FOREIGN INVESTMENT IN MALAYSIA
INTRODUCTION
     A number of  observers have noted the benefit of foreign investment to developing countries.  Leaving aside its external effects foreign investment affects the host country in several ways.  Foreign investors can develop and finance projects that the host country may not be able to undertake due to insufficient funds or other possible difficulties (Macdonald, 1982).  Capital import raises the marginal productivity of labour and thereby reduces real wages and consequently lead to growth increases (Mac Dougall, 1960). In addition, foreign investment plays an important role in creating job opportunities.  In the context of dualistic economic model of Jorgensen in which it is assumed that the economy which consists of 1) a modern sector where labour is fully employed and paid according to its marginal productivity and 2) a traditional  sector where labour is under or unemployed and paid more than its marginal productivity though less than in the modern sector, foreign capital which is in the modern sector creates new jobs and employed labour which migrates from the traditional sector (Hoffmann and Tan, 1980). It is also argued that foreign investment can contribute to the improvement in the balance of payment account.  Foreign capital inflows which finance the investment and the exported outputs produced  by foreign companies can reduce the deficit in the balance of payments, which is indeed a major problem of most developing countries.
 
      One of the vehicles through which  foreign investment takes place are the multinational corporations (MNCs). MNCs normally come along with scarce productive factors such as technological knowhow and business experience. Particularly for developing countries, MNCs can contribute to the improvement of product qualities, which is very important if their exports are to compete in the world market.  MNCs has also been considered as "reservoir of technology" which can provide many times allocations for research and development (R&D).   Technological tranfer agreements signed between the   host countries's government and MNCs have often facilitated direct technological transfer.  Other less direct ways of technological transfer such as through human resource  development has also been used (Beaumont, 1990).  Thus it is not surprising that foreign investment has been associated with economic growth of the developing countries even when all profits of the foreign investment are transferred to the home countries.
 
     This paper discusses foreign investment and industrialization in Malaysia.  Documented  evidence suggests foreign investment started early this century when the country was still a British colony.  Not surprisingly, foreign investment then was dominated by British concerns.  The paper also discusses attempts by the government of independent Malaysia to change the pattern of production which was oriented toward the production of primary commodities through the provision of various incentives to attract foreign investment.   Much of the production activities of the local population before independence and during early post independence were in subsistance agriculture and small scale manufacturing and mining.   The manufacturing activities were mainly primary level processing such as rice milling and saw milling.   Thus foreign investment was seen as a way to
 
 
 
 change the pattern of production towards large scale manufacturing.   As investment is also intimately related to industrialization, the effect of the various investment incentives on the country's industrialization is also discussed.   This discussion will portray that industrialization has been very much influenced by the government's effort to attract foreign investments.
 
      The rest of the paper is presented in five sections. The next section discusses the pattern of foreign investment in Malaysia. This is followed by a discussion on the incentives for investment in manufacturing. In the fourth section the impact of industrialization is discussed. An evaluation of the progress of industrialization and the distribution of foreign investment in the manufacturing sector in post independent Malaysia is presented in section five. The final section provides our concluding remarks.
 
 PATTERN OF FOREIGN INVESTMENT IN MALAYSIA
       Although  foreign investment in Malaysia have started much earlier, documented evidence points this to the beginning of the century with British companies playing a leading role. The British were engaged mainly in the agricultural and extractive industries for the purpose  of supplying raw materials to their manufacturing industries (Kanapathy, 1970).   In 1936, British investment
 
 
 
 in plantation industries represented 70 percent of its total  investment in Malaya1,  17 percent  in mining and 13  percent  in infrastructural  development, commerce, banking and transport (Callis, 1942: 109).  Involvement by other nationals was very minimal and this too  was limited to the American and French who were engaged in a small scale in tin mining, and the Japanese  who were in iron ore (Allen and Donithorne, 1954: 124-129).
 
      The  pattern  of  investment   which  was  concentrated  in the agricultural (plantation) and extractive industries prevailed until the early post-independent period when the government started to recognize the need of diversifying the country's economic activities.
 
