IB ASSIGN Complete)

8/2/2019 IB ASSIGN Complete)

1/26

1

CONTENTS

NO. SYMPTOMS

1.0 INTRODUCTION 2

2.0 DEFINITION 3

3.0 OPPORTUNITY OF FDI 4

3.1 TRANSMISSION OF TECHNOLOGIES 4

3.2 HUMAN CAPITAL ENHANCEMENT AND

DEVELOPMENT TO HOST COUNTRY

7

3.3 SPILLOVER AND LINKAGE OF FDI 9

3.4 EMPLOYMENT EFFECT OF FDI 10

3.5 CONTRIBUTION TO CAPITAL INVESTMENT AND

CAPACITY OF FDI

12

4.0 CHALLENGES OF FDI 13

4.1 PIRACY INCREMENTAL OF FDI 13

4.2 CULTURAL CONFLICT 15

4.3 HUMAN RIGHTS VIOLATIONS 18

4.4 THREATEN SMALL SCALE INDUSTRIES 20

4.5 DIMINISHED OF AGRICULTURE-BASED

ECONOMY

22

5.0 CONCLUSION 25

6.0 ACTIVITY GANTT CHART 26


2/26

2

FOREIGN DIRECT INVESTMENT (FDI)

1.0 INTRODUCTION

Foreign direct investment (FDI) has grown dramatically as a major form of

international capital transfer over the past decade. Between 1980 and 1990, world flows

of FDI which defined as cross-border expenditures to acquire or expand corporate control

of productive assets. FDI became a major of net international borrowing for the Japan

and United States because this country is the worlds largest international lender and the

borrower, respectively. Direct investment has grown even more rapidly of late within

Europe.

Theories predict the scale and scope of multinational enterprises by looking to

differences in the competitive advantages across firm or country that might lead to the

extension of corporate control across borders. So, for example, better technology,

management capability, and product design; stronger consumer allegiance and greater

complementarities in production or use of technology can allow a domestic firm to

control foreign assets more productively than would a foreign firm and could therefore

predicate direct investment. In many cases, these theories also explain why an

enterprises alternatives to FDI-domestically based production or licensing of foreign-

based production are less efficient than direct control of foreign based operation.


3/26

3

2.0 DEFINITION

Foreign direct investment (FDI) is the process whereby residents of one country

(the source country) acquire ownership of assets for the purpose of controlling the

production, distribution and other activities of a firm in another country (the host country).

The International Monetary Funds Balance of Payments Manual defines FDI as

an operating investment that is made to acquire a lasting interest in an enterprise

operating in an economy other than that of the investor, the investors purpose being to

have an effective voice in the management of the enterprise.

The United Nations 1999 World Investment Report (UNCTAD,1999) defines FDI

as an investment involving a long-term relationship and reflecting a lasting interest and

control of a resident entity in one economy (foreign direct investor or parent enterprise)

in an enterprise resident in an economy other than that of the foreign direct investor (FDI

enterprise, affiliate enterprise or foreign affiliate). The term long-term is used in the last

definition in order to distinguish FDI form portfolio investment, the latter characterized

by being short-term in nature and involving a high turnover of security.


4/26

4

3.0 OPPORTUNITY OF FDI

Malaysia is a very open, trade dependent economy. Both contribution and

hindrance could be result at the same occasion. The current global crisis prompts

Malaysia to review its policy on trade, something that is of importance since it is a small

open economy. Malaysias growth has been highly dependent on trade and the inflow of

foreign direct investment (FDI).

3.1 TRANSMISSION OF TECHNOLOGIES

Technology transfer is a crucial and dynamic factor in social and economic

development. Technology has been transferred intentionally or unintentionally. On one

hand, more developing countries are pursuing economic policies open to trade and

foreign investment. On the other hand, developing countries have become important

players in the world economy, as producers, as consumers, as investors and as

destinations for cross-border investment. Sometimes, a generator of technology has

acquired a competitive advantage by undertaking the dissemination of products,

processes and maintenance systems (Bradbury, 1978).

