Choo Yih Lin International Business A1 Semester 1, 2014

1.0 Introduction
Currently, strong competitiveness of home country forces a firm to go and invest in
other countries in order to compete effectively in their home market. Foreign Portfolio
Investment (FPI) and Foreign Direct Investment (FDI) are the popular methods for
firms to invest in a foreign country.

FDI is an acquisition of a physical asset in a foreign country, which runs by parent
cooperation (Eiteman, Stonehill, & Moffett, 2013). It is to be expected that FDI
provide advantage to a developing economy like Venezuela by improving internal
investment, increasing job employment, and transmitting knowledge (Jameelah,
Adam, & Jimoh, 2013). Besides that, it allows a firm to reduce its contact under the
local economic circumstances, so that they could stabilise their cash flows, reduce
their investment risk and lower the cost of financing (Madura & Fox, 2011).

There are three kinds of FDI, including Greenfield Investment, Brownfield
Investment and Mergers and Acquisitions (Investments and Income, 2014).
Greenfield investments are known to be a direct investment of new facilities while
brownfield investments are direct investments to existing facilities to promote a new
purpose. Mergers and acquisitions are the most common kind of FDI as it transfers
existing asset from local to foreign company, merging two companies into one.

Flows of foreign direct investment refer to the inflow and outflow of FDI in a country
over a period (Hill, Cronk, & Wickramasekera, 2007). Inflow of FDI is the flow of
FDI into a country, while outflow of FDI is the flow of FDI out of a country.

During the 1970s, outflows Malaysia FDI was insignificant until lately, Malaysia has
become one of the top five FDI outflow country in East and South-East Asia (United
Nations Conference on Trade and Development, 2013). According to UNCTAD
(2013), OFDI in South East Asia has increased to $61 billion during year 2012.
Regardless to the decline of OFDI from Singapore, which is the leading source of
FDI, Malaysia has rose to $17 billion mainly driven by the intraregional investments.
This significant improvement made Malaysia a net outward investor, and stands out to
be one of the most successful economic stories in Asia (OECD, 2013).

Choo Yih Lin International Business A1 Semester 1, 2014

2.0 Discussion
In this essay, Dunnings OLI framework will be used to critically discuss the factors
influencing the surge in OFDI, mainly focusing on multinational enterprise in
Malaysia.

2.1 Dunnings Ownership Advantage
Ownership advantage is property rights or intangible assets that form a basis for a
company to benefit over other firms (Farlex, Inc., 2014). In other words, by
accumulating the property rights or intangible assets, the host firm will benefit by its
ownership through the other firm.

There are arguments shown that MNCs has certain advantage in some other country
to operate more effectively than in Malaysia. The success story of Malaysias famous
cartoon Upin Ipin created by Les Copaque Productions is one of the examples of
firm operating more effectively in a foreign country than in Malaysia. The cartoon
series was aired in Indonesia by Televisi Pendidikan Indonesia in year 2009 and has
won the hearts of many Indonesian citizens including adult and children (Berita Satu
Media Holdings, 2010). According to The Edge Malaysia (2010), the airing of the
cartoon series in Indonesia was forecasted to generate a higher profit in Indonesia due
to the popularity of it. Since Upin Ipin has captured the attention of many people in
Indonesia, Singapore and India, it allowed the company to generate RM5 million on
their Upin Ipin merchandise product, as these were the first character to be
recognised in South-East Asia (Mahpar, 2012) Based on the report of The News
Straights Times (2012), Upin Ipin has made Malaysia proud because the impressive
popularity of the twins won them a seat in 2012 Universal Childrens Day celebration
held by The United Nation Childrens Funds (UNICEF).