               The  extent  of  the  country's  dependence  on  the  agricultural and  primary commodities during the early post-independent period, is evident in their contributions to both gross national product (GDP) and employment. In 1957, agricultural sector accounted for about 46 percent of the total gross domestic product and about 62 percent  of the total employment.  In 1960 and 1965, agricultural sector represented 38 percent  and 32 percent respectively  of the country's total GDP (Table 1).   In terms of export, rubber and tin constituted more than 80 percent of the country's  gross export  earnings in 1950s, and about 60 percent during 1960 and 1965  (Table 2).
 
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 1 Prior to August 31, 1957, Malaya was a British colony. On 16th September, 1963, together with Sabah and Sarawak it formed a new federation called Malaysia until the early post-independent period when the government started to recognize the need of diversifying the country's economic activities.
 
 
     The country's over dependence on  agricultural and primary commodities has led to various problems in managing the economy.  As Ho (1983) indicated the country's over concentration in primary commodities has led to four major consequences:

    Since  the  Malaysian  economy  was (in fact it still is)  very much dependent on export sector  as reflected by the   high ratios of gross export proceeds over gross national product (Table 3), the over concentration on the exports and production of primary commodities made the economy  vulnerable to external fluctuation.  Being a small country, there was not much that the government could do  to insulate the country from external source of fluctuation.  In other words, the  economy which was characterized by heavy dependence  on export with narrow base  (limited to a few primary  commodities) had resulted in a less stable domestic economic condition because  the booms and the depressions of the world economy were often translated into fluctuations in the prices of the exported commodities in the world market.  The fluctuations in the prices of rubber and tin can be seen in Table 4.  The price of rubber (ribbed smoked sheet, RSS1) dropped from 108.08 sen (per lb) in 1960 to 70.04 sen in 1965 and 56.43 sen in 1970, increased to 141.68 sen in 1980 and  dropped to 85.59 sen in 1985.   Similarly the price of tin (RM per tonne) has been  fluctuating over the last decades (6509.37 in 1960,  11608.66  in 1965 and  10990.76 in 1970).  For crude palm oil, its price  (RM per tonne) had fluctuated from 679.2 in  1960  to  828.3  in  1965  and  down  to  787.2  in  1970.

 
     The over concentration on agricultural and primary sector in the 1960s was so severe that almost no industrial development took place.  The lack of domestic manufacturing activities had made the country so dependent on the imports of manufactured goods to an extent that even  relatively simple  manufactured consumer items had to be imported.   In addition, it was very difficult to modernize other sectors of the economy in the absence of industrial development.
       Over dependence on agricultural and primary sector had also led to the creation of a dualistic economic structure.   Since tin mines and rubber plantations were located only in certain areas suitable for their development, and as demand for the above two products was entirely  from the external sector, there was very limited link between  these "modern enclaves" and the traditional agricultural sector.  There was almost no transfer of technology or skill from the modern sector to the subsistence sector.  As a result, only a small section of the economy benefited from modernization brought about by the development of tin and rubber.   This dualistic economic structure had accentuated the serious regional and racial economic disparities since a large portion of the indigeneous population were involved in the traditional subsistence agricultural and not affected by modernization.

       The primary sectors, particularly agriculture had difficulties in absorbing  the fast growing labour force because they were not able to generate sufficient employment opportunities.
 
 

       The economic specialization in a  few primary products for export and dependence on food and other consumer manufactured goods on imports had placed the country in a disadvantagous position2.   Thus, although there had been increases in the prices of rubber and tin during the 50s and 60s Malaysia (during the early post-independent period) was in a way worse off because it was specialized  in  a few  primary products for exports and dependent on imports of manufactured goods from developed countries.

-     It was evident to the government then that the economy need to expand its production base and diversify export.  In the process of diversifying the country's economy, the government saw industrialization (especially manufacturing sector) as one of the most important elements of diversification (Osman Rani and Haflah, 1990).  The government then was faced with the task of influencing the
 
 

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2The idea that the average income elasticity of demand for primary products is significantly lower than the average income elasticity of demand for manufactured goods in the international market  is well known (see Flanders, 1969 for example).   When there is  an increase in the level of income, the demand for manufactured products will increase more than the demand for primary commodities. Specialization (by less developed countries) in a few primary products for export and dependence on import of manufactured products from developed countries (major exporters of manufactured goods) will lead to a greater income inequality between the developed and less developed countries.   A greater export of primary products is required in order  to  pay  for  a  specific volume of imported manufactured goods.
 
