MBA Semester 1 Economics for Managers (ECO6073) - Part A Case Study

This case study, part of the Economics for Managers (ECO6073) course, examines the economic relationship between Japan and Malaysia, with a focus on Foreign Direct Investment (FDI). It explores the advantages and disadvantages of FDI, analyzing the impact of Japan's investments compared to China's. The study utilizes Dunning's eclectic paradigm to explain Japan's investment decisions, considering ownership, location, and internalization benefits. It also highlights the importance of the source of FDI and its impact on Malaysia's economic growth, particularly in sectors like electrical and electronics. The case study emphasizes how the specific needs of a nation's economy should guide the selection of FDI, differentiating between investments that generate employment versus those that bring technological advancements. The study concludes that not all FDIs are equal and that the source of investment matters significantly for economic development.

ECONOMICS FOR MANAGERS
(PART-A)
Running Head: Economics for Managers (Part-A)

Economics for Managers (Part- A)
Contents
1.............................................................................................................................................................2
2.............................................................................................................................................................4
3.............................................................................................................................................................5
References.............................................................................................................................................7
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Economics for Managers (Part- A)
Part (A): Case Study- Why Japan Has to
Step Up with Malaysia?
1.
Foreign Direct Investment refers to the investment made by the foreign companies in the
domestic companies and hold minimum 10% share in the same. FDI is usually considered to
be very important for the economic growth of the country. However, it sometimes proves to
be disadvantageous for the nation.
Advantage of FDI:
1. FDI often proves to be economically beneficial for the growth of the community. The
profits earned by the companies are usually reinvested for the growth of the workers,
improves their living standard, generate new jobs etc.
2. During import and export it is difficult for the nations to offer the product at a
reasonable price due to heavy tariffs and imposed duties. With the help of FDI,
companies are able to offer product at an affordable rate due to elimination of such
duties and tariffs.
3. FDI brings new technologies to the domestic countries and therefore improves their
technical know-how.
4. FDI improves the skills of human resources through intensive training and education.
Disadvantages of FDI:
1. FDI can hurt the local industry as the multinational companied with vast operations
and heavy bank balances can bear losses in initial phases and kill the local industry.
So, the whole scenario needs to be considered with FDI as it may creates jobs and
infrastructure but it can prove to be more harmful if it is disrupting the small
industries and unorganised players (Gaille, n.d.).
2. There can be issues regarding the improvement of the structure of production and
accumulation for the recipient country because the foreign companies are often
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Economics for Managers (Part- A)
guided by the product life cycle theory. So, they sometimes bring the equipment and
the technology that had lost the status in their own country.
For example there have been several cases of export of the obsolete equipment that in
turn releases the yesterday's models into these developing economies. This can prove
to be harmful for the society and environment because of the risks involved in dealing
with these old technologies and substandard products (Bartels and Crombrugghe,
2009).
3. FDI can introduce threat of huge layoffs if foreign firms not form new facilities in the
host economy but they start flourishing by buying up the existing local firms. These
firms can then introduce new systems and processes that can lead to lower labour and
advanced skills. So, the existing workforce in the economy faces risk to their
employment. Also, there is risk of fraud by the foreign companies as they may not be
answerable to local courts so it will lead to shutting of the business and it can be
harmful for the society.
4. There can be issues relating to sustainability as foreign investors enter into these new
economies with goal of extracting maximum profit in short time. They are least
concerned with improving economic, social and environmental aspect. There aren’t
any efforts toward the renewability of the natural resources and movement towards
clean energy.
The plan of China to invest heavily in Malaysia with a major focus on large-scale
infrastructure projects drew a lot of attention world-wide. Due to its strategic location,
Malaysia has become a significant country for China’s major infrastructure project “Belt and
Road Initiative (BRI)”. As a result, many Chinese State linked companies decided to invest in
Malaysia. China’s investment in Malaysia has proved to be a mixture of good and bad for the
economy of Malaysia.
China’s FDI in Malaysia grew from RM920 Million in 2010 to RM6.2 billion in 2017. Apart
from this, the share of China also went up from 0.3% 92010) to 2.6% (2017) in the FDI
stocks of Malaysia. China has invested into various sectors in Malaysia including industrial
park, public transportation, manufacturing sector which includes textile, steel, electronics &
electronics products), energy, real estate and construction.
