The role of foreign direct investment and special economic zones in economic development of Southeast Asia (exampled by Malaysia and Indonesia)

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Taras Shevchenko National University of Kyiv

THE ROLE OF FOREIGN DIRECT INVESTMENT AND SPECIAL ECONOMIC ZONES IN ECONOMIC DEVELOPMENT OF SOUTHEAST ASIA (EXAMPLED BY MALAYSIA AND INDONESIA)

Kuznietsova N.

Problem statement

Large-scale involvement of the foreign capital, in particular FDI, was a special feature of economic development of the new industrial countries (NIC) of East and Southeast Asia. Although there were some differences in FDI policies in different NICs, all these countries focused on exportoriented and modern industries. Since 1970s to the present, the Asian NIC is an area of the most active operations involving largest multinational enterprises in the world, which moved here production facilities from their home countries in search of the benefits from low labor costs. Later, modern production facilities were established in the processing sector, in high-tech industries, which took their place in the international labor distribution system, in the global value chains system, and in the international commodity markets. Processes attracting foreign capital and multinational enterprises acted as the catalysts for economic growth of Asian NICs, and gave a strong impetus to the economic development of the countries of this region, in particular through the capital generating processes, technology transfer, labor productivity and social standards improvement. Subsequently, national firms adopted their experience in production, management, marketing, etc. and took competitive positions. Increased competition forced national firms to use resources and advanced and productive technologies more efficiently enabling them to generate additional profit. As a result, new export industries were created in Asian NICs, which turned them into dynamic world exporters of industrial products. Multinational enterprise operations became an extremely important factor in development of, first of all, labour-intensive and, later, capital-and knowledge-intensive export potential in a number of Asian NICs.

One of the main factors behind the effective economic development of a number of Asian countries has been market mechanisms and active state regulation combined in all sectors of economy, including state facilitation of foreign capital inflows through the special export production zones with favourable tax regimes.

Analysis of recent research and publications

In the scientific literature, a number of Ukrainian and foreign scholars have studied positive and negative effects of transnationalization, and foreign capital impact on the host country's economy in different time periods. A special place is taken by SEZ mechanisms research and their use as an instrument for investment and industrial policies (especially in developing countries). The main thematic areas for research and authors include the following:

1. The role of FDI in capital generation processes and their impact on the type and rate of economic growth in FDI investment countries (O.I. Rohach, A.S. Filipenko, O.I. Shnyrkov, N.V. Kuznietsova, Prasad E., Rajan R., Subramanian K., Alfaro L., Areendam C., Kalemli-Ozcan S., Selin S., Carkovic M., Levine R., Haddad M., Harrison A.E., Mansfield E., Romea A., Lipsey R.G., Theodore H. Moran, Blomstrom M. etc.).

2. Impact of FDI on the level of technological and innovative development, impact on the human capital development in the country of FDI investment (O.I. Rohach, Borensztein E. J., De Gregorio J., Lee J. W., Findlay R., Radosevic S., Blomstrom M.тощо).

3. Impact of FDI on competitiveness of the economy and development of the export sector of recipient countries (O.I. Rohach, Barry E., Goldberg l., Klein l., Markusen J. R., Venables A. J., Rojec M., Fosu O. E., Magnus F.J. etc.).

4. Impact of foreign capital on the economic and industrial development of second-wave Asian NICs, in particular Malaysia and Indonesia (Amir S., Ananta A., Aritenang A.F., Chandramidi A.N., Othman J., Jafari Y., Sarmidi T., Wad P., Mun-Chow Lai, Djafar F., Hassan M. K., Soekami M. etc.).

The purpose of the article

foreign investment asia economic

The main purpose of the paper is to analyze the impact of foreign investment, in particular, FDI, on the economic and industrial development of the new industrial countries of Southeast Asia (involved in the second wave of industrialization) taking Malaysia and Indonesia as an example. The role of SEZ is reviewed as the main tool for attracting foreign investment and an instrument for implementing industrial policies in the countries. The article also pays considerable attention to the study of the governments' policies of Malaysia and Indonesia on foreign capital raising and SEZ creation. Developing countries experience, mechanisms developed by them for creating SEZ and using them as the catalysts for economic growth is of considerable interest to Ukraine.