 
 
 
 

pattern of foreign investment as well as moving the country towards industrialization.   Rightly the government then put forth  several incentives to attract foreign and local investors into the manufacturing sector.

     Although the effect of heavy concentration on primary commodities lingered on until the late 70s, the various attempts by the government to attract foreign investment did change the pattern of production over the years. The incentives were clearly aimed at diversifying production and encouraging manufacturing activities.   Using GNP as a basis for comparison, it is seen that by 1980 agriculture's contribution was reduced to 26 percent while manufacture had increased to 17 percent.  In 1989, the contribution of agriculture to GNP was reduced even further, to 19 percent, while manufacture increased to 27  percent (Table 1).  In addition the structure of GNP is now more spreaded out among the economic sectors.   The effect of the government's program is even more pronounced on exports.  By 1989, the country's export of manufactured products contributed over 50 percent of its total value.   This is much different from the 1960s when rubber and tin  provided most of the export revenues.

INCENTIVES FOR INVESTMENT IN MANUFACTURING
      One of the first actions to attract foreign investment was the introduction of Pioneer Industries Ordinance (PIO) 1958 right after independence in 1957.   The
 
 
 

PIO provided generous incentives as well as tariff protection for new industries.  Unfortunately, the 1958 PIO had some weaknesses.  First, it did not encourage industries to make full use of domestic raw materials.  Second, there was no strong encouragement for the manufactured exports and third, it did not emphasize on labour intensive industries.   Another act, the Investment Incentives Act was then introduced in 1968 to overcome the shortcomings of the 1958 Act and to encourage industries to be more resource-based, labour intensive and export oriented.
 
     The Investment Incentives Act, 1968 provided six major forms of incentives related to manufacturing.  They are Pioneer Status, Labour Utilization Relief, Locational Incentives,   Investment  Tax  Credit,  Export  Incentives  and Increased Capital Allowance.  Industrial growth rate in Malaysia was quite significant during 1960s and early 1970s.  However,  the growth rate was more in quantitative terms rather than qualitative.  As Ghazali (1988) put it:
     1. The level of value added in the manufacturing output was low
     2. The manufacturing base was narrow
     3. The link between industries was very weak
     4. Production was mainly targeted for domestic markets
     5. The level of technology was low
 
 

     Further adjustment was made to the investment incentives in 1975 when the Industrial Co-ordination Act (ICA) was introduced.   The main feature of the Act was the requirement of obtaining a licence for all manufacturers unless exempted.  This was to ensure orderly development of industries in conformity with the New Economic Policy goals.  In other words, post-1975 industrialization was more governed by policy instruments which focused on certain socio-economic objectives.

      To give direction and spearhead the industrialization programe  for 1980s  and 1990s,  Industrial Master Plan  (IMP) covering the 1986-1995 period was introduced in 1986.  The main objectives of IMP were to:
    1. Accelerate growth of the manufacturing sector
    2. Utilize the country's abundant natural resources
    3. Increase indigeneous technological capacities and  competitiveness
     To avoid ambiguities, specific targets for GDP, total investment requirement in overall and  manufacturing sector,  manufacturing value added and employment for manufacturing by 1990 and 1995 were stated in the IMP.

     The global recession in mid 1980s did not provide much opportunity for the target of the IMP to materialise.   It also seemed to have neutralised the progress of the ICA 1975 as the  global recession had a strong negative impact on the overall Malaysian economy. The average annual growth rate for the manufacturing sector in 1985 was -3.8 percent  while the average growth for the overall economy was -1.0 percent (Table 5).

