Rocky times ahead for China FDI in Malaysia

Li: ‘Malaysia must remember that by targeting Chinese investors in an unreasonable way, this will scare away not only FDI from China, but also from other countries.’ - credit: Malaysia Today

Great wall of controversy: Dr Mahathir’s criticism of Alliance Steel’s barricade for its RM6bil integrated steel complex has upset some Chinese investors.

A series of attacks on China-funded projects in Malaysia by the Prime Minister is causing anxiety not only to Chinese nationals but also locals.

INVESTMENTS and mega contracts linked to China will have to brace for rocky times ahead if Prime Minister Tun Dr Mahathir Mohamad continues unchecked with his incessant tirade against Chinese endeavours in Malaysia.

The golden era for Chinese investments, which possibly peaked during the rule of former prime minister Datuk Seri Najib Razak, seems to have come to an unceremonious end.

The future of foreign direct investment (FDI) from China is now seen as unpredictable – at least for the next 3-5 years – under the new government of Dr Mahathir, according to Datuk Keith Li, president of China Entrepreneurs Association in Malaysia.

Li: ‘Malaysia must remember that by targeting Chinese investors in an unreasonable way, this will scare away not only FDI from China, but also from other countries.’

“The series of comments made on Chinese investments by the PM have affected the confidence of Chinese investors. Those who originally wanted to come are adopting a wait-and-see attitude, while those already in are careful about their expansion plans,” says Li in an interview with Sunday Star.

The outspoken leader of Chinese firms notes that businessmen from the mainland are “worried”, although some comments of the Prime Minister were later “clarified” by other Cabinet Ministers or the PM’s Office.

“Malaysia must remember that by targeting Chinese investors in an unreasonable way, this will scare away not only FDI from China, but also from other countries as well,” adds Li.

Since his five-day official visit to China that ended on Aug 21, the 93-year-old Malaysian leader has caused anxiety to all by making shocking announcements.

While summing up his China trip on Aug 21, he declared he would cancel the RM55bil East Coast Rail Link (ECRL) and two gas pipelines being built by Chinese firms.

As the ECRL is of strategic importance to China’s Belt and Road Initiative – the policy which Dr Mahathir has repeatedly voiced his support for, Beijing would expect a renegotiation of the contract terms rather than an outright cancellation.

Dr Mahathir had reasoned that with national debt of over RM1 trillion, Malaysia could not afford these projects. In addition, these contracts are tainted with unfair terms and smacked of high corruption.


Although the Prime Minister said Chinese leaders understood Malaysia’s situation, reactions of Chinese nationals on social media were unforgiving with many suspecting Dr Mahathir “has other motives”.

Many see Dr Mahathir as attempting to raise Malaysia’s bargaining power in the negotiation for compensation for the cancelled projects. China, according to social media talk, is asking for RMB50bil as compensation.

On social media, there are also suggestions that Dr Mahathir is aiming at his predecessor as most China-linked projects were launched during the rule of Najib.

During the rule of Najib, Malaysia-China relations were intimate.

This has resulted in the influx of major construction and property companies from the mainland, followed by banks and industries.

But on May 9, Dr Mahathir’s Pakatan Harapan coalition toppled the Barisan Nasional government of Najib after the most bitterly fought general election in local history.

The second-time premier has put the blame on Najib for the massive 1MDB financial scandal, which Najib has denied, and mismanagement of the country’s finance.

And while the Chinese nationals are all riled up by the cancellation of ECRL, Dr Mahathir came up with an ill-advised statement.

Last week he ordered a wall surrounding Alliance Steel, which is investing US$1.4bil (RM6bil) for a massive steel complex, to be demolished. This was seen as unreasonably targeting a genuine FDI.

Although the foreign ministry later clarified that the leader had mistaken the wall to be built around the Malaysia-China Kuantan Industrial Park (MCKIP), the anger of Chinese nationals lingers on.

The industrial park is a G-to-G project to jointly promote bilateral investments. There is an even bigger sister industrial park in China that houses many Malaysian firms. All these were built during Najib’s reign.

Dr Mahathir’s statement has also caught the attention of China’s Global Times, the mouthpiece of the Communist Party of China.

In an editorial on Aug 28, the news portal warned: “Many words of Kuala Lumpur can spread to China via the Internet, causing different reactions. How the Chinese public sees China-Malaysia cooperation is by no means inconsequential to Malaysia’s interests.”

It noted “while Dr Mahathir advocates pursuing a policy of expanding friendly cooperation with China ... but when it comes to specific China-funded projects, his remarks gave rise to confusion. Like this time, it is startling to equate the controversy surrounding a factory wall with state sovereignty.”

Global Times added: “When such remarks are heard by Chinese people, the latter find it piercing. They will definitely make Chinese investors worry about Malaysian public opinion and whether such an atmosphere will affect investment in the country.”

In fact, it would be unwise for the government to disrupt MCKIP. Co-owned by Chinese, IJM Corporation and Pahang government, this industrial park has lured in Chinese FDI of over RM20bil.

It is an important economic driver in the East Coast and has aimed to create 19,000 jobs by 2020.

While the “wall” statement might be seen as a minor mistake, Dr Mahathir’s flawed announcement last Monday that foreigners would be barred from buying residential units in the US$100bil (RM410bil) Forest City stirred another uproar.