Basic material

The processes of industrialization and rapid economic development started in the countries of Southeast Asia in the late 1960s, when the governments of a number of countries in the region initiated structural economic reforms aimed at industrial development of the countries, in particular exportoriented industries, at actively involving countries in the system of international labor distribution, at the countries' economies opening for cooperation with foreign companies, and at gradually liberalizing domestic markets on a large scale. Back in the 1960s, some countries in the region were the main choice for multinational enterprises, which wanted to relocate their production of labor-intensive segments (and with the year also capital-intensive ones). The region has been and remains a major recipient of FDI, and multinational enterprises are interested in a growing regional market, natural resources, and their bases created for export-oriented production. The most impressive fact is that the NIC region of Southeast Asia, which was insignificant in terms of industrial production and development in the 1970s, became the largest industrial region in the world in the early 2000s. Southeast Asian countries now receive the bulk of FDI to developing countries. The economies of these countries are the most successful models for export orientation, which achieved significant outcomes in processing industries and social progress.

Over time, the model of economic development of Asian countries involved in the first industrialization wave (Singapore, Hong Kong, South Korea, and Taiwan) started introducing a number of other Asian countries, so-called second wave NICs of Asia, i.e. Malaysia, Indonesia, the Philippines, Thailand, and later Vietnam. In the 1980s - 1990s, these countries started actually copying the main development stages of the first wave NICs, taking advantage of the fact that the latters have lost their previous comparative advantages by this time, and, first of all, this referrs to the labor-intensive industries.

Among second-wave NICs, two subgroups of the countries can be also distinguished. The first group includes Malaysia, Indonesia and Thailand. These countries have long attracted FDI and stimulated multinational enterprises activities in exportoriented industries. In terms of the new foreign direct investment inflows, Malaysia and Indonesia are second only to Singapore and Hong Kong among the newly industrialized Asian countries, and significantly ahead of even South Korea and Taiwan. NICs involved in the second group, actively attracting foreign investment and multinational enterprises (especially Malaysia), have significantly changed the structure of economy and exports and are gradually shifting their focus to the capital-intensive industries development with medium complexity of technology. In another subgroup of the second-generation NICs, which includes the Philippines, Vietnam and Sri Lanka, the volume of multinational enterprise operations is much lower, although Vietnam very rapidly increases its annual inflows and total accumulated foreign direct investment. Multinational enterprises relocate their production facilities of labour-intensive products to these countries, since the labor force here is much cheaper than in the first-wave NICs. FDI inflow to Asian NICs takes place both as investment in the new production facilities and as purchasing of existing enterprises as a result of M&A.

Since the early 2000s, Indonesia has initiated ambitious decentralization reforms that have shaped regional development and investment geography across the country. Local selfgovernment bodies were entrusted with extensive powers to public services and economic policy making, including investment policy. Increase in FDI (Foreign Direct Investments) in Indonesia can be also explained by a number of economic policies implemented by the government in the recent years. Considerable attention was paid to deregulation procedures carried out in the state, business reforms in the legal field, fiscal policy softening, energy tariff reduction for labor-intensive industries, and tax incentives for investments in Special Economic Zones (SEZ). Indonesia also reduced demands to equity ownership for foreign investors and canceled a number of mandatory permits for a number of commercial transactions involving foreign investors.

Indonesia, which has one of the largest economies among ASEAN countries, has been historically and remains a key destination for FDI investments in the region. For the last 10 years alone, it has been observed FDI flows in amount of USD 198.7 billion, which can be explained by strong economic growth, low government debt, and sound tax policy (Table 1).

In 2020-2021, the FDI flow to Indonesia amounted to 19.18 and 21.17 billion USD. The largest FDI flows in 2020 were directed to the following sectors: steel industry - 323 projects with a total investment amounting to $1.5 billion; electric power industry - 220 projects and $868.8 million; transportation and telecommunications sector - 346 projects and $806.9 million; housing and office buildings - 490 projects and $602.9 million; chemical and pharmaceutical industries - 508 projects and $569.4 million [1,2]. In 2019, Indonesia was ranked 20th in the world among the countries with the highest FDI flows [3]. However, in 2020, FDI flows to Indonesia decreased by 22% to $19.18 billion due to 60% investment drop in the processing industry because of COVID-19 pandemic impact. During 2010-2020, the processing industry has four major industries: chemical (8% of the total FDI), metalworking (8%), food (7%) and automotive (6%). Investments in financial services, logistics, and communications, as well as real estate, increased, but not enough to offset the decline in industrial sector.