 
     In order to improve the growth rates,  various new measures and relaxation in  the existing guidelines pertaining to investment in the manufacturing sector were introduced.  For instance, in 1985, the government made some amendments on the Industrial Co-ordination Act (1975).  Following the amended act, only manufacturing companies with shareholders's  funds  of  at least  M$2.5  million (previously M$250,000) or engaging 75 (previously 25) or more full time workers need to apply for the licence.  In addition, no approval is required for any company which plans to undertake expansion in order to export 80 percent or more of its products (the company is only required to inform the Ministry of Trade and Malaysian Industrial Development Authority (MIDA) on the details).  Similar conditions and procedures are applicable for a company which undertakes diversification for export.  In relation to the expansion of capacity for domestic market, any licensed company with shareholders' funds less than M$2.5 million can expand while licensed company with shareholders' funds more than M$2.5 million can expand provided that the 30 percent of the expanded equity is reserved for Bumiputera (the indigeneous people).

     The government also proposed a major overhaul of the existing investment incentives.  As a result, the Promotion of Investment Act, 1986 was introduced which was aimed at stimulating private sector business activities in various sectors including manufacturing.  Among the major incentives for the manufacturing sector were pioneer status, investment tax allowance, abatement of adjusted income, accelerated depreciation,  reinvestment  allowance,  double  deduction  for promotion of export, industrial building allowance, incentives for research and development, and export credit refinancing scheme.  Under the pioneer status, a five year period of tax  relief was given  irrespective of the level of investment.   Abatement of adjusted income was designed for resident companies which manufacture (locally) products for exports while accelerated depreciation was intended to encourage capital investment, modernize and expand factories.  The government's encouragement for exporting manufactured products was reflected in double deduction on export credit insurance premiums, double deduction for promotion of export and export credit refinancing scheme.

IMPACT ON INDUSTRIALIZATION
     Following the government's effort at changing production and attracting foreign investment the role of the manufacturing sector in the economy has increased substantially.  The shares of manufacturing in the GDP and exports have increased steadily since 1960 (Table 1 and Table 2).  The major contributor to GDP has shifted from agriculture to manufacturing.  The share of agriculture, livestock, forestry and fishing in the GDP had dropped from 38 percent in 1960 to 19 percent in 1989, while the share of manufacturing had increased from 9 percent in  1960  to 27  percent  in  1989.   The manufacturing output include  the primary commodity based products such as processed rubber (like gloves and tyres), plywood, furniture and fixtures, refined palm oil and metal products.  There has been no major change in the other sectors of the economy except for the mining sector where its share of GDP has recently increased  slightly due
 

to the contribution from petroleum activities coupled with the escalation of petroleum price.   The contribution from  finance, insurance, real estate and business services to the GDP has also increased (from 6 to 9 percent).

     In the export sector, the most obvious change can be seen in the percentage share of manufactured products, rubber and tin in the total export.  The share of rubber in the country's export had consistently decreased from 44 percent in 1960 to 6.5 percent in 1989 while the share of tin had dropped from 20.2 percent in 1965 to 1.8 percent in 1989.  In contrast, the contribution of manufactured products to the total export had increased from 10 percent in 1970 to 54.7 percent in 1989 (see Table 2).  In short, the main source of export has shifted from raw agricultural products and primary commodities to manufactured products which include electronics, textiles and primary commodity based manufactured products such as refined palm oil, plywood, and rubber gloves.   This fact also suggests that the country's effort in reducing over dependence  on exports of raw agricultural products and primary commodities has been quite successful.

     In terms of employment, even though the agricultural sector still has the highest level of employment, its share in  total employment has decreased.   On the other hand, the manufacturing sector has gained higher portion of employment, from 9.5 percent in 1970 to 17.6 percent in 1990 (see Table 6).

