Incentive Schemes and Foreign Investment in the Industrialisation of Malaysia

Asian Survey, Vol. XVIII, No.3, 1978

15 Pages Posted: 21 Jun 2012

See all articles by Neil Dias Karunaratne

Neil Dias Karunaratne

University of Queensland - School of Economics

M. Abdullah

University of South Australia

Date Written: March 1, 1978

Abstract

Post-independence, Malaysia has implemented policies to encourage private foreign investment (PFI) in the manufacturing industries through a plethora of incentive schemes (tax relief, pioneer status, investment tax credits, export incentives, locational incentives). The incentive schemes aimed to rectify the skewed nature of PFI which has concentrated in traditional extractive industries pre-independence, by encouraging diversification into manufacturing. However, the statistical analysis of survey results reveal that the incentive packages were ineffective and PFI was attracted to Malaysia and Singapore in order to gain a beachhead as a centre for regional distribution. Furthermore, the incentive schemes promoted capital-intensive industries and were located in developed regions with good infrastructure and financial services. Furthermore, the incentive schemes perpetuated unprofitable projects resulting in a drain on potential fiscal revenue. The study clearly reveals that whilst incentives such as free trade zones (FTZ) and tax-concessions promoted export oriented industries, overall the incentive packages were ineffective or even counterproductive. It appears that PFI is attracted more by non-incentive factors such as political stability and sound macroeconomic policies rather than tax-incentives. The need to reshape policies to attract the type of PFI that will generate employment and develop the rural hinterland needs to be addressed. In this context the prospects for regional cooperation among the ASEAN countries to counteract the 'concessions war' by harmonization of tax and incentive policies is moot.

Keywords: private foreign investment (PFI) , incentive schemes, manufacturing, export-oriented industrialisation, free trade zones, capital-intensive PFI, political stability, sound macroeconomic policies, regional co-cooperation, tax harmonisation

JEL Classification: F23, O10

Suggested Citation

Karunaratne, Neil Dias and Abdullah, M., Incentive Schemes and Foreign Investment in the Industrialisation of Malaysia (March 1, 1978). Asian Survey, Vol. XVIII, No.3, 1978, Available at SSRN: https://ssrn.com/abstract=2087981

Neil Dias Karunaratne (Contact Author)

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

M. Abdullah

University of South Australia

37-44 North Terrace, City West Campus
Adelaide, South Australia 5001
Australia

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