This op-ed was first published on Fulcrum, a platform under ISEAS-Yusof Ishak Institute on 12 August 2024 here. This was written as part of my 6-month fellowship with ISEAS-Yusof Ishak Institute.
Malaysia is enjoying strong inflows of foreign direct investment. To up its game, it needs to channel such flows to less-developed states.
Prime Minister Anwar Ibrahim announced recently that Malaysia had attracted potential foreign direct investments (FDI) of RM76.1 billion (US$17.2 billion) as of March 2024. The first-quarter performance follows investments of RM329.46 billion in 2023. However, FDI remains concentrated in more industrialised states such as Penang and Selangor. For lesser-developed states to benefit from FDI flows, they would need to up their game in terms of transparency and oversight.
Recent investment pledges include Intel’s RM30 billion, Texas Instruments’ RM14.6 billion, Microsoft’s RM10.5 billion and Google’s RM9.4 billion in manufacturing and digitalisation activities. While these investments are positive, they mostly benefit highly developed and industrialised states such as Selangor, Kuala Lumpur, and Penang. The 2023 statistics showed Penang leading in total capital investment, followed by Kuala Lumpur and Selangor. These states benefit from valuable resources such as land, talent and infrastructure. Kuala Lumpur and Selangor are centrally located, with major airports, ports, and higher education levels.
There are, however, pressing problems. At the Selangor ASEAN Business Conference 2024, state chiefs of Selangor and Penang expressed serious concerns over the lack of industrial land. Penang has limited industrial land, and 31 per cent of Selangor is reserved as permanent forest. To increase FDI further, Malaysia faces a two-pronged problem: the problem of land saturation in highly developed states, and the need for lesser-developed states to attract foreign investors.
How can lesser-developed states do so when there is significant variation between states in economic competitiveness? Not all states have advantages like geography (Selangor, Kuala Lumpur, Johor), natural resources (rare earths in Perak and Pahang, oil and gas in Kelantan, Terengganu, Sabah and Sarawak) and high levels of industrialisation (Penang, Selangor and Kuala Lumpur). Only a handful of states such as Selangor and Johor have well-performing State Economic Development Corporations (SEDCs), which own large plots of land and industrial parks. Further, past practices on water services have an impact on the price users pay in each state.
For states that have less competitive advantages yet are competing to attract investment, even marginal value-add may make a big difference. For instance, very few state governments transparently publish their full state budgets — and changing this could be a low-hanging fruit. While most state government budgets are small relative to the federal budget, this could be a step for states to demonstrate seriousness in good governance as a principle and practice.
In a recent Malaysia Open Budget Index (MyOBI) 2024 report published by the Institute for Democracy and Economic Affairs (IDEAS), it was found that Terengganu and Selangor tied for the top position in providing “substantial disclosure” in their budget transparency. Alongside Negeri Sembilan and Perak, they provided a detailed breakdown of their respective expenditure and revenue in 2022. Only Terengganu publishes its enacted budget, which is passed by its legislative assembly and used the following fiscal year. These states are administered by different coalitions and parties; Terengganu is led by the Islamic Party Parti Islam SeMalaysia, Selangor and Negeri Sembilan are administered by Pakatan Harapan (PH), whereas Perak is under a PH-Barisan Nasional coalition.
Ultimately, what investors appreciate is policy predictability, which is what a more transparent working environment can provide.
Malacca, Johor, Sarawak, Sabah and Penang provided only “minimal disclosure” (Penang and Malacca provided only their budget speeches to the public) of their budgets. In the lowest category, Perlis, Kelantan, Kedah and Pahang were deemed to have provided insufficient disclosure of budget documents. Kedah and Kelantan did not release any form of budget documents to the public.
Apart from budget transparency, IDEAS also studied “oversight”, which tracks the role of the state legislative assemblies in their oversight of budgetary processes. In this aspect, Selangor, Terengganu and Sabah scored the highest. There was timeliness in the tabling and passing of state budgets and in the laying out of audit reports to legislative assemblies, respectively. States that provide state assembly official records (Hansards) and information on Public Account Committees (PACs) are regarded as performing well; at this, only Selangor provides both. Selangor has the highest number of days in which state representatives deliberate the budget, followed by Sarawak and Johor.
Budget transparency may not be significant for states already attracting investment. After all, Penang does not perform very well in the MyOBI index and yet outperformed all other states in investment figures in 2023. But good governance could make a difference for states neighbouring the Klang Valley and Penang. For instance, Negeri Sembilan and Kedah could benefit from spillover proximity effects. While resources like land and infrastructure are still fundamental factors of production, states can signal to investors that they are serious about good governance.
But do investors really look for good governance practices to inform their financial decisions? In a 2015 study, greater fiscal transparency was found to lead to better debt management and improved public financial management. Macroeconomic stability also led to lower investment risk and higher credit ratings. At the state level, an analysis of 10 pilot studies showed that subnational fiscal transparency exposes holes in subnational public financial management and tracks financial flows from the source to points of programme delivery. Transparency assessments help to control subnational borrowing as they measure the ability of subnational governments to pay back what they borrow. This allows for comparisons between states, which in turn encourages inter-state competition.
As more state governments raise their own funding — such as Sarawak Energy’s issuance of a RM3.5 billion sukuk (bond) — it is in states’ interests to improve their subnational transparency rating. Since investors scrutinise states’ allocation of resources, these subnational entities should consider improving their governance scores. If states like Penang and Johor want a greater share of revenues generated within their borders, they should demonstrate responsible stewardship of resources they already control. States also oversee local governments, which are important providers of services for firms.
Malaysia is currently benefitting from global interest in the semiconductor industry; as a result, states are now competing for investments. Ultimately, what investors appreciate is policy predictability, which is what a more transparent working environment can provide. Apart from fiscal transparency, states can also incorporate sustainability and business and human rights (BHR) practices into existing economic development policies and plans. This would send a signal that states are open for business, and are willing to adopt globally accepted practices to do so.