On Aug 27, Reuters quoted Dr Mahathir as saying: “That city that is going to be built cannot be sold to foreigners. Our objection is because it was built for foreigners, not built for Malaysians. Most Malaysians are unable to buy those flats.”

Currently being developed by Country Garden Holdings of China, this 20-year long project, built on reclaimed land in Johor Bahru, aims to house 700,000 people. As about 70% of the house buyers are Chinese, some locals fear this could turn into a China town.

Unlike Alliance Steel that has stayed silent, Country Garden fought back by seeking clarifications from the PM’s Office.

In a statement, the major Chinese developer said all its property transactions had complied with Malaysian laws.

Citing Section 433B of the National Land Code, it added a foreign citizen or a foreign company may acquire land in Malaysia subject to the prior approval of the State Authority.

In addition, it said Dr Mahathir’s comment did not correspond with the content of the meeting he had with Country Garden founder and chairman Yeung Kwok Keung on Aug 16.

During the meeting, Dr Mahathir said he welcomed foreign investments which could create job opportunities, promote technology transfer and innovations.

In fact, this forest city project – along with ECRL – were the main targets of attack by Dr Mahathir before the May 9 election.

Opposition to these projects had helped drive Dr Mahathir’s election campaign, during which he said was evidence of Najib selling Malaysia’s sovereignty to China.

These projects, together with major construction contracts won by Chinese and the inflow of industrial investments, place the total value of Chinese deals at more than RM600bil in Malaysia.

But few would expect Dr Mahathir to use his powerful position to resume his attacks on China-linked projects so soon after his so-called “fruitful visit” to Beijing.

During his official visit to Beijing, the Malaysian leader was accorded the highest honour by China, due mainly to respect for “China’s old friend” and strong Malaysia-China relations built since 1975.

Dr Mahathir was chauffeured in Hongqi L5 limousine, reserved for the most honourable leaders, and greeted in an official welcome ceremony by Premier Li Keqiang. He was also guest of honour at a banquet at Diaoyutai State Guesthouse hosted by President Xi Jinping.

But beneath these glamorous receptions, there were reservations exuded by the Chinese for this leader whose premiership is scheduled to end in two years.

There were no exciting business deals signed in Beijing. There was absence of high diplomatic rhetoric that “Malaysia-China ties have been elevated to another historic high”, oft-repeated during Najib’s past visits.

Many even notice that Premier Li and Dr Mahathir had a cool handshake after their short joint press conference in Beijing.

And although China promised to buy Malaysian palm oil, the statement was qualified with “price sensitivity”, which means it will not buy above market price.

In addition, there was no mention of “buying palm oil without upper limit”, which was promised to Najib last year.

If Dr Mahathir’s original intention was to target Forest City and its owners, his move has certainly backfired. The country will have to pay a price for his off-the-cuff statement.

The “new policy” will have serious ramifications as it would hit the value of the properties not only in Forest City but also in other China-linked and non-Chinese projects.

Country Garden’s Danga Bay project will also be hit. It now faces a more daunting task of selling the balance of about 2,000 units in Danga Bay, according to a Starbiz report.

Other Chinese developers like R&F Princess Cove and Greenland Group will be affected.

VPC Alliance Malaysia managing director James Wong told Starbiz there may be legal suits against the government.

“That may force Country Garden to scale down because it has invested a lot with its industrial building systems factory and an international school, among other investments. It will impact Country Garden and Malaysia’s property sector negatively,” Wong said.

“Foreign buyers and other foreign companies will shy away,” Wong added.

The change in government and the insensitive comments on China-funded projects have turned Malaysia into a high-risk investment destination for the Chinese, according to Li.

“We don’t know which China projects will be targeted next. Looking back, it’s a blessing in disguise that we were pushed out of the RM200bil Bandar Malaysia project. It is also lucky that Chinese money has not gone into the RM30bil Melaka Gateway project,” says Li, who owns a travel agency in Malaysia.

“In the immediate future, more tourists from China are likely to shy away from Malaysia.

“Malaysia may not hit the target of having three million visits from China this year,” Li adds.

Credit: Ho Wah Foon The Star

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Review of Malaysia's external debt; SE Asia draws more FDI investments

Malaysia External Debt Forecasts are projected using an autoregressive integrated moving average (ARIMA) model calibrated using our analysts expectations. We model the past behaviour of Malaysia External Debt using vast amounts of historical data and we adjust the coefficients of the econometric model by taking into account our analysts assessments and future expectations. The forecast for - Malaysia External Debt - was last predicted on Tuesday, March 17, 2015.

Putting the finger on external debt

As the country’s situation has become a topic of debate and confusion, it is useful to review and clear the air on the matter.

LAST week there was some confusion over the state of the country’s external debt, but it was to some extent cleared up after an explanation by the Finance Ministry.

It is thus useful to clarify what external debt is, and have an informed discussion on how dependent or vulnerable the country is to external funds and changing conditions.

On March 11 the media reported that the Finance Minister, in a written reply to a Parliamentarian’s question, said Malaysia’s external debt had risen from RM196bil in the final quarter of 2013 to RM740.7bil in the third quarter of 2014.

The reply did say that the sharp increase was due to a new definition in debt reporting which now includes ringgit-denominated debt securities held by foreigners.

However, this nuance was lost amidst the headlines that the country’s external debt had tripled to RM740bil, causing surprise and perhaps a tinge of alarm.