Sometimes, a recipient (or transferee) has done much better than the original

innovator. For example, it was the Chinese who invented gunpowder, but to the

Europeans who used it and developed it for world conquest. Sometimes the

technology has taken a new form at each transfer, absorbing local traditions of design or

local market preferences and there is value added during the process of technology

transfer.


5/26

5

The two words technology transfer seem to convey different meanings to

different people and different organizations. Technology transfer is defined in the Work

Regulations of the United Nations, as the transfer of systematic knowledge for the

manufacture of a product or provision of service (Yu, 1991). It has been defined in many

other ways.

According to Abbott, (1985), it is the movement of science and technology

from one group to another, such movement involving their use.

Traditionally, technology transfer was conceptualized as the transfer of hardware

objects, but today also often involves information (e.g., a computer software program or a

new idea) that may be completely devoid of any hardware aspects.

Research into technology transfer has matured from the early period of emphasis

on the technology itself, through general management objectives to the current state of

development where interest has arisen in the appropriateness and effectiveness of the

technology transfer. It has been identified that without knowledge transfer, technology

transfer does not take place as knowledge is the key to control technology as a whole.

Knowledge transfer is crucial in the process of technology transfer. Therefore, the focus

of the paper is to address the fundamental element of technology transfer knowledge

transfer.

Knowledge transfer is about connection, not collection and that connection

ultimately depends on choice made by individuals (Dougherty, 1999). It is worth noting

that this form of transfer in particular may well be a two-way process between the

transferor and the transferee.


6/26

6

Knowledge transfer is also an increasingly popular term in the literature as writers

attempt to highlight the human aspect of knowledge management. This natural transfer,

or unstructured exchanges and informal exchanges, are vital to a firm's success. It is of

great significance for an organization to be able to capture and use the knowledge inside

managers' heads. Maitland (1999) argues that the crucial factor in determining a

company's competitive advantage is its ability to convert tacit knowledge into explicit

knowledge through organizational learning.

Polanyi (1967) considered human knowledge by starting from the fact that we

know more than we can tell. In general, knowledge consists of two significant

components, namely explicit and tacit. However, the greater the extent to which a

technology exists in the form of the softer, less physical resources, the greater the

proportion of tacit knowledge it contains. Tacit knowledge, due to its non-codifiable

nature has to be transferred through intimate human interactions (Tsang, 1997).

Therefore, with technology transfer knowledge transfer of FDI in Malaysia. I

strongly believe that it would increase the inflow of foreign direct investment in my home

country especially to the manufacturing sector. Based on my research, Malaysia is now

host to more than 5000 foreign companies, including multinational corporations. Many

manufacturers have taken advantage of the countrys capabilities by outsourcing their

manufacturing activities to Malaysian companies or setting up their own operations in

Malaysia. Many companies have since expanded and diversified their operations

reflecting their continued confidence in the ease environment of the country.


7/26

7

On the other hand, new technology bringing from neighborhood helps the origin

country the increase the level of competition in a market. As a result, it gave the

indication that Malaysia is moving forward to a developed nation.

3.2 HUMAN CAPITAL ENHANCEMENT AND DEVELOPMENT TO A HOST

COUNTRY

Human capital enhancement may be related in various ways to the issue of the

transfer of technical knowledge, management technique and also training. Foreign Direct

Investment (FDI) can be a medium for acquiring skills, organizational and managerial

practices. When a country receives some type of foreign direct investment, it means that

human capital becomes more educated through training. Foreign direct investments in the

country allows for funding to train the employees and make them more efficient and able

to perform more complex jobs. Thus, the human development of the country as a whole

can be increase.

A developing countries need to have reached a certain threshold of development

to be able to fully absorb new technologies. However, some country are shortage of good

instructors in transferring practical knowledge about newest technology to trainees as

some instructors can only give theoretical lectures but not practical ones. But, with the

foreign direct investment, foreign firms will invest in training and provide

lecturer/instructor who is able to transfer their practical technical knowledge such as

machinery processing, mechanical metal sheet processing, and electric control of trainees.

As a result, local employees will become more educated through training and that

employees are able to perform more advanced operations. For an example, Vietnam has


8/26

8

started industrialization for only a short time, thus to some extent, the shortage of

instructors who could accumulate enough knowledge and experiences is understandable.

