportunity offered by the current global crisis for substantive, structural and transformational reform.

It is essential to demonstrate again the courage and pragmatism shown in previous crises to think the unthinkable in pursuing the national interests. One key area for such reform is the FIC guidelines. While viewed as sacrosanct by some, many have joined the chorus calling for change in what is viewed as an instrument that not only impedes growth but has also outlived its usefulness.

If FIC were an effective instrument for distribution, it may be an acceptable trade-off to the extent that it constrains growth. However, studies have shown that FIC has not delivered sustainable wealth creation or economic participation by Bumiputeras.

With the proposed changes, the government aims to ensure that the economy is competitive, there is growth with equity and that Malaysia's economy is able to make the quantum leap from the upper middle-income to the higher-income level.

With increased competition for limited foreign investment funds, the policies and measures to encourage private investment, both local and foreign, should be facilitative and strengthen the competitiveness of the economy without sacrificing domestic needs.

Malaysian policy-makers must keep up with the changing circumstances and cater to the needs of a new breed of businessmen and entrepreneurs who are more discerning and demanding. They have more choices of where to invest their money. The policies must also contribute to growth, equity and national development.

Moving forward, policy instruments promoting growth and distribution of wealth are urgently needed. The review of the FIC in no way means that the government will sacrifice the needs of the Bumiputera community. It is not zero-sum game. A review of FIC guidelines does not involve benefiting the economy at the expense of Bumiputeras. It is, in fact, a mutually beneficial move.

If we can move beyond perception and sensitivities, growth will benefit all Malaysians, Bumiputeras and non-Bumiputeras alike. By making policy instruments sharper and more market-friendly, the government can achieve more effective and sustainable partnerships between Bumiputeras and non-Bumiputeras, in the true spirit of growth with equity.