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Economics for Managers (Part- A)
As per a survey, the respondents considered business expansion and market access along with
national economic and industrial development as the positive impacts of Chinese FDI in
Malaysia. They also believed that it also boosted service sector, manufacturing sector and
development of economic infrastructure. Infrastructure sector included port and high-speed
rail, service sector included development of e-commerce, Fintech and ICT services.
Businesses of Malaysia are not clear about the effect of Chinese FDI on the Malaysian
economy because most of these investments are majorly into large-scale infrastructure and
connectivity, handled by big corporations and not by the SMEs of Malaysia. Majorly, these
Chinese FDI in Malaysia has generated opportunities of employment and proved beneficial
for national, economic as well as industrial development (Socio-Economic Research Centre,
n.d.).
However, these FDIs of China has also proved negative to some extent. The Chinese
companies settled in Malaysia are heavily financed and managed by the state of China. As a
result, local firms of Malaysia are facing intense competition from Chinese MNCs in terms of
prices and product. It can be considered as an unfair advantage because competition should
be between the same level. It has also been seen that Chinese MNCs have always preferred to
hire Chinese labours over the local labours of Malaysia. The reasons behind such a partial act
is stated as lack of required skills, differences in terms of work-related practices, local
capacity etc.
It has been seen that FDI has proved beneficial when knowledge and technology are
transferred on a high level. However, local Malaysian companies especially SMEs hardly get
such opportunities from the Chinese MNCs (Todd and Slattery. 2018).
Japan is a country that has always supported Malaysia’s economy to grow. It has assisted
Japan through various agencies which include the famous Japan International Cooperation
Agency (JICA). Japan has also invested in Malaysia to develop the country as Electrical and
Electronics (E&E) industry hub. Japan has always been a promising FDI partner in
automotive sector along with E&E sector. Right from 1980, the manufacturing sector of
Malaysia is heavily invested by Japan and in 2016, two-thousand six-hundred twenty-one
projects of manufacturing sector were implemented by them. It generated around 343281 jobs
for the people of Malaysia and successfully attracted an investment of RM 88.5 billion. Right
from 2006 to 2017, 176 projects of global establishment were implemented by Japan which
created 2453 jobs in Malaysia. The projects included the famous Roland Corp who is well
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Economics for Managers (Part- A)
known manufacturer of electronic equipment, musical instruments and software in Japan
(The Star, 2017).
2.
As per Dunning’s eclectic paradigm following are the reasons why Japanese invest in
Malaysia:
a) Ownership Structure: Malaysia do not have expertise in terms of electric and electronic
products along with communication. Apart from this it does not have skilled labour.
However, Japan holds expertise in automobile, electric and electronic products as well
as communication. It also has advanced technology and expertise to train labours of
Malaysia. Apart from this, Japan is a developed country and therefore is able to win
trust of Malaysian locals in terms of manufactured product quality.
b) Location Benefit: Malaysia is said to be placed in the South Asia’s heart which means
that it is located in mid of the world’ fastest growing economic-regions. There exist a
competitive advantage of low cost of operations offered by the strategic location along
with the infrastructure of Malaysia. This infrastructure incudes airports, logistics, ports,
tele-communications and ports. Investors of Japan can earn a lot by settling their
business in Malaysia due to immense growth opportunities and quick access to market.
It is de to the factors like Free trade agreements signed and implemented by Malaysia
from the last many years. Japanese investors can get a ready-made market of 3.9 billion
individuals as Malaysia has Foreign Trade Agreements (both regional foreign trade
agreements and 14 bilateral FTAs) with nations like India, Australia, New Zealand,
Turkey and Chile.
c) Internalization Benefit: Apart from this, Malaysia has placed a supply chain (local)
which is properly-integrated in the global value-chain which provides Japan with
another competitive advantage. The labours in Malaysia can converse in English
language which makes them suitable for the foreign business-environment. Therefore, it
makes it suitable and cost efficient for the Japan investors to carry their operations in
Malaysia (Mahmud, 2019).
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Economics for Managers (Part- A)
3.