However, with foreign direct investment, FDI enterprises, whose are accumulating

sufficient practical knowledge and experiences can transfer the skill and speed up

industrial skill development of Vietnam. This human development can be expected to

lead to higher productivity and profitability as a direct result of the increased capacity of

the employees to perform their tasks.

In addition, foreign direct investment (FDI) has direct effect on the skill levels of

the workforce of a host country. Foreign firms will made significant investments in skill

development of a country, if the educational system had not prepared local workers

adequately for the level of industrial competition they would now face. The investments

that were made normally will across the entire skill-set, from entry, assembly lineworkers

to managing directors. Therefore, local company can up skill their workers and can get

managerial expertise from foreign direct investment. Moreover, as foreign companies are

typically more skill intensive than domestic firms, they could further develop the skills of

the domestic workforce and upgrade employees quality.

In sum, foreign direct investment (FDI) will in turn contributing to transfer

oftechnical knowledge, management technique and skillupgrading of a host country.

Employees of a host country in which there is a Foreign Direct Investment (FDI) can get

exposure to globally valued skills and the training and skills up gradation can enhance the

value of the human resources of the host country.


9/26

9

3.3 SPILLOVERS AND LINKAGES OF FDI

We take into account sectoral fixed effects, control for non-random selection of

FDI recipients and employ the semi-parametric estimation method suggested by Olley

and Pakes (1996) to account for endogeneity of input demand and firm exit.

Our results can be summarized as follows. We find robust empirical evidence of

positive spillovers from FDI taking place through backward linkages but no spillovers

occurring through horizontal channels. In other words, firm productivity is positively

affected by the sectorsintensity of contacts with multinational customers but not by the

presence of multinationals inthe same industry. The data also indicate that domestic firms

tend to benefit more from backward linkages than firms with foreign capital. Further, we

find support for the hypothesis that spillovers take place in the presence of a moderate

technological gap between domestic andforeign firms but not when the gap is large or

when local firms are more productive than their foreign competitors or the difference

between the two groups is negligible.

As expected, the results suggest that firms supplying mainly the domestic market

are more likely to benefit from backward spillovers from FDI than those with extensive

export experience, since the latter already have frequent contacts with foreign clients

located abroad. This study is structured as follows. In the next section, we briefly discuss

FDI inflows into Lithuania. Then, we describe our data and the methodology.

Technology Gap Matter for Spillovers through Backward Linkage is the extent of

backward linkages between multinationals and domestic suppliers ofintermediate goods

is likely to depend on the technological sophistication of domestic firms insupplying

sectors.


10/26

10

As numerous case studies (see Moran, 2001) indicate, multinationals frequently

provide support in terms of technology, advice on organization of the production process

and quality control training to their suppliers. If, however, local firms are much less

advanced than suppliers of the multinational in its home country, their ability to learn

may be limited and the multinational may prefer to import intermediate inputs instead or

to source from foreign companies present in the intermediate sector. In such a situation,

there will be little scope for interactions between multinationals and domestic suppliers.

On the other hand, if domestic firms are more or equally productive as their foreign

counterparts, there is little roomfor learning from a multinational customer. These two

factors are illustrated in the graph below, which suggests that learning is most likely to

take place in the presence of a moderate gap between local and foreign firms. In this

study, we test whether this is also the case with spillovers through backward linkages,

which is a plausible hypothesis.

The presence of spillovers through backward linkages and to examine whether

these effects are sensitive to the magnitude of technological between domestic and

foreign firms.If we take into account sectoral fixed effects, control for non-random

selection of FDI recipients and employee the semi paracmetic estimation method

suggested by Olley and Pakes (1996) to account for endogeneity of input demand and

firm exit.

3.4 EMPLOYMENT EFFECT OF FDI

The government responded by trying to boost investment and spending. To attract

foreign investment, the government introduced new incentives under the Promotion of


11/26

11

Investments Act 1986, cut down on red-tape, opened up new industrial zones and

modernised the infrastructure. The government initiatives coincident with the revaluation

of the yen in 1985 encouraging a large number of Japanese manufacturing firms to lower

production costs by off-shoring production units to Southeast-Asia. The large inflow of

foreign investment, while very effective in reviving the economy, is not, by itself, a long

term solution to economic development.