     Another important aspect of industrialization  is related to the contribution of foreign capital to the manufacturing sector.  Foreign investment clearly has

 
played a very important role in the development of the Malaysian manufacturing industries.  Foreign capital in the manufacturing sector has increased substantially (Figure 1 shows the recent trend of foreign involvement in the Malaysian manufacturing).  The amount of foreign proposed capital investment  in the approved manufacturing projects for the 1984-1989 period constituted  47.5 percent of the total proposed capital investment (MIDA, 1990).   The country source of foreign investment has also changed. An important feature is the reduced importance of United Kingdom in the Malaysian foreign investment scene.Japan, United States, Taiwan, Singapore, Hong Kong, United  Kingdom, are currently among the most important sources of foreign investors.   Table 7  and Figure 2  provide  more information on the share of equities among the major
countries involved in foreign investment in the Malaysian manufacturing sector.
      With regard to the country's balance of payment, Hoffman  and  Tan  (1980)  has indicated that the effects of foreign investment on the balance of payments could be broken into three categories: (1) resource effect;  results of their study strongly supported the hypothesis that the resource effects of foreign controlled companies (FCC) tended to be negative.  The biggest outflow was mainly in the form of investment income (Figure 3 shows the net outflow of investment income for the 1976-1988 period);   (2) Exchange effect; the study concluded that the trade surplus of FCCs significantly outweighed the negative resource effect (outflow of investment income), and other transactions including royalties, salaries to expatriates and short-term capital export.  The observations are consistent with

 
the hypothesis that there is positive net balance of payments effect of foreign
investment; (3) Import substitution and export expansion; Despite the claims that foreign investment in manufacturing was adding to the country's balance of payments problem, data from 1968-1971 showed that 60 percent of the output increase of FCC had contributed to the improvement of Malaysian balance of payments.  On the contrary, it was shown that import substitution and export expansion of local controlled companies (LCC) had on balance a  negative balance of payments effect.  Thus, the allegation saying that FCCs are heavily oriented toward the domestic market is not very accurate in the above cases.

     Foreign investment has also contributed to the  Malaysian technological development in a great extent.  There were at least 601 technological transfer agreements signed between Malaysian government and multinational corporations (MNCs) during the 1981-1985 period (Beaumont,1990).  Besides the direct transfer of technology through  agreements, there were also less direct ways of technological transfer, for instance through human resource development (HRD).  HRD is an area of technological transfer which is often overlooked.  Perhaps, an excellent example of what MNCs have been doing in Malaysia is the improvement in the services sector such as banking, finance, insurance, marketing, communications, trading and the fast food business.

     In addition,  foreign investment particularly from the Asian Newly Industrialized Countries (NICs),  has led to a tightening of the labour market and a wage increase in some segments of the labour force.  Some areas such as Klang Valley and Southern Johor have recently been experiencing increasing labour demand and wage rise.  Besides the direct employment, MNCs also deserve some credits for generating indirect employment through auxiliary industries which support the MNCs major activities.  Furthermore, foreign investment has played major role in the export trade.  MNCs have utilized Malaysia which has low wage rates and abundance of resources as a production base.  The MNCs manufacture their products in Malaysia and export them to other countries including their home countries.
 
 

EVALUATION ON INDUSTRIALIZATION AND DISTRIBUTION
OF FOREIGN INVESTMENT

     Despite the apparent success of the government's industrialization program the move was not without undesirable consequences. The two major weaknesses are explained below.

     An examination of data on the manufacturing industry reveals that its manufacturing base is quite narrow.  A few industries such as electrical are heavily invested while some others are under invested.  The share of electrical in the total number of approved manufacturing projects was 14.4 percent (which is the highest) during 1984-1989 period (Table 8).  In terms of capital investment, the electrical industry constituted 14.7 percent of the total capital investment in manufacturing (which is also the highest) during the 1984-1989 period (Table 9).  The contribution of electrical  industry  to  the total  capital investment  in the
 manufacturing sector has also increased lately.  In 1989, capital investment in the electrical industry (electronic and electrical appliances and machinery) alone accounted for almost a quarter (25 percent) of the total capital investment in approved manufacturing projects.

     The uneven amount of investment across the various industries has resulted in an imbalance pattern of employment.  An investigation on the structure of employment in the manufacturing sector shows that electrical industry dominates the major portion of the employment.  By December, 1988, the highest employment was in the electrical industry, representing 22.7 percent  of the total employment in manufacturing, followed by the textiles and textile products,  15.2 percent and  food manufacturing,  10.7 percent (Figure 4 indicates the employment distribution among the industries).   In addition, during 1987-1989 period, potential employment in the electrical industry formed almost one third (31 percent) of the total potential employment in the approved manufacturing projects (Table 10).

