Introduction

2004 was a very good year for Malaysia. Although the Malaysian economy showed some signs of easing in the fourth quarter of 2004, strong growth in the first three quarters (averaging 7.6 per cent) delivered a robust GDP growth of 7.1 per cent for the full year. (The economy grew 5.3 per cent and 4.1 per cent in 2003 and 2002 respectively.) Although growth prospects appear fairly positive over the next year or two, is Malaysia able to sustain a strong rate of economic growth in the medium to long term?

Malaysia has undoubtedly recovered from the Asian financial crisis of 1997/98 (see Figure 11.1) but the world has changed significantly since then. Besides the US and Japan, China has in recent years become an important engine of growth for the region as well as a major recipient of foreign direct investments (FDI). The world economy has also become increasingly globalised and this poses new challenges for Malaysia. These emerging challenges may affect Malaysia's economic development and overall international competitiveness in the coming years. This chapter aims to identify the key economic challenges that will have an impact on Malaysia's medium- to long-term economic development.

Rising Competition for FDI

FDI inflows to Malaysia have been showing a declining trend in the 1990s. Using UNCTAD's World Investment Report 2004 database, as a percentage of developing countries total, FDI inflows to Malaysia declined from 8.7 per cent in 1992 to 1.4 per cent in 2003. According to the UNCTAD Inward FDI Performance Index, which measures the extent to which host countries receive inward FDI, there has been a sharp deterioration in Malaysia's FDI performance.

This is a worrying trend as Malaysia is dependent on FDI as a driver of growth.