Table 1

Source: [1]

The country has an active state policy for attracting foreign investments [4,5]. Thus, foreign investors (in accordance with Presidential Decree No. 49 dd. 2021) are entitled to a number of tax, customs, and other benefits if foreign investments are made: 1) in accordance with the national programs of economic development of the country; 2) in the relevant capital-intensive and labor-intensive industries defined by the laws of the country; 3) in export-oriented enterprises, enterprises in the field of high technologies or enterprises engaged in R&D. In some cases, foreign investor should meet the requirements for creating new jobs or requirements for "internal content" of the products manufactured.

Tax and customs benefits include: reduced import duties; tax incentives; tax holidays; research and development deductions, etc.. The updated tax incentives policy has been in effect since 2019 and applies to 183 business areas. Tax holidays can provide for a reduction in corporate income tax for 5-20 years based on the scope of investments made and are applied in 18 strategic industries for Indonesian economy (petrochemicals; motor vehicle production; crop, plantations or forests processing; pulp production; economic infrastructure construction, digital economy, etc.). Other benefits include: licensing procedure simplification and guarantees of energy, raw materials, and labor availability [6].

International investment cooperation of Indonesia is also facilitated by trade agreements with a number of countries around the world that contain separate investment provisions. In particular, the European Free Trade Association Agreement with Indonesia on Economic Partnership (2018); Comprehensive Economic Partnership Agreement between Australia and Indonesia (2019); the Republic of Korea-Indonesia Trade Agreement (2020).

Despite the fact that Indonesia has recently significantly liberalized the regime for foreign investments, regulatory FDI restrictions in the country are significantly higher than in other countries, such as Thailand, Malaysia, and Vietnam [7]. In addition to restrictions on foreign capital activity in certain sectors (Indonesia restricts foreign investments in certain sectors through a special prohibition list. For example, agriculture, fishing, oil and gas, electric power, construction, transport, telecommunications, insurance, and other financial services) discriminatory measures have been introduced in Indonesia such as higher minimum capital requirements for the companies with foreign investments, limited access conditions for foreigners to key management positions in the companies, restrictions on land purchase by foreign companies, and restrictions on access to government contracts and purchases.

As of 2020, Indonesia has created 15 SEZs across the country. The country has been implementing SEZ concept on a large scale since the early 2000s. Prior to this period, only one SEZ was introduced in Indonesia, namely Free Trade Zone (FTZ), which was located in Batam. Special Economic Zones were introduced by the Indonesian government to accelerate economic and industrial development by creating new centers for business activity and economic development with high competitiveness. The Indonesian government has made SEZ as a priority policy for attracting foreign investments, stimulating industrial activity, and promoting job creation. The country has developed a program of tax incentives to attract foreign capital required for industrial projects. Tax incentives include exemption from income tax, value-added tax (VAT), import duty, excise duty, etc [8].

Currently, SEZs are created in different regions of Indonesia based on the opportunities to use demographic potential and region accessibility to global markets (which makes them more attractive for foreign investments), management centers, seaports, etc. Each SEZ is developed for specific sectors and has its own separate and specific approaches to creating a mechanism for global competitiveness, and has its own "value proposition". It is also worth noting that the country receives in average $8.7 billion of local and foreign investments for SEZ development [5]. It is interesting that the Indonesian government effectively uses SEZ mechanism as an instrument of investment, industrial, innovation and regional policy. So, among the main goals of SEZ creation, the following can be distinguished:

- additional capital raising based primarily on the use of territories with geo-economic and geo-strategic advantages;

- development by raising additional capital of the most important industries for the country's economy;

- export-import operations improvement and other international economic activities development;

- regional development by creating new centers of economic activity to balance development between individual regions;

- regional development model implementation for economic growth, namely industry, tourism and trade; job creation.

In Indonesia, SEZ is divided into the following types [5,8]: free trade zones (free customs, transit zones): establishment of mainly export-oriented production facilities;

industrial zones: production of various types of industrial products; port zones: implementation and organization of shipbuilding and ship repair activities, logistics services; high-tech zones (technoparks, technopolises): for research, design, and engineering enterprises; tourist zones: tourist services.

The mechanism for creating special economic zones in Indonesia provides for a number of benefits in the form of certain preferences:

A) tax preferences:

-30% discount when paying income tax;

- accelerated depreciation;

- tax exemption for large investors (more than $60 million) within 5-10 years from production start on a commercial scale with their subsequent discount 50%;

- exemption from VAT, luxury goods tax, as well as duties on goods and services export produced in SEZ.

B) customs preferences:

- full exemption from import duties on raw materials, materials, and equipment, which is required for the companies operating in SEZ for a period of 2 years;

- within 4 years - when importing machinery and equipment required for production processes.