     The uneven trend in investment  has also changed the structure of manufactured exports.   Manufactured exports are now dominated by  electrical products (electronic, electrical appliances and machinery).  The share of electrical products in the total manufactured exports has increased substantially from 3 percent in 1970 to 57 percent in 1990 while the shares for other industrial products  have  not  changed  much  (Table 11).    In 1990,    all industries in
 
manufacturing except electrical and textile, clothing and footwear contributed less than 5 percent each to the total manufactured exports.  The exports of textile, clothing and footwear products (second largest contributor to the manufactured exports) constituted 10.3 percent and 8.4 percent in 1989 and 1990 respectively of the total.

     Electrical industry has also accounted for the major portion of the manufacturing value added.  In 1987, electrical machinery contributed 16.1 percent of the total manufacturing value added, while chemical and chemical products contributed 14.6 percent and food contributed 8.3 percent (Malaysia, Industrial Surveys, 1988).  Note that in 1963, electrical machinery accounted for only 1.1 percent of the total manufacturing value added (Malaysia, Census of Manufacturing Industries, 1964).

     Another deficiency in the country's industrialization is  the under-utilization of local natural  resources in the country's manufacturing industries.   It is quite ironic that  Malaysia has been relatively successful in industries such as electronic-component assembly and textile manufacturing  (where  other than  labour,  it  does  not  have any  resource  comparative  advantage)  and  less successful in downstream processing and manufacture of products based on  local commodities  of which it is the world's major exporter.  Malaysia still exports a large amount of its rubber, palm oil, tin and timber (in their low-value added forms) to advanced countries to be reprocessed into higher value added products.  For instance, the Malaysian sawn timber is used in the large scale production  of plywood and fabricated furniture by Korea and Japan while  its natural rubber is exported to the United States, European Economic Corporation (EEC) countries and Japan for the  production of tyres and surgical protective devices (Fong, 1988). In the electrical industry, most of the electronics and electrical appliances  plants (which are mainly off-shore plants) are owned by multinational firms.  They are engaged in the assembly processes of  integrated circuits (ICs) and consumer appliances and industrial equipment like air-conditioners, radios and  television sets from completely knocked-down imported units for  the local and export markets (Fong, 1988).

     The above discussion reflects the need of further expanding certain industries (which are based on local resources) such as rubber and wood products, furniture and fixtures, and food processing and canning.   Resource based industries (RBIs) is very important in terms of reducing the problem  of import  dependence  and  foreign  exchange savings. Since foreign exchange earnings for most of the developing countries are limited and have to be carefully managed, the RBIs can effectively contribute towards foreign exchange savings because of their relatively more conservative consumption of imported inputs than the non-RBIs (Ismail, 1988). The superiority of RBIs can also be seen in comparative advantage terms.  The level of comparative advantage  can be indicated by the effective rates  of protection (ERP) which is the proportionate increase in domestic value added per unit of output over free trade value added, per unit of output as a result of tariff protection.  In other words, the ERP measures  the degree of protection required by an industry at its current level of production.  The lower the protection needed, the higher the comparative advantage, vice-versa.  It was found that many of the RBIs in Malaysia had comparative advantage and would be excellent candidates for expansion (Anuwar and Osman Rani, 1986).

     In terms of foreign  participation  as measured by capital committed there is almost a similarity to what was seen in the manufacturing sector. Some industries are highly invested while  others appear to be overlooked by foreign investors. For example,  by December, 1988, foreign share in the total fixed asset constituted 81 percent for the electrical industry, 94 percent for the scientific and measuring equipment industry, and 70 percent  for the beverages and tobacco industries, 56 percent for rubber product industries,  and  53 percent for  textile  industry.   In  contrast,  foreign  share in the total fixed asset for the wood and wood product, plastic and chemical industries represented only 14.6 percent, 17.8 percent and 21  percent respectively of the industry total fixed asset (MIDA, 1990).