Firms early investments usually happen in countries that have similar cultural
background with the home country or relational ethics and families tie with a specific
minority population in the host country, which can be exploited (Dunning & Lundan,
2008). This argument is totally true according to the success story of Upin Ipin.
Reffering to Mahpar (2012), Hassan Muthalib, the guru of Malaysian animation
said he was being told that children in Indonesia shaved their hairs just like the main
characters Upin and Ipin. The cartoon series made such a huge hit in Indonesia that
Choo Yih Lin International Business A1 Semester 1, 2014

every child in Indonesia loves it and Les Copaque Production received a lot of
positive opinion online regarding to their cartoon. Through gathering all the evidence
of the success story of the cartoon series, it is to be known that the series was a big hit
in Indonesia and Malaysia due to the similarity of culture among the citizens.

Information and telecommunication skills could also be an ownership advantage of a
company to invest in foreign country, as these intangible assets could be practical to
manufacture in other without decreasing its efficiency (Neary , 2014). Axiata Group
Bhd, the sister company of Telekom Malaysia has investments abroad, mainly with
the telecommunication companies in Indonesia, Bangladesh and Sri Lanka (Thomson
Reuters, 2014). The company mainly generates revenue in overseas through providing
mobile services, renting substructure, and others, include establishment of
interconnect services, pay television broadcast services and endowment of other data
services.

Hence, ownership advantage pushes the local company in Malaysia to invest in other
countries around the world so that they can generate profit by selling intangible assets
such as copyrights or specific knowledge.
Choo Yih Lin International Business A1 Semester 1, 2014

2.2 Dunnings Location advantage Resource Seeking
Dunnings theory in locational advantage explicates Malaysia companies resource
seeking engagements as cheaper resources abroad has been one of the reasons for
MNC in Malaysia to invest overseas.

In the point of view of the merchants, cheaper resources means lower cost and by
lowering the cost, the company could generate more profit and increase their
competitiveness with their competitors. Raw materials available in Malaysia no
longer able to sustain the rapid growth of the economy, so in order to continue their
business, Malaysias MNC goes out of the country to seek for long term supply of
raw materials. Raw materials needed by MNCs in Malaysia include electrical
products, refined petroleum products, machinery parts, chemicals, transportation and
so on (MATRADE, 2014).

The main OFDI investors in Malaysia seeking resources overseas include Petronus,
YTL Corporation, Sime Darby, IOI Corporation, KNM and so on. Petroliam Nasional
Bhd (Petronus) is an oil and gas company in Malaysia wholly owned by the Malaysia
government. Throughout the years, due to the limited resource of domestic
hydrocarbon supply, Petronus has been investing abroad to ensure the continuous
supply of hydrocarbon (New Sabah Times, 2013). Currently, the oil and gas
multinational company is investing in Sudan, Chad, Iraq and Canada. Since year
1997, Petronus has contributed RM154.9 billion on the gas subsidies (Star
Publications (M) Bhd, 2013). The continuous contribution of the company brings a
better life to the citizens in Malaysia as they have fewer burdens on gas fuels compare
to other countries in South East Asia.

Choo Yih Lin International Business A1 Semester 1, 2014

2.3 Dunnings Location Advantage Strategic Asset Seeking
Other than exploiting raw materials overseas, MNCs also seek for strategic assets in
developed markets, which meet the MNCs criteria, include research and
development (R&D) abilities, design facilitates infrastructure, technology skills and
propriety knowledge. Normally, what will the MNC in Malaysia do is through
purchasing the company or subdivision the MNC in developed countries. One of the
factors that boost the sudden growth in Malaysias FDI is the adoption of FDI
liberalisation policy (Kogid, Lily , Asid, Mulok, & Loganathan, 2009). According to
Bank Negara Malaysia (2006), rules and regulations concerning about overseas
investment were more lenient as local corporations with national borrowing were
permitted to invest abroad and are approved to hedge foreign exchange risk of their
oversea ventures. Policies that are more liberalised have encouraged many local
investors go out of the country acquiring assets that do not exist in Malaysia.