C) other types of preferences:

- simplified procedure for companies registration (foreign companies registration process in Indonesian SEZ lasts 14 days);

- simplified procedure for foreign employees hiring;

- minimum administrative barriers;

- preferential prices for land lease and purchase in SEZ;

- simplified licensing and immigration control procedures for foreign workers;

- right granted to foreign investors to conclude long-term land lease agreements (up to 75 years) and carry out construction works thereon;

- right granted to foreign investor to own property and a permanent residence permit in Indonesia.

For the national industry development, especially in the areas near SEZ, and for business relations establishment between SEZ companies and national suppliers of goods and services, products entering the domestic market from SEZs are not subject to duty if they meet minimum requirements of "internal local content", namely 40% [8]. Such requirements are aimed at involving national producers in joint production processes with foreign companies, which in turn affects competitiveness between national companies. After all, to obtain the contracts for cooperation with foreign companies (for example, to supply parts, individual components, and other intermediate products for finished products), a national manufacturer should meet certain quality standards.

The first SEZs were opened on Batam, Bintan and Karimun (islands of the Riau Archipelago) to benefit from their geographical proximity to Singapore and Malaysia. These territories proved to be very attractive for foreign investors due to a number of factors: efficient activities of SEZ operator; assistance from local authorities, which pay great attention to the transport, energy, and other market infrastructure development; availability of a sufficient amount of cheap labor forces and no problems with their hiring; and possibility of stable and unhindered exports, in particular through the channels of global production chains. SEZ operator in the Riau Archipelago is the Batamindo Industrial Park operator. SEZ operator managed to attract foreign investments in amount of nearly $8 billion in shipbuilding and ship repair industry (in accordance with the principles of industrial policy implementation by Indonesian government, and key and priority areas allocation for its development). Subsequently, due to foreign investment flow into the region through the SEZ mechanism, Batam became the largest shipbuilding center in the country, and now there are nearly 150 shipbuilding companies in this province [9].

SEZ on Batam, Bintan and Karimun also acted as the centers for electronic industry enterprises development and establishment. This was facilitated by a high demand for electronic products among Asian consumers and prospects for individual enterprises to participate in the global system of multinational enterprise international production (which provided access to the latest element base and export experience), among which, first of all, Sony, Sanyo, Panasonic, Siemens, Philips, etc. The success of electronic sector was stipulated by the model of economic, in particular industrial, development used by Indonesia, which has been worked out and tested in Asian NIC of the first wave (Singapore, South Korea, etc.) and has shown successful implementation outcomes in above-mentioned countries [10] (It should be noted that Batam FTZ is an example of a partial success of SEZ policy in Indonesia. A while ago, Batam became an important manufacturing center in the region and raised more than $20 billion of investments, most of which came from abroad. For the most part, foreign investors founded their businesses due to their proximity to Singapore and cheap labor forces. Since decentralization, the FTZ effectiveness has stagnated, in particular, due to complete legal uncertainty regarding zone management between authority appointed by the central government and regional government).

In general, it can be noted that in recent years, the Indonesian government has implemented a number of structural reforms aimed at attracting investments through various tax, customs, and other incentives introduction and by removing a number of significant restrictions for foreign investors. However, among a number of ASEAN countries, Indonesia remains the most limited for FDI. At the same time, due to a number of competitive advantages, Indonesia was ranked 19th in the world in terms of FDI flows among the countries of the world in 2020. Indonesia also continues actively creating and developing special economic zones, which are considered as an instrument of investments and industrial policy, and signing new investment agreements. But they had insignificant impact on FDI raising to other less attractive regions, as well as on creating sufficient multiplier effects from SEZ, namely increasing productivity outside SEZ and improving overall national welfare.

As in any economic phenomenon, in addition to some positive aspects of SEZ implemented in Indonesia (and first of all it refers to the country industrialization and a number of industries development), we can distinguish certain negative factors that took place in certain Indonesian SEZs [11]:

reduction in the tax base and state revenues due to tax incentives;

- resistance to fair competition development between the firms within and outside SEZs (due to tax incentives, especially tax holidays, and other incentives);

- gradual displacement of the national producer from domestic market in certain regions of the country (demonstrated in the opportunities for SEZ companies to sell goods and services on domestic market, using competitive advantages over Indonesian companies analogues outside the zones, for example, due to tax benefits), which in general affects national regional development;

- active policy of the companies, which are based on the territory of SEZ, in their goods selling on domestic market can have an adverse impact on productivity and quality standards in a particular region of the country, since foreign firms, avoiding export markets, reduce their competitiveness indicators and quality standards, increasing profitability at the international prices. Such trends can have a negative impact on economy as a whole.