     The nonuniform distribution of total investment in various manufacturing industries can be associated to a certain degree with the unequal participation of foreign investment across the manufacturing  industries.  Foreign investment plays  very important  role  in most of the highly invested industries.  For example,  total foreign paid-up capital and fixed asset in the electrical industry accounted for more than 60 and 80 percent (respectively) of the total amount by December, 1988. By the same time,   foreign fixed asset in textile industry represented more than 50 percent of the industry's total fixed asset (MIDA, 1990).  Note that electrical and textile  are among the most important industries in terms of export contribution, paid-up capital and employment.

CONCLUDING REMARKS
     The country's effort at changing production and attracting foreign investment has brought many structural changes in the economy in terms of GDP components, exports and employment.  Basically, it has successfully reduced the country's over dependence on agricultural and primary products. Foreign investment is no longer dominated by British corporations. However, as explained in the previous section, there are some deficiencies in the industrialization process.

     First of all, the manufacturing base is narrow as reflected by the rates of investment across the various industries which are concentrated only in a few industries.  Electrical  and textile industries have been highly invested  while  certain industries have been under invested.  The uneven  distribution of  investment among various manufacturing industries  has caused an imbalance structure of employment and manufactured exports.  Over one third of employment in manufacturing are in those two industries.

     The unequal growth of the manufacturing industries has also led to the imbalanced structure of the country's export.  The export sector is dominated by manufactured products while more than half of the manufactured export is represented by electrical products which are mainly electronic.  In short, the country's export base is currently quite narrow. This is rather similar to the export pattern the country had during the 50s and 60s except that the commodities being exported are no longer rubber and tin but electronic products.   Given the present pattern of exports the country is therefore sensitive and vulnerable to the changes of world supply and demand for electrical products.  Should there be any severe drop in the demand for electrical products in the world market, the country's economy would be adversely affected in terms of growth and employment.   This was in fact the case in the mid 80s. The world electronic industry did experience severe doldrums  in  the  middle  of  1980s  in  the  aftermath  of a massive supply expansion in anticipation  of  increased  demand which did not materialize and many exporters of electronic products including Malaysia suffered badly.

     Next, there has been limited use of the country's natural resources in the country's exporting industrial process.   A large amount of the country's commodities are still exported in their low value added forms to several advanced countries to be reprocessed into higher value products.  The country's currently most dominant industries such as electronics and electrical appliance are basically non-resource based and highly dependent on imported inputs.   Industries which are based on local resources like rubber and wood products, furniture and fixtures, and food processing have not  been given as much attention by foreign investors. In short, it is a fact that the country's efforts at diversifying the economy through industrialization have been quite successful in enhancing the role of manufacturing sector in the country's economy and in reducing the country's over dependence on agricultural and primary products. However, the policies have not been very satisfactory in promoting a stable and balanced structure  manufacturing.

     As far as tax incentive scheme is concerned,  special incentives are available for investment projects which consume local resources.  Incentives for utilizing local natural resources are provided in the Promotion of Investment Act, 1986.   Despite the above incentives,  industrial development  still tended to concentrate on certain industries.   Basically, there are two possibilities that can explain the above situation:  first, the incentives are not attractive enough to the investors and second, there are other considerations that are more critical than tax incentives  in the investment decision.
 
      Like in many other countries much of foreign investment in Malaysia are affected through multinationals.  For this reason, it is important to understand the behaviour of MNCs as well as to identify factors influencing foreign investment in the Malaysian manufacturing sector so that further refinement of the current investment incentives and  policies can be made.  For example it is important for Malaysia to have a more balanced and diversified manufacturing base.   The manufacturing industries should also be encouraged to use more of the local natural resources and processing them into higher value added products.  For the purpose of further study it is worthwhile to pursue investigation on foreign investment in Malaysia centering on the two possibilities mentioned earlier. Specifically it is worthwhile to explain the motive and behaviour of MNCs involved in foreign investment and analyse the country related determinants of foreign investment in the manufacturing sector in Malaysia.   Similar activities can also be extended to study in detail a particular manufacturing industry.