Economics Politics & government

[2888] Clearing the air around FDI definitions

There is a kerfuffle about the definition of foreign direct investment, due to the former PM Najib Razak’s messaging and the general public’s unfamiliarity of it. I strongly believe Najib actually understands the nuances of FDI but he is navigating through the somewhat complex definition to score political points with half-truths. Truly, you need to know the actual definition to play around with skillfully. After all, he was the Finance Minister for about a decade and one ought to learn something while at it, including about government policy on fund transfers and its weaknesses.

Of interest today are 3 points, given the ongoing popular public discussion, which is quite ill-informed.

One is approved FDI published by Malaysian Investment Development Agency, or MIDA.

Two is actual FDI published in the Balance of Payments documents published by the Department of Statistics

Three is “asset sale.”

I will not very delve deeply into these because the manuals are thick, arcane and I doubt more than 1,000 people in the world have read the manual from cover to cover. In Malaysia, probably fewer than 10. For instance, the Balance of Payments manual published by the International Monetary Fund, (the mouthful title is the Sixth Edition of the IMF’s Balance of Payments and International Investment Position Manual) has 351 pages with discouraging font size and spacing.

But there is a surge in public interest it in. Which I suppose, is a good opportunity to educate.

Let us start.

Approved and actual FDI

To start we need to attack both point 1 and 2 because they are easily confused despite have been frequently published and easily accessible.

Approved FDI and actual FDI are two different sets of numbers. Yet more than once, the media and even trained economists have referred to both as simply FDI without hinting its differences. The media probably does not know any better while economists are being sloppy though they likely know the difference. This is a constant source of confusion for the public (and the media) and it becomes crazy when politics is injected into it.

Approved FDI is self-explanatory. A foreign investor applies for permission to invest in Malaysia and the Malaysian authority decides whether to approve. Not all investments get approved and for example, my former employer’s request to do so was rejected for unclear reason. If approved, it will go into the approved FDI statistics published by MIDA.

The important thing is approved FDI functions as a leading indicator to actual FDI. In less complicated English, approved FDI provides the maximum limit to actual FDI. Theoretically, approved FDI is always higher than actual FDI because sometimes, a company would get its approval but later change its mind in terms of investment of value, or even investing at all.

Theoretically because sometimes, approval to invest is given for a period of time and practically too, it is difficult to invest immediately upon approval. Accounts have to be set up, the money has to be transferred, people have to hired, etc. I have been told after approval, a lot of approved FDI get realized roughly about form 1 to 3 years. But the point is, approved FDI gives us an inkling what the actual FDI would be. Example: when approved FDI in 2017 was low, so was actual FDI in 2018. When approved FDI was high in 2018, actual FDI in 2019 was also high. It is not a clean correlation due to the problem of lags, but there is a noticeable one.

There is further complication to the public understanding of FDI. MIDA publicly published approved manufacturing FDI quarterly (all-sector data annually). So without basic understanding of the metadata, confusion is easy. Indeed, the relatively complicated definitions have been used by Najib to spread half-truth about FDI.

The purposeful switching of context

Before I move on to point 3, allow me to digress and comment about the ongoing political conversation about FDI.

When assessing Najib’s post, one has to realize when he is switching the definition and context. When the government talks about 2018 approved FDI, he will switch to 2018 actual FDI and accuse the government of lying by stating actual FDI is lower than approved FDI. When the government talks about actual FDI in 2018, he would veer somewhere else to again pain the picture that the government is being dishonest.

For those unfamiliar with the numbers and context, they would say Najib was arguing based on facts. But if only they knew how context could make facts as half-truth. The best of disinformation works as such.

FDI and “asset sales”

The last point I want to make is about FDI asset sale.

The definition of FDI is hard to master fully even for working economists. But in general, it is acquisition of long-term stake in local companies (plus several other things). In the IMF manual, if I recall correctly, a purchase of share at least 10% in local company would qualify as FDI.

This is why when Mitsui buys a minority stake in the Malaysia-based IHH Healthcare, it is FDI.

This is also the reason why when Petronas sold its 50% stake in its RAPID projects in Pengerang to Saudi Aramco of Saudi Arabia, that was considered FDI too. But of course, Najib will not mention that asset sale that happened under his watch. He would call that investment, and he would be right, just like how Mitsui’s purchase is investment. Najib wants to have his cake and eat it too.

Finally, for me personally, I am not hung up on asset sale. In the end, what is important is the returns to investment, not the investment per se. A fund should maximize returns, and if it diverges from that, it has to be for a very, very good reason.

But perhaps politics is more complicated than the Balance of Payments manual. You do not a good reason, just half-truth. We are, after all, live in the age of Trump.

And for the FDI conversation, know that Najib is switching the context and manipulating public ignorance to win the credibility game.