A day later the Finance Ministry issued a statement clarifying the new external debt fi­gures were in line with debt reporting requirements of the IMF, and under the new definition, the external debt now includes holdings of debt securities, deposits and trade credits denominated in ringgit by non-residents, as well as the offshore borrowings by the Government, public enterprises and the private sector.

The high level of non-residents’ holdings of ringgit-denominated debt securities and deposits comprise over 40% of Malaysia’s external debt, and “this is due to the wider depth, openness and attractiveness of the Malaysian financial market”, added the statement.

This should give relief, that the external debt hasn’t jumped three times after all. It was really, mainly, a redefinition issue.

While the jump isn’t so high, this explanation does reveal that the country’s external debt is really much higher than originally thought.

Under the old definition, Malaysia’s external debt was RM328bil in end-March 2014 or 30.5% of Gross Domestic Product.

Using the broader new definition, the debt level had become higher at RM700bil or 65.2% of GDP at the same date, according to Bank Negara’s explanation of the redefinition of external debt, in its Quarterly Bulletin of First Quarter 2014.

The ratio of short-term external debt to exports also jumped from 15% to 39% using the redefined figures.

These figures show that the country is more vulnerable than previously thought, in terms of the share of foreigners in domestic loans and the exposure or risks to changes in conditions that affect foreigners’ perceptions on whether to maintain the holdings of their credit to the country.

The newly defined external debt has increased further to RM744.7bil, or 69.6% of GDP, as at end-December 2014, according to Bank Negara data.

The redefinition exercise is a positive one. It puts the country’s debt reporting in line with international standards, meeting the International Monetary Fund’s requirements.

It also provides a more realistic and accurate view of the true state of the country’s external debt.

Previously, only the loans taken by the Government and private companies from abroad and denominated in US dollars and other foreign currencies were considered to be external debt.

Meanwhile, foreigners have been taking up billions of ringgit worth of Government and corporate bonds issued in Malaysia and denominated in ringgit. These had previously not been considered external debt.

By the end of 2014, non-residents’ holdings of domestic debt securities were RM223bil, and non-residents’ deposits were RM88bil, thus totalling RM311bil of the total RM745bil external debt. The remainder were offshore borrowings (RM367bil) and trade credits and other items (RM67bil).

On one hand, ringgit-denominated borrowings by Malaysia do not carry the same risks of exchange rate volatility that dollar-deno­minated loans have.

Thank goodness for that, because the recent depreciation of the ringgit means that more ringgit would have to be forked out to service and repay those external loans that Malaysia has taken in US dollars and other foreign currencies.

On the other hand, the increase in foreigners’ holdings of Malaysian Government securities and corporate bonds, although denominated in ringgit, also increases the country’s exposure in terms of having to service the loans (including paying interest to foreigners, thus causing an outflow on the current account of the balance of payments) and of outflows of funds if and when the foreigners decide to withdraw the credit they provided.

Much of the public securities or private bonds that the foreigners took up can be sold back in the market and taken out of the country, and it is not unusual that buyers do not hold the financial asset until the maturity date.

If there is a change in market sentiment, prompted by either international or domestic conditions, then there can be a net outflow of foreign funds held in debt securities.

It is true that the build up of foreign holdings of Malaysian securities and bonds is made possible by the increased openness and attractiveness of the Malaysian financial market, as explained by the Finance Ministry.

On top of the exposure to foreign ownership of loans, there is also significant foreign ownership of equity in the Stock Exchange (which is not counted in the figures on external debt).

The same openness that brought the capital inflows could also lead to capital outflows when conditions change.

The easy-money policies of the United States, that included near zero interest and quantitative easing that pumped over a trillion dollars into the banking system, contributed to huge funds seeking higher yield in developing countries like Malaysia.

Since the end of quantitative easing in the US and with the increasing prospect that interest rates will rise, the same funds have begun to return to the US.

Malaysia is no exception to the countries facing a reversal of capital flow. It is not clear if this will be offset by the new quantitative easing exercise which just started in Europe.

For the whole of 2014, there was a net outflow of RM37.9bil of portfolio investment, and RM20bil of that in the fourth quarter, according to Bank Negara data.

This portfolio investment includes foreign holdings of debt and stock market equity.

The outflow of portfolio funds, together with outflows of direct and other investments, caused the financial account of the balance of payments to have a deficit of RM76.5bil in 2014, thus contributing to the decline in the overall balance of payments by RM36bil, according to Bank Negara data in its Quarterly Bulletin Fourth Quarter 2014.

The international reserves correspondingly declined from RM441.9bil in end-December 2013 to RM405.5bil in end-December 2014 (according to Bank Negara Quarterly Bulletin) and to RM386bil on Feb 27, 2015 (Bank Negara media statement March 6).

The declines are significant but the current situation is manageable as high reserves were built up through the years, so that the country will not be caught again by the crisis conditions of 1997-99.

The redefinition of debt figures and the recent data on movements in portfolio investment and reserves show that a comprehensive overview of the debt situation enables a better picture of the country’s exposure to different types of debt-rela­ted and portfolio investment flows.

Another conclusion is that borrowing through ringgit-denomina­ted debt removes the risks associa­ted with foreign-exchange changes.

But it still results in dependence on the foreign appetite or prefe­rences in investment venue and consequently to exposure to significant outflows when these preferences alter.

As global conditions, especially in the US and Europe change, it will be a challenge to manage the country’s finances.

