Malaysia has embarked on a huge development plan to spread growth and jobs to its Malay-majority hinterlands, but analysts said it faced tough competition for necessary foreign investment.

Prime Minister Abdullah Ahmad Badawi last month launched a RM177 billion development initiative to cut poverty in northern Peninsula Malaysia, the country's Muslim heartland.

He had already unveiled the Iskandar Development Region in southern Johor, which aims to attract RM50 billion over five years to turn the area into a new Asian metropolis.

But other Asian nations such as China, India and fast-growing Vietnam were luring away key foreign investment, analysts said.

Only one-third of the target of RM177 billion for Peninsula Malaysia is due to come from the government, so foreign funds are required for the plan to succeed, said Wan Suhaimi Saidie, an economist with K Kenanga Bhd.

"But now we are facing stiff competition from Thailand and Vietnam. These countries have advantages over Malaysia, for instance in the form of a younger workforce or bigger population," he said.

Hard to attract investors

Chua Hak Bin, an economist with the Singapore-based firm Citigroup Global Capital Markets, also said attracting more overseas money would be hard.

"Malaysia has really fallen behind Singapore, Vietnam and China in attracting foreign direct investment," Chua said.

"It will be hard for investors to justify why they should come to Malaysia. This is global reality," he added, noting China's popular free trade zones and Singapore's relatively low corporate taxes.

Officials have embarked on a marketing offensive in Singapore to sell the Iskandar Development Region, but as yet it has not attracted major foreign investment.

Malaysiakini reported yesterday that the authorities were worried that the troubled RM4.6 billion Port Klang Free Zone could affect foreign investments in the Iskandar project.

One reason is that among those the authorities hope to inject investments into the IDR come from the same business community as the Dubai-based Jebel Ali Free Zone, which pulled out from PKFZ over a number of disagreements with the authorities.

Malaysia, Southeast Asia's third largest economy, has seen foreign direct investment steadily declining. In 2006 it amounted to an estimated US$3.9 billion, compared to US$5.5 billion in 2001.

But analysts said Abdullah's ambitious development project would still have an impact, creating new job opportunities across a variety of sectors over the next few years.

"New employment opportunities will be created with the development of the country's hinterlands," said Lee Heng Guie, the head of economic research with CIMB Investment Bank.

"With infrastructure development taking place, like the second bridge link to the island resort of Penang, there will be a rise in demand for building materials," he said.

Plans 'highly politically motivated'

K Kenanga's Wan Suhaimi said if the plans succeeded, they would be a boon for rural areas.

"It may attract big companies to set up business in the manufacturing and services sectors. And this will create jobs," he said.

Some analysts have speculated that the development plans were announced recently because Abdullah plans to hold early an early election, possibly later this year.

He was hoping to boost his government's popularity by trying to spread economic growth across the country, they have said.

The plans were "highly politically motivated" ahead of an anticipated early election, said Citigroup's Chua.

Malaysia official economic growth forecast for 2007 is six percent, behind that of rivals like China and India. Its economy grew 5.9 percent in 2006.