At the primary level, it has to be accompanied by several domestic developments

such as a transfer of technology to local firms, the development of local production

capacity and sourcing of inputs and the development of local human resources. Generally,

if indigenous enterprises fail to take advantage and benefit from foreign firms, then the

economy may well get stuck as a labour intensive export-manufacturing platform for

multinational companies.

For a country with a small population like Malaysia, inviting labour intensive

foreign investment creates a tight labour market which threatens to increase labour costs.

In 1979, Singapore dealt with the same issue by allowing wages to rise thereby pushing

out labour intensive industries in favour of more technology intensive investment. This

allowed for a general increase in wages and lifestyles of workers and has, a generation

later, produced a highly skilled workforce able to support high-tech instead of labour

intensive industries.

The Malaysian government, on the other hand, responded to the labour problem

by the large scale recruitment of foreign workers. Bowing to pressure from major

corporations, about rising workers wages, the government began to import labour thereby


12/26

12

slowing wage increases among blue collar workers. By the end of 1996, the migrant

labour population had reached an estimated 2.5 million. The important of this article is

that policy makers should pay close attention to those factors that negatively affect FDI

flows.

One important finding is the negatively relationship between FDI flows and

export of goods and services in both the short run and long run. Policymakers need to

review the tariff system and any other barriers that may act to inhabit a smooth FDI flows

into the country. These measures can increase the confidence of foreign investors in

Malaysian economy making the country, in the long run, a favorable investment in the

region.

3.5 CONTRIBUTION TO CAPITAL INVESTMENT AND CAPACITY OF FDI

The name "Foreign Direct Investment" usually brings to mind a significant

contribution of FDI to domestic investment and to capital inflows. However, there has

been a lot of Scepticisms concerning the contribution of FDI to these engines of growth.

As noted by Froot (1993), FDI (the purchase by a domestic resident of a controlling stake

in a foreign company) actually requires neither capital flows nor investment in capacity.

Management under portfolio equity ownership may be plagued by a free-rider problem.

Under disperse ownership, if an individual shareholder does something to improve

the quality of management, the benefits will accrue also to all other shareholders, see

Oliver Hart. In contrast, FDI investor, who is endowed with management skills and gains

control of the firm, has better incentives to pursue proper monitoring of management, and

will be in better position to micro manage the firm. Furthermore, based on possessing


13/26

13

"intangible capital" in her source country, the FDI investor can apply more efficient

management standards in the host country compared to domestic investors.

Thus, the unique advantage to FDI, that has only recently been explored, is the

potential for superior micromanagement, based on the specialization in niches of industry.

Anticipating this fine-tuned investment schedule, the value of the firm to the potential

FDI investor is larger than the reservation value to the original owner, and the

corresponding bid value to potential domestic investors. Therefore, FDI investors will

outbid domestic investors for the firms in the domestic industry. Competition among

potential FDI investors will drive up the price close to the price which reflects the

upgraded management of the firm. The initial domestic owners will gain the rent, which

is equal to difference between the FDI investor's shadow price and the initial owner's

reservation price.

4.0 CHALLENGES OF FDI

Contrary with what had FDI given towards human and societies were sometimes

results a reluctantly unexpected outcome. What would be the next discussion part for FDI

clearly the setbacks of it that contributes in a negative way and ultimately results in a loss

towards the societies as a whole. Setbacks, in other words are challenges of FDI that has

come all the way with opportunity. This must brought to the table for handling well.

4.1PIRACY INCREMENTAL OF FDI

The challenges of increase piracy-pirated goods brought by neighborhood have

been up to USD 200 billion in 2005. This total does not include domestically produced


14/26

14

and consumed counterfeit and pirated products and the significant volume of pirated

digital products being distributed via the Internet.

Counterfeiting and piracy are terms used to describe a range of illicit activities

linked to intellectual property right (IPR) infringement. The work that the OECD is

conducting focuses on the infringement of IPRs described in the WTO Agreement on

Trade-Related Aspects of Intellectual Property Rights (TRIPS) it includes trademarks,

copyrights, patents, design rights, as well as a number of related rights. Counterfeiters

and pirates target products where profit margins are high, taking into account the risks of

detection, the potential penalties, the size of the markets that could be exploited and the

technological and logistical challenges in producing and distributing products.

