Fighting Corruption – which key areas should Malaysia work on to improve its international image?

Background

Malaysia has enjoyed a tremendous period of financial growth, diversification of it’s economy and level of FDI (foreign direct investment) in what I call it’s modern era, that period since Intel established it’s first factory in Penang in 1972.

I suspect that the reason that Intel choose to come here as well as the flood of American companies since 1972 and, indeed, companies of all nationalities is because of those basic factors that we learn about in management textbooks:

Infrastructure

Capital

Effective, productive workforce

Rule of law

Pro business government

The result has been that American semiconductor and electronic companies now employ over 60,000 Malaysians at their facilities here.  Additionally, Malaysia is America’s 16^th largest trading partner and America is Malaysia’s most significant source of accumulated foreign direct investment.

And much of this happened during periods when Malaysia did not have optimum transparency in government dealings, the regulatory environment could be viewed as inadequate for a country of Malaysia’s level of FDI and corruption was at a level that was unacceptable.

So why should Malaysia strive to improve its image in relation to fighting corruption?

I thought I would talk about 3 very important issues.

-1- Competition for FDI
-2- Confidence in Financial Markets
-3- Creation of wealth for it’s lower and middle class

Competition for FDI

Unlike the period when China and India were relative upstarts and Vietnam was a non entity when it came to attracting FDI, the current environment for FDI for high end manufacturing such as electronics and semiconductors is fierce.

Even though Malaysia has endeavored to improve efficiency and heighten the fight against corruption with things like:

Establishment of Permudah

Establishment of an IP (Intellectual Property) court

Participating in the World Intellectual Property Organization

Improving transparency in government regulation making

I would offer that other countries are sometimes perceived to be doing more and doing it more quickly.  Malaysia is moving forward but may not be perceived to be moving fast enough.

I would suggest that time is of the essence and Malaysia needs to move with lighting speed to minimize corruption and needs to promote these efforts so that the perceptions of stakeholders around the world will increase.

Confidence in Financial Markets

Companies that are seen as trusted enjoy a higher relative valuation based on financial statistics than similar entities which enjoy a lower level of trust.  It may even be a subliminal decision on the part of investors or money managers to favor one entity over another.

Among the top American fast moving consumer goods companies, the price to earnings ratio varies from about 15 to about 19 which is incredibly significant when you are talking about absolute earnings of tens of billions of dollars. 

It certainly puts into economic reality the benefit of trying to earn the public trust.

Similarly, a country’s equity and debt markets will, I think, enjoy more inbound investment versus their peers when the environment is perceived as less corrupt.  I think that you could likely get a direct correlation from low level of corruption to a high level of equity valuation.

In October of 2007 the companies on Bursa Malaysia had a combined market capitalization of RM 1 trillion (US$285.7 billion).  Assuming a price earnings ratio of 15, this would suggest that these companies had earnings of RM 66.7 billion (US$19.1 billion) .  If I adjust the PE for this level of earnings from 15 to 15 and one one hundredth (15.01), the market capitalization would increase by RM 667 million (US$190.6 million).

Creation of Wealth for lower and middle class

So by improving government transparency and minimizing corruption FDI should be higher than it might otherwise be.

Higher FDI leads to more factories hiring more engineers, technicians, and security guards.  The entities that run these factories will invest more in management training and seminars, they’ll buy more machine tools from local manufacturers and buy more raw materials from vendors.  They will ship more goods and produce more scrap materials that need to be hauled away and recycled.

Hopefully, they will also invest more in the community by way of corporate social responsibility programs.

Federal and state governments will have to build more roads and bridges and infrastructure to accommodate this growth.  Yet more jobs, although indirect, from the FDI.

Wealth will also be created from the higher valuations that accrue to Malaysian entities that benefit from the improved perception of Malaysia.  EPF (employee provident fund) accounts and brokerage accounts should be higher than they might otherwise be.

Malaysian entities will enjoy higher valuations than they might otherwise and will enjoy greater latitude and reduced costs in debt issuance.  They should have greater dexterity in relation to acquisitions and mergers, gaining additional efficiencies and be able to bring even more jobs here to Malaysia. 

Which areas should Malaysia work on to improve it’s image

Transparency

Malaysia should embrace full disclosure as vigorously as possible to maximize openness.  This should lead to a vibrant debate on issues and should help to instill confidence amongst key stakeholders – I’m certain that the business community, both international and domestic would look favorably on this.

Government regulation

All government officials should take care not to suggest regulations that could hamper the business environment.  I’ve don’t think I can relate the attention that talk of an onerous government regulation receives from the international business community.  Not only amongst those posted in Malaysia, but the attention that regional operation and financial management and worldwide operational and financial management and worldwide legal counsels devote to such regulations.  Regulations that may never even pass but which could impact amounts of foreign direct investment that come to Malaysia – and comes here from entities that know Malaysia best – the companies that are already here.

Government procurement

Relaxing rules in relation to government procurement especially to foreign companies that have already invested in Malaysia would probably result in more positive perceptions amongst the international business community.  It might even result in some cost efficiencies for Malaysian taxpayers.

If Malaysia does these things, I believe that many stakeholders, both Malaysia and amongst the international business community will pass the word improving the perception of Malaysia from a corruption standpoint.

Malaysia has experienced an exception period of development since 1972 but much opportunity still exists.  After all, Malaysia ranked 43^rd in TI’s CPI (corruption perception index) in 2007.  It is probably unrealistic for Malaysia to attain the number one rank but some of the entities that rank ahead of Malaysia include Botswana, Dominica, Macao.  Even the US is in reach in a few years time at number 20.

Thank you very much and enjoy the rest of the program.