Foreign investment in Malaysia's manufacturing sector slowed in 2004 but domestic investment took up the slack, hitting its highest level in six years, Trade Minister Rafidah Aziz said today.

Rafidah also ruled out any move to review the ringgit peg, fixed at RM3.80 to the dollar since 1998, despite growing calls for the goverment to revise it as the local currency becomes undervalued following the weakening dollar.

Last year, Rafidah said the government approved a record 1,101 projects with investment of RM28.7 billion, compared to 965 projects worth RM29.1 billion in 2003.

Approved foreign investment, however, fell 16 percent to RM13.1 billion in 583 projects as domestic investment jumped 16 percent to its highest level since 1997 at RM15.6 billion or 54 percent of the total, she said.

"The encouraging level of domestic investment can be attributed to the increasing confidence of the private sector with the recovery of the Malaysian economy since the Asian financial crisis and an improved external economic environment," she told a news conference.

"It also indicates the growing capabilities of Malaysian companies and their positive response ... various domestic investment initiatives."

Top five investors

Foreign investment was concentrated in the electrical and electronics sector, which took RM6.8 billion, she said. The five top foreign investors were Germany, Singapore, the United States, Japan and Taiwan.

Despite the slowdown in foreign investment, economists noted interest remained strong with proposed investments of RM29.3 billion last year, the highest level since 2001.

"The application figures are encouraging amid intense competition in the region but it will be tough for Malaysia if it doesn't move to cut business costs," said Nizam Idris, regional economist with Singapore-based IDEAglobal.

Malaysia's corporate tax rate of 28 percent is among the highest in the region but any reduction is constrained by a budget deficit, he said.

Rafidah said the 2004 investment exceeded the government's annual target of RM25 billion under its 10-year industrial plan to 2005. Total investment approved during the 1996-2004 period now amounts to RM238.50 billion or an average RM26.5 billion annually.

She said the government would further fine-tune its policies to boost competitiveness in the manufacturing and related services sectors in the next industrial blueprint from 2006 to 2020.

Relocating to China

Malaysia's strategy is to focus on moving up the value-added chain to woo foreign investors and compete with China, which grabbed the bulk of US$166 billion of global capital flowing into Asia-Pacific last year, she said.

"We must be competitive in areas where we have built our strength ... but for labour-intensive industries and lower-end manufacturing where we cannot be competitive, we tell our people - please relocate to China.

"We are very pragmatic about this. We don't view China as a threat but China is a competitor and a partner in many ways."

Rafidah said the ringgit peg was not a deterrent to foreign investment as it provided manufacturers predicability in costing.

"So far it's been very good for us. It is a better scenario than having a currency that is fluctuating on a daily basis, which would involve hedging in the process," she added.

IDEAglobal's Nizam said the peg was a "double-edged sword because when it's going to be removed and in what way is in itself an uncertainty."