Counterfeit and pirated products, previously largely distributed through informal

markets, are infiltrating legitimate supply chains, with products now appearing on the

shelves of established shops. Internationally, free trade zones, which are areas where

international traders can store, assemble and manufacture products that are moving across

borders with minimal regulation, are of increasing concern.

Passing merchandise through such zones provides opportunities for parties to

sanitize shipping documents in ways that disguise their original point of manufacture.

They also allow parties to essentially establish distribution center for counterfeit and

pirated goods, with little or no IPR-related enforcement actions being taken. Within the

zones, goods can be repackaged with counterfeit trademarks, prior to being exported to

other economies, and place of origin can be falsified to reduce enforcement scrutiny at

their destination.


15/26

15

The overall degree to which products are being counterfeited and pirated is

unknown, and there do not appear to be any methodologies that could be employed to

develop an acceptable overall estimate. The clandestine nature of many counterfeiting

and piracy activities, the general lack of indicative data and the difficulty in detecting

counterfeit and pirated products contribute to difficulties in this regard. Analysis has

therefore focused on international trade, where data, from customs authorities, are more

abundant.

Counterfeiting and piracy are illicit activities in which criminal networks and

organization crime thrive. The items that they and other counterfeiters and pirates

produce are often substandard or even dangerous, posing health and safety risks to

consumers that range from mild to life threatening.

The illegal activities undermine innovation, which is the key to economic growth.

The economic gains that some consumers experience by knowingly purchasing lower-

priced counterfeit or pirated products need to be considered in a broader context; many

consumers do not experience such gains, they are worse off.

The effects of counterfeiting and piracy are more pronounced in developing

economies, which is where infringing activities tend to be highest, due, in part, to

relatively weak enforcement.

4.2 CULTURAL CONFLICT

Culture is definedas an integrated system of learned behavior patterns that are

characteristic of the members of any given society. Thus culture can be seen as being


16/26

16

made up of a number of elements such as language, religion, values and attitudes,

manners and customs, material elements, aesthetics, education, and social institutions.

These elements, and variations in them from one nation or region to another, can also be

viewed as the sources of cultural differences and conflict.

When the cross-border mergers and acquisitions (M&A) happens, it becomes the

prime task to integrate resources and operations. The companies have different cultures,

values, and operating style due to their different backgrounds and external environment.

The cultural differences arising from cross-border M&A are not limited to those on the

company level, but also on the national level. The clash of cultures can arise from

different countries, nationalities, or companies.

Company culture is very important, for it correlates to a companys strategy and

employees performance with the fast development of cross-border M&A and other kinds

of foreign direct investment (FDI), cross-cultural management becomes a key role in

management process because of cultural differences and conflicts.

Cultural differences of nations are found in attitudes toward nature, rules, status

and power, ideas of individual and group, time, the modes of communicating and

thinking, and interpersonal relations. There are several differences when comparing

Malaysia culture with Western culture. For instance, most Malays are aware of Western

ways so the handshake is normal but there may be slight differences, Malay women may

not shake hands with men.

Besides, if you give food to Malays, it must be halal. In addition, Malay women

are disallowed to wear veil during working time in some multinational company (MNC)


17/26

17

otherwise she will be fired from her job. This action will violate ethical norms of Malays.

It can be concluded that cultural differences exists between Malaysia and the West.

Cultural integration eliminates conflicts arising from cultural differences by

organizing and merges the values, psychological states, and behavior modes of different

communities. Cross-border M&A cultural integration seek to reduce cultural differences

as much as possible in the acquired company.

In general, the following problems should be solved in cultural integration of cross-

border M&A. First, it should coordinate the cultural differences of peoples and states to

promote understanding and communicating between the different communities in one

company and to avoid the negative influence arising from the different thinking models,

behaviors, and values. In other words, the multinational company (MNC) should respect

the culture of the acquired company and try to understand the culture. The company

should not use fixed values to judge the other companys culture, but should combine the

companys strategic significance with its culture.

