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All Rights ReservedCh. 1: #

Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Chapter4

Tutorial answers 5 & 6

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Q1

Define the term Foreign Direct Investments.

FDI is the amount invested by a foreign enterprise, in alocal industry

The investing company may make its overseas investment

in a number of ways - either by:

1. Setting up a subsidiary in the foreign country,

2. Acquiring shares of an overseas company

3. A merger orjoint venture.

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Q2

Briefly explain the TWO forms of FDIs

Portfolio investmentforeigner acquires shareswithout controlling rights.

A Malaysian investor buys share in Singaporeanfirm (non controlling shares)

Direct investment - foreigner acquires > 10%shares with controlling rights.

Example Laureate International Universitiesbuys over INTI.

Nottingham University Malaysia

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Q3

Explain the positive effect of FDI in Malaysia

i. Technology transfer: modern technology andmanagement improvement, increased technicalefficiency& promote R&D.

ii. Bridge gap between savings and investments to boostexports.

iii. Foreign exchange reserve increase due to inflow offunds.

iv. Training by foreign firms help develop Malaysianhuman capital.

v. Profit generated from FDI contributes to corporate taxrevenue.

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Q5 Success of the MSC

Phase I (1996-2000)Target milestones

1 One Corridor A 15 x 50 km2 corridor ranging from KLCC to KLIA, including

Cyberjaya and Putrajaya was created

2 50 world class local

companies

742 companies, including 10 strong performers and 50 foreign

and local MNCs were awarded MSC status

3 Launch 7 flagship

applications

All 7 flagship applications were launched before the end of

Phase I

4 World leading framework of

cyberlaws

Comprehensive set of cyberlaws were enacted. However,

cyberlaws targeted at increasing e-commerce adoption such as

the Personal Data Protection Act are still pending

5 Cyberjaya as world-leading

intelligent city with

balanced and

environmentally-sensitive

development plan

Investments in Cyberjaya were focused on physical

infrastructure while the development of social infrastructure

was not at the same pace

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Q6

The Government transfers ownership rights from thepublic to the private liquidating (selling) of state-ownedenterprises (SOEs) or assets to firms in the privatesector.

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Q7

Explain FOUR (4)reasons for privatization in Malaysia.

1. To relieve the Governments financial burden allowingthe redeployment of resources to essential areas suchas basic health, education, family welfare.

The government is able to raise substantial revenues fromprivatization leading to savings in public operating andcapital costs.

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Reasons for Privatization

2. Savings-Avoid budget deficit whichmay be to linked to further highinterest rates.

Proceeds from sale of governmentassets.

Reduction of government employees

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Q7


3. Economic growth as government resources areefficiently allocated

The government provides essential services such as

legislation, national policies, security and infrastructure.

Government is inefficient in productivity enterpriseand so privatization allows government to concentratein public sector

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Ch. 1: #Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Q7


4. To meet the New Economy Policy(NEP) in the case ofMalaysia as economic growth

i. Eradicates poverty.

ii. Facilitates the restructuring of the economy, giving jobopportunities to all Malaysian.

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Q8 Privatization

1. Sale by Equity

Sale by Equity - selling shares on the stock market.

Used when capital markets are more developed andthere is lower income inequality.

Examples MAS, Telecom, Tenaga

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Methods of privatization

2.Lease of Assets

Fixed capital are undertaken by the government buta private firm operates the facility. The governmentreceives annual lease payments in return during the

concession period. The private company (or consortium of companies)

receives the right to collect revenues associated with anexisting asset in exchange for an upfront fee to the

governmental entity. Ports in Malaysia e.g. Klang, Penang

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3. Management contracts The operational control of an enterpriseby contract in a

separate enterprisewhich performs the necessary managerialfunctions in return for a fee.

It is outsourcing of the management functionof the stateowned enterprise to the private sector.

The Langkawi Water Projectcovering the group of islands isunder a 25-year management contract signed in 1996

Malaysia e-Government. Processing student visa application & work permits

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Build Operate (BOO)

The assets are owned by the private company.

The private company will Build, Operate and Own

the project. Therefore the private company gets the benefits of

any residual value of the project.

A BOOscheme involves large amounts of finance

and long payback period.

Examples Paka & Pasir Gudang Power Plant, Lumut

Power Plant

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Build Operate Transfer (BOT)

The host government is the initiator of theinfrastructure project.

The government provides support for the projectin some form. E.g. provision of the land / changesin the laws & finance.

ExamplesLRT 1STAR, KL Monorail, LRT 2 - Putra

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Major Setback for Privatization in Malaysia:

1. Government still retain majority share holding. Nocomplete transfer of ownership or managementpower to private entities.

2. Losses by privatized companies. A number ofprivatized companies (still existing) sufferingcontinues losses. This has prompted Governmentto take back some of the privatized companies.E.g LRT -1, Indah Water, KL Monorail. This proves

that not all privatized companies can survive.

Tutorial 5 & 6 (1)3441

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