- Global Trends by Martin Khor

> Martin Khor is executive director of the South Centre, a research centre of 51 developing countries, based in Geneva. You can e-mail him at director@southcentre.org. The views expressed here are entirely his own.

SE Asia draws more FDI investments

Region draws more investments than China for 2nd year running.

JAKARTA: South-East Asia's major economies drew more foreign direct investment combined than China for the second straight year in 2014, as growth in their giant neighbour cooled. But by country, inflows into the region were uneven, swayed by political change and the varying costs of doing business.

Overall FDI into Singapore, Indonesia, Malaysia, the Philippines, Thailand and Vietnam rose to a record US$128bil in 2014, estimates compiled by Thomson Reuters show.

That surpassed the US$119.56bil that flowed into China.

FDI into the Philippines grew the fastest, at 66%, while in Thailand, where the military seized power last year, inflows fell. FDI into Indonesia, the region’s biggest economy, rose around 10% even though it was an election year.

As China’s troubled manufacturing sector loses momentum, Chinese businesses will be venturing abroad to cut operating costs and to search for new markets, economists say.

Manufacturing powerhouses in South-East Asia should pay heed.

“Rising wages in China are leading low-end manufacturers to look for other low-cost locations for their factories, with countries like Vietnam and the Philippines looking like attractive alternatives,” said Dan Martin, Asia economist at Capital Economics.

“Asean is also a large market in its own right, and one with good long-term growth prospects. Given the general slowdown in other emerging market regions in recent years, it is starting to stand out.”

The Philippines, the second-fastest growing major economy in Asia, attracts investors with its strong economic fundamentals.

But one concern is the continuity of economic policies following the 2016 general elections.

That means some investment decisions might be postponed. Slumping commodity prices could pinch on FDI inflows into resource-rich Indonesia and, to a lesser extent, Malaysia.

Indonesian President Joko Widodo, who took office in October, is seeking more foreign investment in manufacturing to counter the volatile resources sector. But Indonesia has many improvements to make, particularly in its business infrastructure, to successfully challenge the region’s manufacturing leader.

— Reuters

China, the largest in Asia and the world's top recipient of FDI set to be net investor

Asia the world's top recipient of FDI 

KUALA LUMPUR: Amid scratchy global economic growth, Asia accounts for nearly 30% of global foreign direct investment (FDI) inflows, making it the world’s top recipient of FDI.

Generally, developing countries were attracting more FDI than developed economies, according to the United Nations Conference on Trade and Development (Unctad) World Investment Report 2014, which said total inflows to developing Asia (excluding West Asia) amounted to US$382bil last year, 4% higher than the previous year.

In the last two years, top 10 recipients of FDI flows in developing Asia were China, Hong Kong, Singapore, India, Indonesia, Thailand, Malaysia, South Korea, Vietnam and Taiwan.

China took the lead with an estimated FDI outflow of US$101bil last year, spurred by mega-deals such as the US$15bil takeover of Canadian oil and gas company Nexen by China state-owned entity CNOOC Ltd as well as the US$5bil Shuanghui-Smithfield acquisition in the food industry.

South-East Asia registered slower growth, however, with inflows to the region rising just 7% to US$125bil in 2013, compared to the rapid growth in the regional grouping – from US$47bil in 2009 to US$118bil in 2012.

The report said Singapore was the largest FDI recipient in the region, with new mega-deals driving the figure to a record high of US$64bil.

Indonesia showed stable performance, while Thailand’s inflows grew to US$13bil although many projects were shelved due to political instability.

“At today’s level of investment in SDG-related sectors in developing countries – both public and private – we still face, according to Unctad’s estimates, an average annual funding shortfall of some US$2.5 trillion over the next 15 years following the end of the Millennium Development Goals,” UNDP resident representative for Malaysia, Singapore and Brunei Michelle Gyles-McDonnough said at the launch of the report at the Malaysian Investment Develop-ment Authority headquarters.

She highlighted the important linkages between trade and investment, amplifying the need for sustainable development.

-Contributed by Cheryl Pod,The Star/Asia News Network

China's outward investment to soon exceed FDI, set to be net investor

Outward flows likely to exceed FDI in nation this year, UN report says

China's outward investment is very likely to exceed foreign direct investment inflows this year, making the country a net investor, according to officials at a United Nations body.

This "inevitable trend" will have "great significance in reshaping the economic structure and long-term development" of the world's second-largest economy, they said.

In 2013, China's foreign direct investment rose by 2.3 percent year-on-year to $123.9 billion, ranking second in the world after the United States, according to the United Nations Conference on Trade and Development's World Investment Report on Tuesday.

"China remained the recipient of the second-largest flows in the world. Meanwhile, the quality of FDI inflows improved, with more into high-end manufacturing and services with high added value," said Zhan Xiaoning, director of the Investment and Enterprise Division at UNCTAD.

"What's more, China's outward investment is more striking," Zhan said.

In 2013, investment outflows from China increased by 15 percent year-on-year to $101 billion, the third highest in the world after the United States and Japan, the report said.

As China continues to deregulate outbound investment, outflows to developed and developing countries are expected to grow further, it said.

Zhan said, "China's economic landscape, driven by exports and foreign investment in the past three decades, will change significantly. Outward investment will serve as an important driver for industrial upgrading and economic growth."

Liang Guoyong, an economic affairs officer at UNCTAD, said, "It is very hard to predict when China will become a net investor, but the trend is inevitable."