So, the policy focused on the active use of various types of tax incentives within the framework of SEZ in Indonesia should gradually move from relying on fiscal incentives to more active measures in promoting effective business environment that supports fair competition between the national and foreign producers (balancing competitive conditions between SEZ enterprises with the rest of the country are extremely relevant priorities in the current strategy of Indonesian government to expand the number of SEZs), integrates target sectors with the rest of economy, improves quality standards and monitors compliance with ecological requirements.

Malaysia is a resource-rich country, strategically located, and now is a major FDI destination in Asia. Foreign investors also see Malaysia as a country with abundant human resources (much cheaper than in many other Asian countries) against the background of economic and political stability, and liberal and open government policies. Among the countries of Southeast Asia, Malaysia's economy has long been recognized as one of the most rapid growing, with 5% average indicator of sustainable economic growth over the past 10 years (although it should be noted that in the early 90s of the last century, when industrialization of the country and broad economic liberalization processes were actively implemented, the economic growth has reached 8-9%. This period in the country's economic development is called “export-oriented growth”). The processing sector was the main source of growth, which increased its GDP share up to 33.4% [12].

Some political measures (a number of economic and trade agreements concluded), an effective macroeconomic policy of the government, steadily growing indicators of economic development, a well-functioning financial system, an effective policy of the country in liberalization of the foreign investors' activities and incentives and benefits introduced therefor (including through the SEZ mechanisms development) have made Malaysia into an attractive country for FDI for several decades. FDI has served as a catalyst for the country's economic, particularly industrial, development. Thus, FDI inflow to the country in 2021 amounted to a record $18.6 billion, which accounted for 5% of GDP (Table 2). It should be noted that during the period of active industrial development in the country in the last decade of the last century, GDP indicator made up 9%. In total, over the past 10 years, FDI inflow to the country amounted to $103.6 billion in average $10 billion per annum. From 2015 to 2019 accumulated FDI indicator per capita in the country increased from $4,127.1 to $5,364.4. Thus, FDI inflow into Malaysian economy is an obligatory component of the country's economic development. First of all, it should be pointed out the processing industry development (new modern enterprises establishment) due to FDI inflows, construction of the new export-oriented industrial production facilities (due to government programs implementation to stimulate exports), and new jobs creation (and further professional development of the local labor forces).

Table 2

FDI inflow to Malaysia

Source: [1]

Against the background of the economic consequences caused by COVID-19 and drop in FDI inflows down to $4 billion, Malaysian government has taken 40 short-term measures to restore economy and stimulate FDI inflows, implemented in the government plan “Pelan Jana Semula Ekonomi Negara”. The plan was aimed at solving some issues in the following areas: to stimulate economy; to attract foreign capital and provide sectoral and systematic support; to conduct employment incentive program, namely, creating new jobs and developing new programs to save existing jobs, including incentives for hiring, subsidizing wages or retraining/advanced training of the workforce; programs to stimulate consumption and support businesses; and to transit to economy digitalization [13]. The success of these programs is confirmed by the following international ratings. So, Malaysia ranked 12th among the countries in the Ease of Doing Business Index [14]; 25th in the Global Competitiveness Index [15]; and 35th in the Global Attractiveness Index of the countries for foreign direct investment [16].

By analyzing the geographical structure of foreign investment inflows for ten years (2012-2021) it allows identifying the main countries - investor in Malaysian economy, including the USA, some EU countries (Germany and the Great Britain), and Asian countries such as Japan, China, Singapore, South Korea, and Taiwan. FDI inflows from the first-wave Asian NIC confirm conclusions about their economic development models transfer to the second-wave Asian NIC. The shares of major countries - investors vary greatly over individual years, depending on the size and number of investment projects. For example, the share of Japanese investors reached 72.7% of the total investment in 2012 due to major investment projects in electrical products, transport equipment, petroleum products and petrochemicals, etc.; the share of investments from China in 2018 amounted to 62.1%, and from the USA - 84.2% due to large investments in the processing industry, in particular in electrical and electronic products, production of the base metals, etc. USA investments were mainly focused on electronic measuring instruments and equipment, production of integrated circuits and testing of semiconductor devices [2].

