Private Investment

This IMF working paper has been out for quite sometime (August 2006), but I think its conclusions are still very valid. Also, this paper represents a nice change from the extreme dearth of academic papers on Malaysia, thanks to our wanton disrespect of scholarship, especially on matters pertaining to public policy and the economy.

What's Driving Private Investment in Malaysia? Aggregate Trends and Firm-Level Evidence

By Roberto Pereira Guimarães and Olaf Unteroberdoerster

Abstract
Private sector investment has been a key source of growth in Malaysia over the last three decades, but after an unprecedented decline in the wake of the Asian crisis it has remained sluggish in recent years. Using aggregate and firm-level data, this paper aims to explain these trends and their implications for Malaysia's investment and growth outlook. Aggregate data point to sustained overinvestment in the years prior to the Asian crisis and the role of shifts in investor perceptions as important determinants of the recent decline in private investment. Meanwhile, firm-level data suggest that low profitability, along with financing constraints affecting smaller firms and those in the services sector, has also been important.

Conclusion
Overall, our findings suggest that addressing the worsening perceptions’ of the investment climate and enhancing prospects for profitability at the corporate level are critical for sustaining the ongoing recovery of private investment. The analysis of the long-term trends indicates, however, that a return to pre-crisis investment levels appears neither desirable nor necessary for securing Malaysia’s growth prospects.

Three results can be drawn:

1. Feverish investment rate prior to crisis was neither necessary nor desirable. We do not want to get back to that;
2. Policy should be directed at improving investment climate and perception; and,
3. Enhancing corporate profitability is vital for encouraging sustained investment activities.

It is interesting to note that the model in the paper suggested that private investment takes 9 years to catch up after a general economic recovery. This year marks the 9^th year since 1998, and latest economic statistics indicate that investment growth has finally caught up with general economic growth last year.

It is thus becoming increasing crucial for policies to be directed at both improving investment climate and corporate profitability for investment activities to be sustained for future economic growth.

And less emphasis on silly propagandist remarks.

Elanor