The process will accelerate along with the nation's fast economic growth, the increase in Chinese companies' competitiveness and the amount of resources and market share they gain, Liang said.

The change will lead to a more effective allocation of financial resources for the Chinese economy, as the country holds the world's largest foreign exchange reserves, Liang added.

Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation, a Ministry of Commerce think tank, said China's new role as a net investor will help ease trade frictions.

"The rapid increase in overseas investment by Chinese enterprises is very likely to transform the trade landscape, because profits from the overseas market will lessen the country's reliance on exports, reducing trade frictions and pressure from swelling foreign exchange reserves," Huo said.

Contributed by By Li Jiabao and Mu Chen (China Daily)

Outflows from the Association of Southeast Asian Nations (Asean) rose five percent, with Singapore leading the pack at $27 billion, more than double in 2012. The Philippines' FDI outflows last year fell to $3.6 billion from $4.2 in 2012.



However, the Philippines is nowhere in the top 10 recipients of foreign inflows in Asia amid the slowdown in FDI in Asean compared with the rapid growth in the past 3 years -- from $47 billion in 2009 to $118 billion in 2012.

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An American-Made Business Model Has Less Success Overseas

For years, the titans of finance have held out the promise that they could export their business model overseas and mint billions in the process. Yet, there are increasing signs that global deal-making was always a myth.

If you’ve been anywhere near a Wall Street conference in the last five years, you know the drill. Deal makers bemoan the United States as a mature and overregulated economy. They talk about heading abroad, as emerging market economies leave us far behind. To listen to them, one might think the rest of the world was a paradise out of “Atlas Shrugged,” where capital flows and where private equity, investment banks and other investors can freely seek opportunities.

So what country is No. 1 in initial public offerings so far this year? Yes, it is the United States, according to Renaissance Capital, with 75 I.P.O.’s raising $39 billion in total. Compare this activity with China, where 41 I.P.O.’s raised just $8.1 billion.

M&AS

And in mergers and acquisitions? Again, it is the United States, with 53 percent of the worldwide deal volume, up from 51 percent from last year, according to Dealogic. For investment banks, this means that the United States has a 46 percent share of the $63 billion in worldwide investment banking revenue, up from 34.6 percent in 2009.

With the slowdown in once-hot emerging markets, the tide is going out, baring all of the problems and issues associated with global deal-making.

China is a prime example. Huge amounts of foreign and state investment produced an economic miracle. And in that time, wealth was there to be had.

But let’s be clear about where that wealth came from. In the United States, deal makers make money primarily by buying underperforming assets, adding some financial wizardry and riding any improvements in the stock market. Sometimes, they get lucky by making a quick profit, but often private equity works to squeeze out inefficiencies and make operating improvements in companies and then takes them public a few years later.

China's situation

In China, what increasingly appears to have been a stock market and asset bubble spurred by hundreds of billions in direct investment has created some spectacular early profits for deal makers. The private equity firm Carlyle Group, for example, has made an estimated $4.4 billion on an investment in China Pacific Insurance, which it took public on the Hong Kong Stock Exchange.

But now, with the Chinese I.P.O. market at a virtual standstill and the Shanghai market down more than 30 percent from its high last year, that avenue to riches is over. People are starting to say that investment in China resembles a “No Exit” sign.

Deal makers are left with a back-to-basics approach that looks to make money from companies through economic growth or improving their performance. Yet most of these investments are made with state actors and minority positions, meaning that there may be little opportunity to actually do anything more than sit and wait and hope. And you know what they say about hope as a strategy.

It appears that deal makers are starting to realize the problem. Foreign direct investment in China was down 3.67 percent from last year to $9.6 billion, and it is likely to remain on a downward trend.

And China has been among the friendliest places for deal makers. Other emerging markets have been less accommodating. Take India, which has been criticized for excessive regulation, high taxes and ownership prohibitions. David Bonderman, the head of the private equity giant TPG Capital, recently said that “we stay away from places that have impossible governments and impossible tax regimes, which means sayonara to India.”

Foreign issues

The comment about India highlights another problem with foreign deal-making: it’s foreign. Sometimes, the political winds change and local governments that initially welcomed investment change their minds.

South Korea, for example, invited foreign capital to invest in its battered financial sector after the Asian currency crisis. But when Lone Star Investments was about to reap billions in profits on an investment in Korea Exchange Bank, a legal battle almost a decade long erupted as Korean government officials accused the fund of vulture investing.

And the political problems are sometimes not directed at foreign investors. South Africa, for example, is undergoing the kind of political turmoil that can stop all foreign investment in its tracks over treatment of its workers and continuing income inequality. Things are not much better in the more mature economies.

Economic doldrums

Europe is in the economic doldrums, and its governments are increasingly protectionist of both jobs and industry. France, for example, recently threatened to nationalize a factory owned by ArcelorMittal, which sought to shut down two furnaces.

The national minister said the company was “not welcome.” It’s hard to see a deal maker profiting from buying an inefficient enterprise that it can’t clean up without risking national censure.

Buying at a low is the lifeblood of any investment strategy — but this assumes that there will be an uptick, and on the Continent, that is uncertain given the state of Greece and the other indebted economies in Southern Europe.

This is all a far cry from the oratory vision-making at conferences. Now that the global gold rush has ended, the belief that the American way of doing deals is portable is being upended.