Communicating with each other effectively and understanding each other culture

is the most effective way to eliminate cultural conflicts. Second, it should coordinate the

different company cultures to eliminate the barriers in leadership styles, communication

models, personnel system, performance appraisals, and social security benefits. Third, it

should establish the companys core values by integrating diverse cultures to improve the

companys creativity and competitiveness. Fourth, the effective integration of the

companies cultures could provide conditions beneficial for the integration of operations.


18/26

18

4.3HUMAN RIGHTS VIOLATIONS

Human rights are "commonly understood as inalienable fundamental rights to

which a person is inherently entitled simply because she or he is a human being. Human

rights are thus conceived as universal which applicable everywhere and egalitarian (the

same for everyone). These rights may exist as natural rights or as legal rights, in

both national and international law.

Human rights can be classified and organized in a number of different ways; at an

international level the most common categorization of human rights has been to split

them into civil and political rights, and economic, social and cultural rights. Human rights

violations occur when actions by state (or non-state) actors abuse, ignore, or deny basic

human rights (including civil, political, cultural, social, and economic rights).

Furthermore, violations of human rights can occur when any state or non-state actor

breaches any part of the Universal Declaration of Human Rights (UDHR) treaty or other

international human rights or humanitarian law.

Malaysia has experienced some human right violations from foreign investors in

the manufacturing sector such as U.S investor. Since Malaysia lack of a minimum wage

rate, it may be a contributory factor for these violations, meanwhile it also violates the

International Labor Convention rule, which is requires all cities to establish a minimum

wage. However, some foreign investors took advantage of this problem causing certain

Malaysians to suffer hardships and abuses from them.
http://en.wikipedia.org/wiki/Rightshttp://en.wikipedia.org/wiki/Universality_(philosophy)http://en.wikipedia.org/wiki/Egalitarianismhttp://en.wikipedia.org/wiki/Natural_rightshttp://en.wikipedia.org/wiki/Legal_rightshttp://en.wikipedia.org/wiki/List_of_country_legal_systemshttp://en.wikipedia.org/wiki/International_lawhttp://en.wikipedia.org/wiki/Civil_and_political_rightshttp://en.wikipedia.org/wiki/Economic,_social_and_cultural_rightshttp://en.wikipedia.org/wiki/Economic,_social_and_cultural_rightshttp://en.wikipedia.org/wiki/Civil_and_political_rightshttp://en.wikipedia.org/wiki/International_lawhttp://en.wikipedia.org/wiki/List_of_country_legal_systemshttp://en.wikipedia.org/wiki/Legal_rightshttp://en.wikipedia.org/wiki/Natural_rightshttp://en.wikipedia.org/wiki/Egalitarianismhttp://en.wikipedia.org/wiki/Universality_(philosophy)http://en.wikipedia.org/wiki/Rights


19/26

19

The Malaysian government has been criticized for failure to enforce workplace

health or safety laws. Workers employed by foreign-owned electronic companies

sometimes work in poor conditions. Situations have been reported where huge electronic

industries lacked proper ventilation and workers were subjected to various forms of

health hazards.

In the early 1980s, many Malaysian women working in electronic factories began

to experience hallucinations and seizures this particularly happened after standing for

long hours on the assembly line in electronic industries. International labor standards are

not really enforced and institutions set up to observe companies do not work efficiently in

most developing countries. American companies investing in Malaysia have been

criticized as for being the worst violators of workers rights in Malaysia.

In 1986, General Instrument Corporation warned the Malaysian Minister of Labor

that if the local employees ever formed a union the corporation would sell its optic-

electronic business and close down the Malaysian Plant. In our opinion, in efforts to

eliminate violations of human rights, building awareness and protesting inhumane

treatment has often led to calls for action and sometimes improved conditions.

Each country is responsible for protecting human rights within its own borders.

