Introduction
Return on Investment (ROI) is the measure of the performance of each investment. In other terms, ROI is the ratio between the financial benefit or loss of an investment and the amount of money invested in the same. Technology on the other hand means the goods and services produced and the means by which they are produced in a firm, an industry or an economy (Stoneman 4). Malaysia has enjoyed a good bargain on the area of technological advancements especially in the palm oil industry that has given her a competitive advantage over other countries.
This knowledge was achieved through alteration of incentives such as taxes, increase in supply of skills, influence market through market building functions and finally through institutional support. Natural resources in general have been fully exploited after trade liberalization leading to long run welfare losses especially to the mother country in this case Malaysia. This is so because of poorly regulated resource sector in the country. According to Ascher, multiple cases of natural resource abuse have been caused by policy failure and resource overexploitation translates to an income transfer from the future to the current generation (56).
Effects of FDIs
Foreign Direct Investment (FDI) has greatly affected the environment and as far as natural resource sector is concerned, there has been decline in the benefits for the host country. Pollution emission acts as a proxy for every environmental impact. To this effect, natural resources have ended up being exploited due to both market and policy failures as well as competition effects in Malaysia. Much of investment to Malaysia is channeled into the sector. The benefits gotten from the investment are minimal as compared with other sectors like the manufacturing sector. Most FDIs in pollution intensive and resource extraction industries involve new facilities, which account for a small percentage of the total FDIs flows. The bigger percentage is for mergers and acquisitions across the borders.
FDIs have numerous benefits to the host country which include: productivity capacity increase, new technology, skills and knowledge acquisition to the local firms. In addition, they can stimulate economic growth by spurring competition, innovation and the country’s export performance. On the contrary, these benefits are less clear cuts with investment in the natural resource sector. Extreme capital-intensity of production renders the transfer of technology impossible from the foreigners to the locals.
Additionally, forward and backward linkages in extractive sector are fewer. Actually, foreign investments operate virtually autonomously with very few links to the national economy except on employment of the local cheap laborers and tax revenues. It is hard to effectively tax the TNCs because of their ability to exploit transfer pricing as a way of minimizing their liabilities. According to UNCTAD, the TNCs use these methods to avoid taxes levied on them.
High Return on Investment
Investors end up with a positive Return on Investment because of various reasons. Firstly, there is tariff escalation, a practice mostly found in trade in the resource sector in Malaysia that ensures that there is reduction in the value-added production benefits. This impediment to the development of the host country has a ripple effect in advancement of profits to the investors. The investors end up benefiting from the country’s specialization on low-valued products while they transact in the most profitable products at the expense of Malaysia as the host country. Secondly, economies of scale and competitive advantages lead to increase in Return on Investment.
The large economies of scale and dynamism in the competition bar new entrants in the market. Additionally, cash flows from mature domestic market, globalised processes and technology from incoming multinational corporations lead to increase in the competitive advantage. Lack of effective international regulations to govern competition has led to the use of restrictive business practices that are beneficial to the investors alone. This has led to generation of monopoly and oligopoly rents that give higher profits to the investors with lower efficiency and misallocation of the country’s limited natural resources to Malaysia.
Thirdly, the local community and the host country at large do not gain fair rents from their exploitation. These rents initially were achieved through mandatory joint ventures with national firms but not anymore. This has changed because of the Bilateral Investment Treaties (BTI) formulated that only sees the investors benefiting the more. According to Zarsky, alternative ways of capturing rents through concession fees and taxes have proved futile in application in the natural resource sector (89) hence the investors having high Return on Investment.
The most important consideration for a firm in the extractive industry is access to the resource base for exploitation. This makes the investors have the last word as far as where to pitch camp. This too gives them the leeway to demand incentives for them to settle for a particular site.
They end up pushing the host country to the wall and give in to their demands by lowering of standards. Malaysia has experienced intensive competition for investment that has led those investors being offered incentives. These incentives include full ownership, cutting of corporate taxes as well as royalty payments especially in the oil industry. This has had tremendous advantage to the investors for they handle the sites with full rights without concern for even the environment. They end up reaping all the benefits at the expense of the poor host country Malaysia.
Furthermore, the investors benefit from environmental laws that exempt them from environmental concerns. They are less concerned with the degradation as a result of overexploitation of the resources as long as they get what they came for. The host country ends up investing more to curb the situation while the culprits responsible for the destruction are free to leave devastated regions for fertile ones. According to Mining Policy Institute, the standards will not improve because no country will be willing to disadvantage herself by introducing much stricter rules and regulations than its competitors (154).
This will in return help the investors in harvesting more from lax or poor environmental standards due to the undifferentiated nature, high elasticity of demand and intense competition for basic extractive resources; and the fact that production can incur considerable environmental costs that include pollution and extraction. Thus, small cuts in production costs always garner potentially large outputs in terms of market share in natural resource products.
Conclusion
Malaysia has seen its natural resource sector grow despite the challenges discussed above. It is undoubtedly true that private estates especially in the palm oil business have tremendously profited unlike the government estates. According to Fold (1994) the private estates have the largest areas and are the most productive given the economies –of-scale. The government too has helped in development of technology in the sector. Also, the industrial policies have improvement hence leading to some returns to the country even though the investors have had it sweet as far as return on investment is concerned harvesting a lot for the owner to realize.
Works Cited
Ascher, William. Why governments waste natural resources: Policy failures in developing countries. Baltimore: Johns Hopkins University Press, 1999. Print.
Fold, Niels. Industrial Organization and Sectoral Linkages: A Study of the Malaysian Palm Oil Industry, New York: Geografisk Tidsskrift, 1994. Print.
Mining Policy Institute. Trade Liberalisation, Mining Investment and the Impacts on the Environment and Related Social Issues. Sydney: MPI, 1998. Print.
Stoneman, Paul. The Economics of Technological Diffusion. Warwick Business School: Blackwell Publishers, 2002. Print.
UNCTAD. Transfer Pricing, United Nations Conference on Trade and Development (UNCTAD) series on issues in international investment agreements. Geneva: UNCTAD, 1999. Print.
Zarsky, Lewis. Stuck in the Mud, Nation States, Globalisation and the Environment: Preliminary Perspectives, OECD. Paris: OUP, 1997. Print.