In recent years, most of FDI flowing into processing industry has been concentrated in high-tech products manufacture with high added value, which is an important achievement of Malaysia in its industrial development programs implementation. In general, the processing sector in Malaysia has accounted for 45% of all FDI in 2019, compared to 36% in 2011 (FDI is concentrated in electronics and electrical engineering, vehicle and equipment manufacture, metallurgy, chemical industry, etc.), while mining industry has accounted for only 3% compared to 17% in 2011. The increase in FDI in the processing sector was mainly stipulated by investment in the capital-intensive projects.

The study of correlation between FDI and GDP growth rates by determining the correlation coefficient between FDI and economic growth in Malaysia for the period from 1999 to 2019 shows that the coefficient significantly increases by 0.94. This allows to conclude that FDI has been and remains an important factor in Malaysian economy development. FDI has played a key role in the country's processing sector study. FDI had the most positive impact on electrical and electronic industries, automotive industry development, in particular automotive components, and chemical industry. Foreign-owned businesses have a significant impact on the country's export structure and volume, and FDI also acts as an instrument for Malaysian economic development by expanding its export opportunities. As a result of significant FDI inflows in the recent years, the country has experienced an increase in workforce productivity, the development of innovation activities, and an overall improvement in the well-being of the population. Multinational enterprises' activities in Malaysia had an impact on the volume and structure of the country-based consumption due to higher wages of their own employees (especially in industrial enterprises).

FDI has contributed to Malaysia's GDP growth, primarily through the highly competitive and dynamic manufacturing industry development, in particular the processing industry [17]. The main processing sectors that received the highest FDI inflows were discussed above. However, the largest of them in terms of FDI inflows have always been the electrical and electronic industries. At the initial stages of Malaysian economic growth, the electronic industry was the main instrument for the current country's economic development. It makes a significant contribution to the country's industrial exports, and during the “period of export-oriented growth”, this industry accounted for more than 50% of the country's industrial exports. During the “period of export-oriented growth”, this sector was the largest employer, which hired 332,297 employees.

The electronic and electrical industry development in the country started during the government policy implementation “Development of the country's export orientation”. It was during the period that major American manufacturers of electronic components, such as Fairchild and Intel, opened their first factories for microcircuit chips assembly in Penang. Further on, multinational enterprises from Japan, South Korea, Taiwan, and the EU countries started investing in the processing industry. The U.S. multinational enterprises preferred financing electronic components industry (assembly operations were set up in Malaysia), multinational enterprises from Asian countries mainly built factories for consumer electronics, aimed at a wide range of products (air conditioners, TV sets, etc.) to meet domestic and regional demand. During the peak “export-oriented growth period”, the processing sector generated annually $2.2 - $2.5 billion due to FDI, and FDI accounted for 80% of the total investment in this sector. The electronic and electrical industry sector showed extremely high growth rates in production, employment, and exports (average growth in production and exports over the “export-oriented growth period” amounted to 25%). In the early 2000s, this sector accounted for more than 50% of Malaysian exports of the manufactured goods. The electronic and electrical industry sector was also first in employment, share capital, and total fixed assets rating. Using electrical and electronic industries development as an example, where foreign capital was a catalyst, it can be stated the progressive role of FDI in Malaysian economy development.

In Malaysia, as in some countries of Southeast Asia, large investment and production clusters are created on the basis of SEZ and foreign companies operating there, which are the key centers of industrial development in a particular region. Within the clusters, an active government policy was also implemented to support small and medium-sized businesses to stimulate the national enterprises development (they are provided with various subsidies and benefits, such as rent subsidies). An interesting example is Penang, which hosts one of Malaysia's most advanced process clusters in electronic components and electrical products manufacture. Similar industrial clusters were developed in the areas such as Johor and the Klang Valley. The industrial development of Penang district started in the late 60s of the last century when agriculture and trade were the dominant activities. Penang free trade zones, free commercial zones and related industrial areas cover an area of approximately 3,150 hectares. Upon free trade zone establishment, Penang became a center of industrial development and went through a certain evolution in its development - from enterprises specializing in assembly operations to capital-intensive operations, and subsequently search centers appearance. Currently, there are more than 4,000 large companies in Penang district, of which 10% are the branches or subsidiaries of multinational enterprises. In the last 10 years, about 140,000 new jobs have been created. The total production of this district is approximately 14% of the total GDP of production sector in Malaysia as a whole.

