Foreign Direct Investment in Southeast Asia: Is Malaysia Falling Behind?

Abstract

This paper examines patterns and determinants of foreign direct investment (FDI) in Malaysia from a comparative Southeast Asian perspective. There is clear evidence that Malaysia's relative attractiveness for FDI within the region has eroded in recent years; outflow of FDI from Malaysia has consistently surpassed inflow of FDI, a pattern not seen in the other major Southeast Asian countries. The explanation seems to lie with the dualistic investment policy regime and the narrow domestic human capital base. We find no evidence that FDI in Malaysia (or major Southeast Asian countries) is crowded out by an increasing flow of FDI into China. On the contrary, Malaysia is well placed to benefit from a complementary FDI relationship with China as a favoured location of high-end tasks within global production networks.