The newly released World Investment Report gives Malaysia a favourable review for its performance in the last calender year.

It said the nation had weathered well the economic downturn of 2002 and ranked it in the 'front-runner' category of nations with high foreign direct investment (FDI) potential.

With FDI inflows increasing by RM2.09 billion (US$0.55 billion) to RM12.16 billion (US$3.2 billion) in 2002, Malaysia is among the top 30 recipients of FDI globally, as well as in the top 10 among developing economy recipients.

In ranking countries that best defied the downturn in 2002, the report also named Malaysia within the top 10 most resilient countries, placing it behind Ireland and Japan but ahead of Slovakia at ninth position.

This position contrasts well against the 108 countries out of 195 surveyed, which reflected lower FDI inflows.

The report - a compilation of foreign direct investment data released annually by the United Nations Conference on Trade and Development - recorded 2002 as the second consecutive year in declining global FDI inflow, making it the largest downturn in 30 years.

Developed countries were the most affected, with 16 out of 26 leading countries featuring symptoms of weak economic conditions - such as poor stock market performance, lower corporate investment, slowdown in industry consolidation and steep drops in cross-border mergers and acquisitions.

Global competition

However, UN Development Programme senior adviser Madeline Loh warned that Malaysia will need to watch out for heightened global competition, as countries intensified efforts to attract or retain their share of investment money.

"China's potential to crowd out the rest of region cannot be ignored, especially with their tremendous range of low to high-skilled labour at their disposal," she said when speaking after the report launch in Kuala Lumpur today.

"The country is estimated to have about 8,000 professionals from American Ivy League universities," noted Loh, adding that as China is the largest recipient of FDI flows among developed countries, regional neighbours will have to adjust as it improves its competitiveness.

While Malaysia's economic fundamentals and prospects for investments is good, Loh said it was important for the country to be more selective by drawing its niche in technology and knowledge-intensive industries, and to steer away from labour intensive, low technology FDIs.

"FDIs can contribute tremendously to economic growth, but studies indicate that there's also a lot of outflows. It is estimated that for every dollar that flows into the country, 80 cents goes out economy," she said.

It is about striking a balance, she said, between encouraging FDIs into the country, and ensuring that inflows will bring greater benefits by furthering development - in essence, control over the right to regulate FDIs in order to preserve national and public interests.

National policies

According to Unctad, Asia was among the "most rapidly liberalising regions, with more national measures, bilateral investment treaties introduced in 2002 to facilitate FDI flows." Asean, in particular, takes the lead in the region in concluding investment and trade agreements

However, Loh noted from the report that there was nothing to indicate that international investment agreements (IIA) will improve investment flows.

"Overall, FDI flows are determined by economic fundamentals, and not IIAs. IIAs can, however complement what is done at the national level in creating a more conducive environment."

In addition, the report warned that no real benefits can be gained from merely opening up countries to FDI flows.

Rather, national policies were "crucial" to countering the dangers of FDI, by limiting anti-competitive practices, preventing foreign businesses from crowding out viable local firms, and protecting the local environment, for example.

Despite predicting that prospects around the world for 2003 will remain dim, the 2003 Unctad report was optimistic that a rebound can be expected by 2004.

"Surveys on transnational corporations and investment promotion agencies, like the Malaysian Industrial Development Authority, paint an optimistic picture, with developing countries more than developed countries anticipating greenfield investments," said Loh.