It is worth noting the effective impact of FDI on the modern technologies implementation in the processing industry of Malaysia. Initially, this was mainly explained by supply channels of the high-tech foreign companies - investors of equipment required and equipment for their branches and training in the skills needed for the local employees. In recent decades, there was an increasing trend towards research institutions establishment in Malaysia as a part of the policy of individual foreign companies, reflecting qualification level improvement among the local population. For example, R&D center establishment by the Japanese multinational enterprise Matsushita on the basis of its foreign branch.

FDI has also become an important financial source for Malaysian economy development due to a large number of new jobs created for Malaysians in foreign-owned enterprises. A greater demand for cheaper (and unskilled) employees from the neighboring countries, namely Vietnam, Indonesia, and Cambodia than for local employees was experienced before foreign investors activities in the country at the enterprises in Malaysia. This reduced the chances of local manpower finding jobs and resulted in increase in unemployment in domestic national market. When large investors came from abroad and the relevant policy of Malaysian government intended to create new jobs was implemented (specifically for Malaysians), the situation has dramatically changed [19]. In case of Malaysia, most of the effects on the country's economic growth from FDI were related to the human capital accumulation. For example, in 2016, an additional 170,000 jobs were created due to foreign-owned enterprises.

FDI was essential for reducing an unemployment rate in Malaysia. New investment projects subsequently developed a broad labor market for the local workforce, supplemented by technical support and knowledge. Initially, FDI facilitated jobs ceration for the local population involving labor-intensive industries. The increase in FDI inflows to Malaysia has resulted in further development of the labor market in capital-intensive industries and improved the GDP structure, which automatically caused lower unemployment and stability of the entire economy. According to the International Labor Organization, Malaysia is currently one of the countries with the lowest unemployment rate, 3.3% in 2019. In the case of Malaysia, it has been proved that unemployment significantly affects the country's GDP, where 1% reduction in unemployment contributes to 1.75% increase in GDP. This was especially clearly confirmed by the practical data during the “export-oriented growth period” when unemployment reached 7.5%, and increase in FDI due to new jobs created significantly reduced this level. International trade development in Malaysia using multinational enterprise channels based on their branches allowed the domestic market to supply goods to the international market, which created more employment opportunities and also reduced the country's unemployment rate.

The Malaysian government policy on foreign investment inflow and foreign investors activities regulation has always been directed in such a way that the foreign capital, in particular FDI, has been treated as a key factor in industrial development and high economic growth rates achieved by the country. That is why a number of political and economic reforms implemented in Malaysia many decades ago were aimed at encouraging foreign investment in the economy (Investment Incentives Act 1968, a number of laws on free trade zone creation and provision of export incentives during the 1970s, a large-scale “accelerated” liberalization of the late 80s - early 90s of the last century, carried out in many countries of Southeast Asia).

Despite Malaysia has taken measures to liberalize its foreign investment policy, there were restrictions in the 2000s and requirements imposed for foreign capital involvement in the certain sectors. In 2009 Foreign Investment Committee abolished some requirements that restricted operations on equity acquisition, and merger and acquisition of the local companies by foreign investors. Malaysia has taken significant steps to liberalize its foreign investment policy, but there are still certain requirements for foreign investors to shareholding in a number of sectors (servicing, in particular financial services, logistic services, wholesale trading, etc.). The prevailing aspects of these restrictions are related to stockholding correlation as 70% to 30%: national investors (ethnic Malays) should own 70% of shares and foreign investors -- 30% [20, 21]. The concept for Malaysian financial sector development has resulted in greater liberalization in financial services sector for 2011-2020.

Malaysia has a successful experience in developing Special Economic Zones (SEZ), which became the centers for industrial development in the country, and later turned into large industrial regions [8, 11]. Malaysia offers a number of carefully developed and profitable incentives and benefits for investors within SEZ, but subject to a number of state requirements met by investors in accordance with priority areas of economic, in particular industrial, development of Malaysia. In 2007, in accordance with the SEZ-based National Development Plan, territorial economic corridors were allocated in Malaysia (in fact, this related to a new type of SEZs development), which were developed to transform the country's economy into a developed industrial economy, to pull up a number of less developed regions of the country to industrial centers, and to eliminate any differences in the standard of living among the population due to a general increase in the level of well-being. Active development within the economic corridors allocated was supposed to be based on the infrastructure built (such as airports, seaports, and highways), labor forces, and related economic sectors development. Currently, Malaysia has five investment corridors (territories united around existing SEZs) [22]: East Coast Economic Region (Corridor); Iskandar Malaysia Regional Development Corridor, in Johor; North Corridor, in Kedah, Penang and North Perak; Sabah Development Corridor; Sarawak Corridor of Renewable Energy.