Fragmented world

We are left with a fragmented world where capital moves not so freely, the problems of politics and regulation are more prominent and investing in emerging markets becomes what it always has been: the province of more specialized investors who are in tune with the political and regulatory requirements. Regardless, the easy riches that many thought these countries would bring are now far out of sight.

And the winner in all of this is likely to be the much-maligned United States, where the economic conditions and regulatory environment first gave birth to these deal makers.

This is not to say that there will still not be global deal-making or that American multinationals will not continue to expand abroad. Of course, there will still be profits in deals overseas. But the vision that deal-making will instantly and seamlessly go global is increasingly exposed as one that was more a fairy tale than reality.- IHT/NYT

---

Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at Ohio State University, is the author of “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion.” E-mail: dealprof@nytimes.com | Twitter: @StevenDavidoff

Malaysia lures for its Gen Y youths?

KUALA LUMPUR: Gen Y youths young people usually recognised for their savvy in communications, media, and digital technology will benefit from the Government's move to draw quality high-tech and knowledge-driven investments to the country.

International Trade and Industry Minister Datuk Seri Mustapa Mohamed said with the Government's emphasis on developing the 11.4 million youths who make up 46% of the nation, it was important for Gen Y workers to have access to companies with good training, exposure and salaries.

“The Government is adopting new methods by looking beyond hard FDI (foreign direct investment) numbers,” he said here yesterday.

“Services companies are becoming more crucial to our economy, and their presence in Malaysia is relevant to the young through their (the companies') job creation.”

Mustapa said the Government was not only giving out fiscal incentives, such as tax holidays and training grants, to attract quality investments, but had also liberalised 18 services sectors this year, to follow the 27 in 2009.

He said such measures had yielded “fruitful results” with companies like Service Source, test and design company National Instrument and computer multi-national Hewlett Packard, employing large numbers of Gen Y workers.

“Service Source, a recurring revenue management company, came to Malaysia in 2010 with only 27 people.

“Last June, it surpassed 550 staff the majority being graduates or diploma holders and more than half of them are below 30.

“National Instrument is another sterling example. It offers a salary scheme to graduates equivalent to that offered by some investment banks in Malaysia,” Mustapa added.

The Jeli MP emphasised that FDI was particularly relevant to Gen Y, as the creation of employment and knowledge spillover from foreign companies allowed youths to be exposed to new technologies and cutting-edge training schemes.

He said these companies offered competitive salary packages.

“This will increase their knowledge in the industry and improve their employability,” he said, giving the example of oilfield services corporation Halliburton, which sends fresh graduates to their training centre in the United States for up to 18 months to gain specialised knowledge.

However, Mustapa said, there were challenges to attracting such investments.

“Some companies are not willing to pay more for talent, and so might face a higher turnover rate.
“There is also competition for FDIs from countries that offer bigger incentives or huge domestic markets.

“However, Malaysia offers a value proposition as we have a sound infrastructure and legal system, investor-friendly policies, and a talent pool that will be able to complement investors.”

International Trade and Industry Minister Datuk Seri Mustapa Mohamed has been working hard to bring in investments that Gen Y can benefit from. 

In an interview, he talked about the government's approaches and challenges faced.
Excerpts from the interview:

>What do you think of the state of Malaysia's economy?

There lots of of challenges globally and regionally. Europe is still in some trouble, America is not out of the woods yet. India is going through a difficult period politically and economically as well - there was a time where India was very bullish. Although growth is still good there, it's not that good as a year and a half ago. China is still going strong. The bright spots will be ASEAN, Africa, the Middle East.

Against that backdrop, our performance has been quite credible, our economy is doing okay, steady growth that is higher than the world's average. Unemployment rate is low, inflation is manageable, we have an issue with the deficit which is being managed well by the govt. We have strong reserves. Our fundamentals are strong.

Some factors leading to Malaysia's relatively strong state of economy are the fiscal stimulus, the Economic Transformation Programme, our diversified economy, and robust customer spending.

>Do you think the youth population of Malaysia will benefit from our economy?

Yes, our employment opportunities will of course benefit mainly young people. Many come out from universities and expect to get a job, a good job. Some come out and do temporary work, which is useful - working in a hypermarket or petrol station, for example - these are very important stepping stones as they allow you to get some experience.

Our graduates are not as selective as before, they are prepared to accept these jobs to sustain them for a few years before moving on to a better-paying one. Gen Y represents a big percentage of the Malaysian population, and the Government is mindful of the fact that this is a volatile and dynamic component of the population.

The issue is quality employment. Graduates being paid RM2,000 is not true reflection of what they can contribute. Some companies are not paying their graduates too well, some graduates are accepting jobs which require lower qualifications and for that reason salaries are lower.

Job opportunities are plentiful, that's not an issue here. We have lots of job opportunities in Malaysia but the challenge for us in government is to generate more quality employment opportunities.

From anecdotal evidence, many graduates are not happy with the entry-level salaries. That's why Budget 2013 focuses a lot on young people, including measures such as the Graduate Employability Taskforce with an allocation of RM200mil. This isn't new, we have Talent Corp, we have collaborated with various institutions like Mida to help young people.

We also have the 1Malaysia Training Scheme Programme (SL1M), which will increase the employability of graduates through soft skills and on-the-job training in private companies.

From MITI's point of view, our job is to stimulate investment, both domestic direct investment and FDI. We have been working very hard.

