Technology and digital economy to drive FDI growth into Malaysia

While most Singapore businesses have always looked to our closest neighbour to launch their regionalisation efforts, Malaysia's attractiveness is also becoming more apparent to companies from around the world.

As part of promoting Malaysia as an investment destination, the country's government has taken an active role in creating initiatives, including competitive investment incentives and tax policies, to attract foreign direct investment (FDI) focusing on technology and the digital economy. These efforts are seeing results. Malaysia's highly-skilled workforce and well-established manufacturing sector make it an attractive investment destination within ASEAN. According to the Malaysian Investment Development Authority, in the first six months of 2019, the country attracted RM45.9 billion in FDI, up 97.2 per cent year on year.

With the Malaysian government committing to furthering economic stimulation and investments and to improving human capital and productivity as part of its Budget 2020, there are three key trends that we believe will continue to draw foreign investments into Malaysia:

1. Rise of the Digital Economy

Rapid technological advancements in recent years have led to the remarkable growth of the digital economy. In Malaysia, the digital economy is expected to contribute 20 per cent to the economy by 2020, up from 17.8 per cent in 2015. E-commerce, in particular, is expected to exceed RM110 billion by 2020, making up nearly 40 per cent of Malaysia's digital economy.

The optimism toward the growth of e-commerce in Malaysia is partly attributed to the Digital Free Trade Zone (DFTZ) launched in 2017. Through the DFTZ, Malaysia wants to attract investments to help drive cross-border e-commerce and trade and the growth of the local logistics industry. It also wants to drive exports for small- and medium-sized enterprises by working with global and regional online marketplaces to increase demand for Malaysian goods.

A rising tide lifts all boats - the rise of the digital economy will boost businesses that offer digital logistics or warehousing solutions that help to increase productivity. Singapore's Aptiv8 Pte Ltd, which recently expanded its operations into Malaysia, is one such example. The company provides a wide range of information technology solutions in areas such as inventory, collection and delivery management.

To boost its digital economy, the Malaysian government in October 2019 announced another two initiatives to continue attracting global digital talent and investment to the country.

First, the Malaysian Digital Economy Corporation (MDEC) encourages the development and testing of next-generation technologies such as financial technology (FinTech) and blockchain. Within FinTech, digital payments, as a key pillar of the digital economy, accounted for two-thirds of the total FinTech investment deals in 2019. This was according to a recent FinTech in ASEAN: From Start-up to Scale-up report by UOB, PwC Singapore and the Singapore FinTech Association. We expect to see continued growth in this area in the coming years.

The other initiative by MDEC is a Digital Talent Development Strategy Framework that will address the growing demand for a digital-savvy workforce. As the digital skillsets of Malaysians continue to deepen, the quality of the workforce will also help sustain the country's investment appeal.

2. Industry 4.0 gaining ground

To increase the productivity and competitiveness of its industrial sectors, the Malaysian government is accelerating business digital transformation through the implementation of Industry 4.0 technologies such as artificial intelligence and Internet of Things. It is offering wide ranging incentives including tax breaks for the electronics sector and related intellectual property, automation equipment capital allowance for services, provision of incentives for digitalisation and innovation efforts, and a generous RM2 billion Industry Digitalisation Transformation Fund.

This commitment by the Malaysian government represents good opportunities for foreign companies that have embraced or are looking to implement Industry 4.0 technologies into their business operations. UOB is well-positioned to help companies that are looking to make this leap.

3. Growing Green Technology

The third trend drawing more foreign investments into Malaysia is the development of green technology. For example, the Ministry of Finance's Green Technology Financing Scheme aims to accelerate the production and use of green technology and products in various sectors by providing financing support through financial institutions such as UOB. These sectors include energy, building, manufacturing, transport, waste management and water. As the scheme is open to Malaysian majority-owned companies, foreign investors specialising in this area can consider partnering local firms to tap the incentive for their ventures in Malaysia.

In the area of solar power, UOB offers a suite of financial solutions - through its U-Solar programme - to support the solar power value chain. This includes firms from solar project developers, engineering, procurement and construction (EPC) contractors, to the end-users of solar power, including consumers and companies. First launched in Malaysia in October 2019, U-Solar is Asia's first solar industry ecosystem to promote the development and adoption of solar energy across Southeast Asia.

Helping companies seize opportunities in Malaysia

With close to 70 years of history operating in Malaysia, UOB has been supporting companies' growth and expansion into the country. Our FDI Advisory team, set up in 2013, offers companies with insights into the local business environment and industry trends. We also provide companies with access to the Bank's specialist teams for financing support and ecosystem partners such as investment agencies, law and audit firms to help them gain a better understanding of government policies and regulations.

Among the companies we have helped expand into Malaysia, close to half were from Greater China and more than a quarter were from Singapore and Thailand, the two closest neighbours.

In addition, our collaboration with various government promotion agencies such as InvestKL, the Iskandar Regional Development Authority, the East Coast Economic Region Development Council positions us strongly to connect businesses to investment opportunities in Malaysia. We also recently signed a Memorandum of Understanding with the Malaysian Investment Development Authority (MIDA) to attract foreign investments in high value-added sectors such as consumer technology, electrical and electronics, machinery and equipment, medical devices, aerospace and renewable energy. The alliance supports MIDA's efforts on driving local industry development and competitiveness through sustainable investments.

With the relevant insights, advice and support, companies can explore and seize the right business and investment opportunities that continue to emerge in Malaysia. A good place to start is to approach their trusted institutional partners such as banks for professional advisory and assistance.

The writer is head of Group Foreign Direct Investment Advisory and Network Partnerships, United Overseas Bank (UOB).