But, in case of FDI, when our countrys rules and regulations are unable to protect the

human rights of the citizens, then the world community has a responsibility to step in

and ensure that these rights are protected. Besides that, education about human rights

must become part of general public education. Public should have the responsibility to

increase knowledge about their rights in work place. Especially, members of the police
http://www.beyondintractability.org/bi-essay/educ-and-conflicthttp://www.beyondintractability.org/bi-essay/educ-and-conflict


20/26

20

and security forces have to be trained to ensure the observation of human rights standards

for law enforcement.

In addition, government should provide free legal consultant to help public when

they face human right violation problem. To uphold human rights standards in the long-

term, their values must permeate all levels of society. Besides that, external specialists

can also play their role in order to offer legislative assistance and provide guidance in

drafting press freedom laws, minority legislation and laws securing gender equality. They

can also assist in drafting a constitution, which guarantees fundamental political and

economic rights.

4.4THREATEN SMALL SCALE INDUSTRIES

SMEs are based on annual sales turnover and number of employees of the SMEs.

A broad definition of SMEs is provided, along with specific definitions for micro, small

and medium enterprises. For wider coverage, businesses are considered as SMEs as long

as they meet either the threshold set for annual sales turnover, or in terms of the number

of full-time employees.

SMEs means a company has a paid up capital in respect of ordinary shares of less

than or equal to RM 2.5 million at the beginning of basis period. Today, the status of

SME has been threatened by multinational company (MNCs).

MNCs have large economic and pricing power due to their large sizes. They do

not have much problem with regards to financial capital and can hence resort to using

advertising which is a costly affair. Also, these companies are global players who have

their operations spread across countries and have effective supply chains which enable


21/26

21

them to have economies of scale which smaller players in the domestic market of the host

country cannot compete with. MNCs produce cheaper products due to their high volume

of production and decrease the cost per unit and more visibility due to the higher amounts

of advertising and have been known to push out smaller industries out of business.

In term of competition, lower import tariffs, quotas and other non-tariff barriers

have the effect of increasing foreign competition in the domestic market, and this is

expected to push inefficient or unproductive local firms to try to improve their

productivity by eliminating waste, exploiting external economies of scaleand scope, and

adopting more innovative technologies, or to shut down. The openness of an economy to

international trade is also seen as increasing plant size which is, scale efficiency, as local

firms adopt efficient technologies, management, organization and methods of production.

Besides that, one of threaten by MNCs is they reducing availability of local inputs

of SMEs. Eliminating export restrictions on unprocessed raw materials will increase

exports of the items at the cost of local industries. It can thus be expected that

international trade liberalization that increases foreign competition in the domestic

market will hurt some inefficient or uncompetitive SMEs.

In our opinion, to protect SMEs our government should increase the import tariffs.

For example, restrict some product that local companies have large number of production

import into our country. Besides that, our government can also increase the import quotas

to protect SMEs. For example, increase the import quotas of foreign car such as Toyota,

Audi, Volkswagens and Honda. So that, our local brand which is Proton and Perodua can

compete with them in term of price.


22/26

22

Besides that, government should give subsidy to the local SMEs companies to

reduce their production cost so that they can sell the product at lower price to compete

with product of MNCs and survive in the market. In our opinion, government should

declare a rule that all MNCs invest or operate in Malaysia should purchase the raw

material in our country to increase our country income.

4.5 DIMINISHED OF AGRICULTURAL-BASED ECONOMY

Foreign direct investment (FDI) played a major role in the transformation of the

agriculture-based Malaysian economy into one which is largely based on high-technology

manufacturing activities. However, the extent of technological spillover from FDI-driven

growth has not been all encouraging in Malaysia, as it has been in Taiwan, Korea and

Singapore. The emergence of China as a more favorable destination for FDI than

Malaysia has also posed a further challenge to the Malaysian economy.

Malaysia can no longer rely on low-wage cost advantage and the provision of

incentive schemes to attract FDI. Moreover, the emphasis on a knowledge-based

economy and increasing complexity of technologies require Malaysian firms to acquire

new knowledge and competencies. Malaysia has adopted best practice networking

strategies to assist firms to meet these needs and enhance their technological capabilities.

These strategies include high-tech cluster development based on the Silicon Valley model,

technology incubators, science parks, venture capital funds and other instruments under

technology policy within the national innovation system (NIS) framework.


