Locational factors country specific factors economics essay

In the South-East Asia, Malaysia has emerged as apromising developing nation characterized with high institutional quality, excellent physical infrastructure, and large public investments in education, soalso consistent commercial policy, sound macroeconomic management and ahigh degree of openness, investment promotion and efficiency, thus attracting ahigh level of FDI inflows over the years. Econmic factorOne of the main indicators that attracts outsider to invest in Malaysia is the economic performance indicated by the GDP growth. (ady change sentence) (Hasan Asari, 2011)Due to the availability of cheap and abundant manual labour, FDI firstly flow into the manufacturing sector. (Sandu and Fredericks, 2005) ady changeThe pro-active strategies of the Malaysian government that came up with numerous incentives and open door policy further attracted MNCs to locate their production plants here. Developing countries are thus, competing to attract FDI into their economy. There are many factors that attract the movement of FDI throughout the world. These factors may differ significantly from one location to another depending again on the attractiveness of the particular region or country. Since the 1980s, the government has been practicing a liberal policy towards FDI. Over the years, the government has provided numerous incentives to attract more FDI into the country. (Sandu and Fredericks, 2005) not yet change sentence

Locational factors (Country specific factors)

Market Size/Attractiveness

Hasan (2004) in his empirical investigation on FDI in the Malaysian manufacturing sector foundexports a crucial determinant in attracting investment. He found that a 1% rise in exports is likely toincrease FDI inflow by around RM120 million. So, for manufacturers, growth of exports is thus animportant factor to influence foreign investor. s confidence. Hasan (2004) further reiterates that FDItends to boost exports from home country to host country and imports from host country to homecountry.

Workforce factors

In the Malaysian scenario, some service industries such as banking, insurance, informationtechnology, telecommunication and BPO are capital and knowledge intensive. These industriesdepend on semi-skilled and educated labour. Malaysia is able to supply such workforce at relativelylower cost compared to established service economies such as Singapore. That is why, this sector stillattracts a substantial amount of FDI. Furthermore, there may be other factors such as availability ofhigh quality English speaking, educated work force which is highly important in the services sector. Areport by Bernama (2004), said that Shell. s success in Malaysia was largely due to the availability ofcheap, highly talented, highly trainable and capable Information Technology (IT) workforce. However, in certain services sector, such as the hypermarket retailing business, cost of manual labour may bemore relevant since this sector employs unskilled workforce. So, whether cost of labour is an importantdeterminant may depend on the type of service industries under considerationMalaysia has managed to develop its labour force over the years into a highly educated andsemi-skilled workforce. This augurs well for the knowledge-intensive services sector such as bankingand insurance, since this sector employs highly skilled workers. The services sector tends to employhighly educated and skilled workers. The availability of such workers in Malaysia at a lower costcompared to our competitor such as Singapore should be a motivating factor influencing FDI into theservices sector. However, this factor may not be important in certain services sector such ashypermarket retailing business which is labour intensive and employs mostly unskilled workers. (Sandu and Fredericks, 2005)Labor is very important to each firm for the production process. Each firm will choose the country with the availability of skilled labor and unskilled labor. (Ali, Ahmad and Muhamad, 2010)

Government factors

Variables that will come under government factors are government incentives, economicpolicies, political environment and government promotions towards FDI. Another important development in Malaysia is the establishment of the Multimedia SuperCorridor (MSC) in 1995. In fact, Malaysia was the first country in the region to create the MSC. TheMSC has attracted world class MNCs both in the services sector and manufacturing sectors. Numerous incentives such as tax exemptions, provision of government grants, etc were provided toattract foreign firms especially in the information technology field to set up their offices in the MSC. This gave Malaysia an edge to attract FDI although other countries in the region are also creating theirown MSCs. The availability of a large educated multi – lingual workforce in Malaysia is already a strongmotivating factor attracting a huge number of foreign call centres to establish their operations here(Idris, 2003). According to the Asian Call Centre Industry Benchmark Study in 2003, Malaysia hasabout 575 call centres and is placed at par with Singapore, Thailand and Hong Kong (Lee, 2003). According to the American Chamber of Commerce (2004), many foreign companies find that they canservice markets from India all the way down to Australia and up to Japan from a centre located inCyberjaya, Malaysia. These foreign companies find that Malaysians have deep industry experience, good research skills and wide exposure, which should be very attractive for service MNCs.


Malaysia has one of the most developed infrastructures in this region after Singapore. It hasdeveloped high quality infrastructure in the financial, telecommunication and transportation sector. Anefficient and developed infrastructure can reduce cost of doing business not only in the services sectorbut also manufacturing sector. Therefore, good quality infrastructure is necessary to lure FDI.

Since this research is examining FDI in services, it will emphasise only on the variables that are

deemed to be more important for service MNCs. As such, variables such as market size, workforce

factors, infrastructure and government factors may be more relevant to the Malaysian services sector.

(Sandu and Fredericks, 2005)

The government body is responsible for attracting investors to invest in Malaysia. The body is responsible for promoting the economy of a country as a major destination for investors to invest. Based on the survey conducted it was found that 60 firms emphasized the environmental laws and safety supervision, whereas 51% stated that tax incentives and compensation elements or damages are very important to foreign firms before choosing Malaysia as an investment location.