In an average year, the companies approved by the Malaysian Investment Development Authority (Mida) will normally generate about 100,000 new job opportunities. The ETP over the next 10 years will generate 3.3 million jobs, that makes 330,000 a year. That's the kind of number we are looking at, and many of these jobs will b available to young people.

>Are we making steady progress towards this goal?

Definitely. There's a company out there, Service Source international - they started small here but when I saw them two weeks ago they had a headcount of more than 500. Their plans are to add more. This is a company of graduates, most of the staff are either diploma-holders or local graduates.

Service Source have also launched a Protg Programme in the company where many fresh graduates are given on the job training at an executive pay package.

Another of fruitful result, is a company in Penang called Agilent which has 2,800 people. 900 of them work in research and development.

In Iskandar you have Legoland, people who work in these places command high salaries.

Of course in sectors like banking and finance they will be well-paid, there has been good growth in Islamic banking and finance in the country. As Islamic finance in Malaysia grows, as the country becomes a hub for the region, there are more opportunities created for young people.

>Why are foreign direct investments relevant to the young, particularly to Gen Y?

The creation of employment - without jobs, our youth will not find an opportunity to improve their economic standing.

Panasonic, for example, employs 20,000 Malaysians as executives and also as blue-collar, factory workers.

The other reason is knowledge spillover as a result of forward or backward linkages with foreign companies possessing high technology that invest in Malaysia, our youth will be exposed to new technology on their job. This will increase their knowledge in the industry and improve their employability as they move further in the industry and perhaps opportunity for them to carry out their own business operations as a vendor to the foreign investor.

Halliburton, one of the world's largest providers of products and services to the energy industry, provide specified training to its fresh graduates from six to 18 months while they are on the job.

They also send these Malaysian fresh graduates to Halliburton Technical Training Centre in the United States. This is an example of how knowledge spillover from FDI can benefit our youth.

>What is the Government doing to attract quality investments? 

We are more focused now, more targeted. We can't compete with some of our neighbours in terms of wages, but where we can compete are the areas where companies require higher skills, productivity. We target companies that are high-tech, knowledge-intensive companies.

The Government is considering GNI creation of any project or investment while also using employment creation as a complementing tool to measure a “good investment”.

In giving out fiscal incentives such as tax holidays and training grants; the Government targets knowledge-driven, research and development based companies that budget a large amount on capital spend on technology per employee.

We have to look at the supply side as well, increase the supplies of trade and human capital.

The Government liberalized 27 services sectors in 2009 and a further 18 services sectors in 2012. The intention behind this is to drive foreign investments which can create quality, high-paying jobs.

While recording low investments, services companies are becoming more crucial to our economy and their presence in Malaysia is relevant to the young through their job creation.

>Have these approaches been fruitful?

Yes, along with companies I already told you about, there's National Instrument - another sterling example, a test-and-design company. NI Malaysia offers a salary scheme to graduates that is equivalent to the salary schemes offered by some of the investment banks in Malaysia.

More importantly, it has a unique internship programme formed in 2009. In 2012, they admitted around 30 graduates and these interns were trained in R&D and manufacturing as well as IT applications.

There is also Hewlett Packard, which has its Operation Headquarters for Asia-Pacific here. We gave them a tax holiday - one of the ways we are attracting investments, as you asked before.

>But how do you know these foreign companies will hire fresh graduates rather than someone who has already been in the workforce for a while?

Well, some companies do prefer to take people from other companies rather than train fresh graduates. There are different ways to do it, and some companies to tend to take the easier way out. But I feel they should invest in youth, employ them, train them. The companies must play a better role in training youth, it can't just be left to the Government.

I'll bring up SL1M again - we've found that our graduates become much more employable after learning these soft skills - they become more proactive, more aggressive, more forthcoming. The government is doing that, but we urge and strongly encourage companies to play a more active role and train its new recruits.

>Are there any challenges when it comes to attractive quality investment?

It's a chicken and egg issue - companies will come here if we have a large pool of skilled graduates and manpower, and that will bring in more investments as well. On the other hand, if the skills are not available then they will not come. We need to increase the supply of human capital.

Companies operate on cost factors and many companies that are interested in Malaysia are still looking at low cost factors in Malaysia. Some companies are not willing to pay more for talent.

There is also competition for FDIs, Singapore, Hong Kong and Taiwan offers bigger incentives and has very liberal policies while countries such as Thailand, Vietnam and Indonesia continue to offer a huge domestic market which interests investors.

However, I am convinced that Malaysia offers a value proposition as we have sound infrastructure and legal system, investor-friendly policies and a talent pool that will be able to complement investors.

>What are some of the challenges a company may face in recruiting Gen Y workers?

In general, those companies which offer lower salaries are not so good with attracting good people. Those which are willing to pay a little more have better luck.

>Do you think these companies would be more inclined to hire expats?

In general, bringing in expats costs money, and if you add up, it will almost certainly be more than what you pay a local.

>Would local graduates be making more if they took their skillset overseas?

If you factor in other costs - rent, transport, cost of car... We found that at the top level, the gap is not that wide. Malaysians earn a decent income. The problem is the entry rates at base levels, entry point salary is where the difference is.

Once Malaysians leave, it is harder for them to come back because they've made friends, settled down, become part of the community. If our entry level salary is low, and because of that people work overseas, it will become even more challenging to build this talent pool.

In my view, if companies have better entry-rate salaries, it will help to prevent brain drain, and also solve some problems companies have when hiring.