Over the years, the Employee Provident Fund, Genting Malaysia Bhd and SP Setia
has been purchasing assets mainly in United Kingdom, Australia, United States of
America, Vietnam, Singapore and many other countries around the globe. Malaysias
Employees Provident Fund (EPF) is the second largest state run pension system in
Asia Pacific. Their assets cost about RM 470 billion and they are currently allowed
to invest in foreign holdings as much as 23% of its portfolio (Chew, 2012).
Allocation of additional RM 4 billion ringgit investment overseas has increased the
EPFs exposure to about RM 94 billion (Appell, 2013).

Choo Yih Lin International Business A1 Semester 1, 2014

2.4 Dunnings Location Advantage Market Seeking
Other than exploiting raw materials and acquiring strategic assets, another reason that
drive Malaysian FDI outwards to other countries is to double up the market share of
the firm. In order to acquire new market overseas, government of the emerging
markets not only give help to firms in relocating their business, but also participate in
two-sided intervention to reduce complicated policy (Rasiah & Gammeltoft, 2009).
Instead of blaming on the complicated policy in Malaysia, the main reason that drives
the MNCs out of their home country is mainly because the attractiveness of the
market abroad. Other than that, the possibility that drives Malaysian firms out of the
domestic market is because they have a greater target market than in Malaysia. A
greater target market means greater profit as more people abroad may consume the
product and eventually become their loyal consumers.

Berjaya Group is one of the MNCs in Malaysia that has core business of retails in
overseas. The company currently has 16,00 employees working in different country
all over the world, generating over RM 8 billion in year 2013 (The Financial Times
Ltd, 2014). Other than that, retails of Berjaya Group are the subsequent most
respected segment as it contributes more than 30% of its revenues with almost 10% of
its assets.


Choo Yih Lin International Business A1 Semester 1, 2014


2.5 Dunnings Internalisation Advantage
According to Batalla (2012), Dunnings internalisation advantage allow firms believe
that owners advantage are best exploited internally than selling it to other firms
through licensing, joint venture or contracting. This is because, when the company
sold their ownership through licensing or contractig, it will increase their transaction
cost and eventually lower down their profit. Based on the firms principle of profit
maximisation and growth, an internal market is formed due to market imperfection in
intangible assets and knowledge (ULUVAN, 199). When purchasing a licence of
other company, the host company will profit buy earning the franchise fund from the
home country, and the profit earned in the foreign market will be shared into an
agreed amount between the home and host country MNC. This demonstrates that
when exploiting to other foreign market, it is better to exploit by home company itself
instead of licensing, joint venture or contract with the foreign company at the targeted
foreign market to maximise the companys profit.

Construction business is one of the best examples on explaining internalisation
advantage. The three big players of construction business in Malaysia include United
Engineers Malaysia, Muhibbah and Sunway. Muhibbah ventured into crane business
in year 1995 by acquiring Favelle Favco in Australia and Krll Germany market,
where it utilised the advanced techniques over there to manufacture high capacity and
high-speed crane (Morgan, 2014). By acquiring companies overseas, Muhibbah was
able to gain full control on the manufacture line and skills, allowing the company to
maximise their profit while investing overseas.
Choo Yih Lin International Business A1 Semester 1, 2014

3.0 Conclusion
In conclusion, over the past decade, Malaysia MNCs have begun to hostilely
exploiting overseas economic interests through amalgamations and procurement.
Outwards FDI has emerged an important tool in which economies is integrated with
the global economy, along with growing trade and FDI. Malaysia MNCs have
acquired companies abroad, which allow the company to access to the overseas
marketing networks, flagship technology, network distribution and supply chain.
Liberalisation of OFDI policy accompanied with economic reform programmes by
the government of Malaysia has impressively changed the economic division and
MNCs in Malaysia gradually placed themselves as global investor among all the
developing economic systems. This has assisted macroeconomic environment policy
framework where liberalization of policy do seem to promote and amplified external
orientation of MNCs.

(2014 words)

Choo Yih Lin International Business A1 Semester 1, 2014

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