All the investments cannot be treated alike. The source of investment plays a vital role on the
economic growth of the country. There are different benefits associated with FDIs of
different nations. Some FDI may generate more employment opportunity in the domestic
country while other may generate less employment. It is also possible that some FDI may
bring new technology in the country but less employment. There may be a nation whose
present requirement for its economy to grow is little technological advancement instead of
generating jobs in the economy. For such an economy, the FDIs bringing advanced
technology to the nation would prove helpful instead over the ones coming with any other
benefits. So, needs of the nation’s economy decides which FDI will be beneficial for it to
grow and develop. In the same way, some FDIs comes with easy terms of financing while
other FDIs might prove costly to afford. In this case, the budget and financial condition of the
nation will play the major role. There are countries which are labour-intensive and therefore
will welcome the FDIs which can generate employment in the company. Here, FDI’s offering
better financing terms or technological advancement will take a back seat and FDI’s
promising to generate employment would be preferred by the nation.
There was an empirical study which showed that the source of FDI inflow actually plays a
major role in the economic development of the country. As per the study, FDI inflows from
Southeast-Asia and North-America contributed more towards the economic growth of
Malaysia as compared to the FDIs attracted from other different nations (Tang and tan, 2018).
Japan is a country who has developed an expertise in automobiles, telecommunications,
electric and electronic products etc. Earlier, Malaysia did not have Electrical and electronic
product (E&E) sector. However, in 1960 Japanese FDI in Penang has helped Malaysia to tap
its feet in this all new sector and turned out to be a hub for E&E industry. During that period,
Malaysia required such FDI that can help the country to develop as a hub for E&E industry
and Japan has that expertise. Therefore, source (Japan) played a major role in establishing
E&E industry in Malaysia.
In the same way, at present Malaysia requires FDI that can generate employment for the
Small and Medium Enterprises (SMEs). No doubt, China has invested a lot in major
infrastructure project called “Belt and Road Initiative (BRI)” but it did not serve the purpose.
For this project, China has hired his own Chinese labour as the Malaysian labour do not have
the required skill and technical know-how.
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Economics for Managers (Part- A)
Hence, it is not necessary that every FDI contributes towards the economic growth of the
nation. Source of FDI also matters a lot and every investment can never be treated equally
(Todd and Slattery. 2018).
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Economics for Managers (Part- A)
References
Bartels, F. L. and Crombrugghe, S. A. (2009). FDI Policy Instruments: Advantages and
Disadvantages. [online]. Available at:
https://www.unido.org/api/opentext/documents/download/10081425/unido-file-10081425
(27 March, 2020).
Gaille, L. (n.d.). 12 Foreign Direct Investment Advantages and Disadvantages. [online].
Available at: https://vittana.org/12-foreign-direct-investment-advantages-and-
disadvantages (27 March, 2020).
Mahmud, A. (n.d.). 'Much to gain' for Japanese businesses. [online]. Available at:
https://www.japantimes.co.jp/2019/11/29/special-supplements/much-gain-japanese-
businesses/#.Xn2lldQzbIW (27 March, 2020).
Socio-Economic Research Centre. (n.d.). China’s investment in Malaysia: Perceptions,
Issues and Prescriptions. [online]. Available at:
https://www.acccimserc.com/images/researchpdf/Final---China-Investments-in-
Malaysia---Perception-Issuess-and-Prescript___.pdf (27 March, 2020).
Tang, C.F. and Tan, E.C. (2018). Does the Source of Foreign Direct Investment Matter to
Economic Growth in Malaysia?. Global Economic Review. 47 (2). pp. 174-181. [online].
Available at: https://www.tandfonline.com/doi/full/10.1080/1226508X.2017.1406815 (27
March, 2020).
The Star. (2017). Japan remains Malaysia’s top source of FDIs. [online]. Available at:
https://www.thestar.com.my/business/business-news/2017/11/02/japan-remains-
malaysias-top-source-of-fdis (27 March, 2020).
Todd, L. and Slattery, M. (2018). Impacts of Investment from China in Malaysia on the Local
Economy. [online]. Available at:
http://www.ideas.org.my/wp-content/uploads/2018/10/P154-China_FDI_V2.pdf (27
March, 2020).
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