>Do you think that the development of our Gen Y will meet the Government's aspirations of attracting quality investments?

In a way, some of our measures are short-term. We need more medium and long-term solutions, for example, reform the education system. It needs to be more hands-on, so we've got some measures like the National Education Blueprint.

We also need to regularly change the curriculum in schools and universities. Malaysians have to develop a love for skills, fight to get a job.

I would like to relate to you a story of a young girl by the name of Nani Abdul Rahman. She is an alumni of Yayasan Khazanah, which I chair. She read Law at IIUM and in her penultimate year, she interned at Khazanah. Khazanah Nasional offered her a job as an analyst and after working for a few years, she got an offer to do her Masters in Jurisprudence at Harvard University. Today, she is a senior personnel at one of the biggest Islamic banks in the world.

I have complete trust in our Gen Y. They are very confident and well exposed generation.

>How do MNCs feel about local graduates? Do they prefer those who graduated from foreign universities, Ivy Leagues and similar?

Some of our local graduate are good, some are outstanding. Many of our top corporate figures were trained in this country. Not every top corporate guy studied overseas. I don't think companies have a preference, it does depend on the person.

If you're a foreign university graduate but you're quiet, timid, aloof - the company will not want to take you on. It is the qualities a person holds.

Companies are looking for a person who is outgoing, passionate, ready to learn, good work ethics... These characteristics can come from a local or foreign graduate.

>You hold the importance of education in very high regard. 

Yes - even within my community in Jeli, the constituency I am MP for, I focus on developing human capital.

I run and fund the Darul Falah programme, which provides free tuition for students between 10-12 every Friday and Saturday. The focus is on English, Maths and Science.

The centre actually operates out of my house in Kelantan, it started about 15 years ago. I also have three other centres which have been up and running for three years now.

It is important in a rural area like Jeli, the children get some exposure. There has been improvement, but I am still not happy with it.

The programme has expanded to offer free computer classes, we hold camps, essay writing competitions in both Malay and English - I give prizes to the winners.

Last year when I was in Perth for work I met a number of students and one of them, a JPA scholar, came to me. She said she was an alumni of Darul Falah. Her father was a customs officer who used to send her back and forth on a motorcycle to Darul Falah when she was 10.

She is now a scholar reading Commerce at the University of Western Australia and she aspires to be a Partner at PriceWaterhouseCoopers.

It's moments like those that underline my conviction that education is the best investment.

>Do you have any advice for Gen Y looking to make a living in Malaysia?

Be prepared to start small, meaning, accept any job and learn while doing it. Shine in your job, by which I mean outshine others.

Discipline and passion are very important qualities. You need to be disciplined. Work ethics, passion - in my view, these are qualities some graduates are lacking. Passion and commitment are important.

The technical knowledge you earned is important, of course, but so are passion, discipline and commitment.

By TASHNY SUKUMARAN tashny@thestar.com.my

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National Instruments to set up its largest R&D facility outside US in Penang
 Supporting Engineering and Science Education Worldwide 

National Instruments to set up its largest R&D facility outside US in Penang

KUALA LUMPUR: US-based National Instruments (NI) is aiming to set up its largest research and development (R&D) facility outside the United States with the expansion of its facilities in Penang.

“Currently we are operating in a rented space. With this expansion, we will have our own infrastructure to support our business in the region,” NI Penang managing director Raj Purushothaman told a press briefing on the expansion plans of the company yesterday.

The company also aims to increase its manufacturing capacity to support an additional US$1bil in the company's growth.

Raj: ‘With this expansion, we will have our own infrastructure to support our business in the region.”

The capacity would add another 40% to its global hardware manufacturing capacity which would include the manufacturing of academic products, embedded controllers, industrial chassis and modular instruments.

Its manufacturing arm is slated to be operational in the fourth quarter.

In tandem with the planned five to 10-year expansion, the company is aiming to expand its local headcount to 1,000-1,500 employees from its current 165.

This includes 250 engineers in electrical, mechanical and engineering management fields.

The technology hardware and software provider began operations in Malaysia in 2009 with an US$80mil capital investment.

Raj said as part of the planned investment, the expansion was envisioned to transform its facilities in Penang to be the Asia-Pacific hub, serving its clients in the region and elsewhere.

“It will be an integrated operations centre, which manages R&D, manufacturing, supply chain, product distribution, product services, IT and finance,” he said.

Its expansion includes the construction of a 314,000 sq ft office and manufacturing space on a 23-acre site in Batu Maung, Penang.

Its manufacturing arm slated to be operational in the fourth quarter would have the capacity to support an additional US$1bil in the company's growth.

NI is among other American multinationals that have established its presence in Malaysia such as Honeywell, Dell, Intel, General Electric, Western Digital and Motorola.

At the event, International Trade and Industry Minister Datuk Seri Mustapa Mohamed said the United States was the third largest foreign investor in the manufacturing sector in 2011 with RM2.5bil.

The investments were mainly in electrical and electronics, chemical and chemicals products, transport equipment and wood & wood products.

“The electrical and electronics (E&E) industry continues to be a major contributor to Malaysia's gross domestic product growth . For the period January to May 2012, E&E exports were 32.27% of the total country's exports and 48.73% of the manufactured exports,” he said in his speech delivered by Malaysian Investment Development Authority (Mida) chief executive officer Datuk Noharuddin Nordin.

- The Star

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