23/26

23

Although the first science park was set up in 1988, it was not a science park in the

true sense of the term because it was housed in a small building with hardly any science-

based activities in it. The first proper science park was in fact launched in 1996.

Malaysias bid for transition to a knowledge economy would, however, greatly depend on

the ability of the country to harness the creative and innovative capacity of its people

through the provision of a policy environment amenable to the development of

entrepreneurship and the growth of investment in R&D.

It is significant that Malaysias competitiveness ranking had dropped from sixteen

in 2004 to twenty-eight in 2005 in the face of the countrys strong export performance

like high FDI inflow. The implication is that Malaysia had lagged behind technologically

in relation to other countries during this period. In recent years, a combination of factors

have colluded to make attracting FDI more challenging. Key among them is the rising

labor cost. Malaysia no longer has cheap labor and the people are becoming more

selective about jobs.

Understandably so because the average Malaysian is more educated, has higher

expectations and needs a higher income to cope with the rising cost of living. At the same

time, the poor and low-income countries of the region are becoming more open and

stable, and are offering the kind of incentives that Malaysia can no longer match.

China and India are economic regions by themselves. Then there are Indonesia, Thailand,

Vietnam, Cambodia, Laos and Myanmar, who offer cheap labor, an abundance of land

and a large domestic market, which Malaysia does not have.


24/26

24

One very positive aspect of industrialization that is often neglected or not fully

realized is the shift away from land-based development. Had industrialization not been

introduced, much more of the country's tropical rainforest would have been cleared to

make way for agriculture. The shift from agriculture to industry has saved the forests. But

we have to admit that we have become a bit too settled and sedentary due to our huge

economic success.

Not only are we not as hungry for success as we were in the 1970s through to the

1990s, but our economy has also since then been ravaged twice by economic recessions,

first in 1997- 98 due to the Asian Financial Crisis and in 2008-09 due to the US sub-

prime crisis. While these crises had major effects on our economy, they also exposed the

weaknesses and shortcomings of our economic system, in particular, those pertaining to

regulatory measures, the quality and adaptability of the workforce and more recently, the

perception that the country is less stable politically. Thus, there's a need to understand

and address these changes.

Not the least important is the fact that while we want foreign investors to continue

to bring their capital and expertise to our country, we have a situation where our own

capitalists are taking their companies private and sending their capital abroad.

Globalization brings with it increased competition and more opportunities for trade.

However, the competition that comes with globalization, more than being viewed as a

challenge that provides opportunities, is often seen as a threat. This is particularly

obvious in the case of Malaysia, which has resorted to protectionism in the case of its

automobile industry. The case of the automobile industry to illustrate a policy can retard


25/26

25

the potential of an economy such as Malaysias which depend so heavily on FDI and

international trade.

4.0 CONCLUSION

From the perspective of Malaysia in term of Foreign Direct Investment (FDI) as a

whole, it could be prominently seen that the number of opportunity and challenges

offered the same amount of endeavor to be coped. In addition, Malaysia has been an

encouraging economy to foreign investors either from Asian or European. The

reinvestment and the new capital injection among the present foreign companies

specified their assurance in Malaysia investment. The FDI could aid in a huge

accomplishment of a positive side movement that a fore mentioned such as the

transmission of technologies. Put in the other way, the movement is also be derived from

the negative side of FDI which will harm each nation in long-term. It has always

endeavored to maintain the competitiveness of FDI determinants. Many policy

instruments had been set up. The Malaysian government has improved the value of the

present determinants and is considering new strategies to attract to FDI.


26/26

GANTT CHART

ACTIVITY /

CALENDAR

15

NOV2011

22

NOV2011

29

NOV2011

6

DEC2011

13

DEC2011

20

DEC2011

FIRST MEETING

DISCUSSION ABOUT

THE CHOSEN TOPIC

SECOND MEETING

ANALYSE THE TOPIC

REQUIREMENTS

THIRD MEETING

ALLOCATION PART

TO EACH

INDIVIDUAL

DATE OF

SUBMISSION

FOR GROUP

CHECKING

COMPILATION OF

ASSIGNMENT

FINAL DATE OF

SUBMISSION

Documents

IB ASSIGN Complete)