What headline-generating FDI tells us

FOREIGN investors continue to flock to Malaysia, based on the most recent total approved investments announced by the government, in which out of the RM285.2bil reported in the first nine months of this year (9M25), 53% stemmed from foreign direct investment (FDI) – a 47.5% jump from the same period last year.

In 2024, of the RM378.5bil in total approved investments, 45% stemmed from FDI while in 2023, out of the RM329.5bil, 57.2% stemmed from FDI.

However, these headline numbers do not often translate easily into the real economy that people can see, as government officials often point out.

One observation often made in relation to investment numbers is on jobs and economic growth, as government announcements on total approved investments come with the number of projects to be implemented and jobs to be created.

Government data shows that between 2021 and this year, 85% of manufacturing projects have been implemented.

This is from both foreign and domestic investments.

Manufacturing typically makes up around a third of investments in the country, with the services sector making up for most of the rest.

But there are signs that the approved investments are coming to fruition at a slower pace.

Priyanka Kishore, founder and principal economist at Asia Decoded, says while large FDI commitments take time to translate into actual flows, geopolitics, uncertainty around US foreign policy and US-China frictions have likely made the decisions more complex.

Indeed, Affin Hwang Research in a Dec 15 report notes that while Malaysia continues to have a strong investment pipeline, the current investment cycle is increasingly characterised by the contrast between strong headline approvals and more gradual realisation of the commitments.

The investment bank says while approved investments and FDI are not strictly comparable, as actual FDI is net of profit repatriation, loan repayments and divestment, there are useful insights that can be extracted from the directional patterns to find out the pace in which these announced investments are being implemented.

From its estimates, the three-year rolling FDI realisation rate averaged 29% between 2021 up to this September, below the 64.4% observed from 2017 to 2019. From a total approved investments standpoint, the realisation rate has also eased to 89.9% in the same period compared with the 112.4% seen from 2017 to 2019.

What is interesting is that while investment realisation overall for the manufacturing sector has eased to 43.1% in 2021 to 2024 compared to 79.2% from 2017 to 2019 on a three-year rolling basis largely due to the timing of foreign deployments and global supply chain repositioning, domestic investors have stepped up with the pace of realisation at 127.7% from 2021 to 2024 compared to 126.3% from 2017 to 2019.

Affin Hwang Research says this has ensured continued capacity expansion, equipment upgrading and ecosystem strengthening.

It also highlighted that realised investments have become more diversified, less cyclical and more technology driven.

What stands out in Malaysia’s FDI is how data centres (DCs), which create minimal jobs and whose efficacy is still being debated following large funding into building them around the world, comprise a major portion of the investments.

Under the information and communications subsector, which captures DC investments, close to RM100bil was recorded in total approved investments in 9M25, a figure which makes up some 40% of total approved investments in the period.

The argument is that DCs are needed for computing capacity and to store data in the cloud, among other uses, which in turn enables the more advanced manufacturing subsectors to operate more efficiently and to move up the value chain under the country’s industrial policy.

CGS International Research senior economist Nazmi Idrus contends that while DCs create minimal jobs, their value chain generates employment with specialist skill sets such as cloud architects or data scientists.

“Would this be an issue for the labour market going forward?

“Not if the government balances it well. Malaysia has been trying to seek ways to improve wages and going for DCs are one way to do just that,” Nazmi says, adding that given its potential to be a sizeable industry.

According to him, DCs will create supply chains and increase the talent pool that will benefit other industries such as financial services, digital services, artificial intelligence and information technology equipment.

Carmelito Ferlito, founder of the Centre for Market Education and a faculty member at Indonesia’s Universitas Prasetiya Mulya, argues that FDI is in general beneficial because of the variety of advantages it can bring.

“These benefits may take different forms, including knowledge-based effects that unfold over time in ways that are inherently unpredictable.”

Ferlito cautions that the investments into DCs and their multiplier effects such as job creation and technology transfer that have broader spillovers across the economy can only be assessed based on actual results and not forecast.

He adds that the World Bank approach to calculating FDI is more robust. Ferlito notes this includes capturing new investments associated with a lasting management interest of 10% or more foreign ownership in an enterprise.

“This measure combines equity capital, reinvested earnings, and both long-term and short-term capital flows.”