Malaysia currently has 530 SEZs, 77% of which are public and 23% are privately managed. By 2018, investment corridors have created about 2 million jobs and raised foreign investments amounting to $188 billion [22].

East Coast Economic Zone (Region): the main incentives for attracting both foreign and national investors are as follows: exemption from income tax up to 100% for 10 years; infrastructure prepared for industrial enterprises development; and exemption from the stamp duty for land or for any building purchased for business development. During the period of zone existence, 164,500 jobs were created and 38,000 business facilities were put into operation.

Iskandar Malaysia Regional Development Corridor, in South Johor is one of the largest zones in terms of its territory. Iskander Malaysia SEZ positions the east coast of Malaysia as a key area for free trade development in ASEAN countries. The corridor was established in 2007 to improve the economic performance of the state of Johor. The Malaysian government has allocated $241 million for the region development. The economic development program of the region was aimed at the following areas: IT and biotechnology, processing industry (electronics and electrical engineering), banking development, education and healthcare, and servicing (primarily logistics and tourism). For the period from 2006 to 2019 more than 700,000 jobs were created in various sectors of economy within this development corridor. In 2019, the territorial borders of this regional corridor were significantly expanded.

North corridor. The two main priority areas of this regional corridor were as follows: policy implementation increasing value added in existing industries focusing on the target areas of economic development transformation and expansion (agriculture, manufacture, tourism and logistics) in the region; social policy implementation to improve the overall well-being of the population in the region based on the certain economic areas development.

Sabah Development Corridor. The corridor is located on the territory of the state of Sabah and aimed at its natural resources development and rational use, and at economic development mainstreaming. The corridor has six defined strategic development zones. The main areas of activity are as follows: trade, investment and tourism development, industry and agriculture.

The Sarawak Corridor is an initiative targeted at the central region development and Sarawak transformation into a developed state, as well as the quality of life improvement among its population. The region has its key energy resources (hydraulic power industry (28,000 MW), coal (1.46 billion tons), and natural gas (40.9 trillion square cubic meters)) and provides for investment in power production and energy-intensive industries. The electric power industry development should act as a catalyst for industrial development of the entire region. The region has now significant natural resources reserves identified, in particular, the corridor has 0.8 billion barrels of well-known oil reserves, more than 80 million tons of quartz sand and more than 22 million tons of kaolin.

Conclusion

Summing up the above material, it is worth noting that Malaysia and Indonesia are an example of the countries, which fairly successfully use foreign capital for industrial development of their countries, structural economic reforms, and economic growth processes activation in the countries. Despite the fact that several decades ago, foreign investment in the countries was not significant due to restrictive government policies (e.g., capital controls in the case of Malaysia), the countries were able to transform their strategies towards further liberalization and are now raising significant FDI inflows for further state development. These two countries have increased their market potential as a result of foreign capital inflows and are now effectively using this economic factor, which has powerful influence on decision-making in further investment.

Current market potential of Malaysia and Indonesia indicates their readiness to further FDI use for their economic growth.

In many Asian countries, special economic zones and business centers are effectively used in achieving dynamic and innovative growth. The development of economic zones is a catalyst that can stimulate industrial activities in a single region and attract FDI, mainly in the processing sector, to increase exports and create jobs. Development goals include various reasons, such as industrialization, small and medium-sized enterprise development, foreign currency, economic diversification, investments and trade, regional development, jobs creation, and pilot zones for applying new policies.

Having studied SEZ functioning experience exampled by Malaysia and Indonesia, it can be stated that they were successful in terms of foreign capital raising, initiating foundations for industrialization and further industrial development allocating the areas of international specialization (primarily in the processing industry), increasing exports, and improving the level of employment, general standard of living and well-being of the population. At the early industrialization stage, most foreign investment covered labour-intensive industries, in particular light industry, but later (against the background of general economic development of Malaysia and Indonesia) they gradually switched to capital-intensive industries, for example, related to electronic and electrical industries, and high-precision mechanical engineering. In the countries studied, it is possible to determine the defining role of SEZ in competitiveness development and structural transformations of the country's economy, especially at an early stage of development. The fact that the multinational enterprises located their branches on the SEZ territory of these countries contributed to their production and research capacities transfer, introduction of the new production equipment and advanced technologies, and improvement of the level of education and skills of the employees. SEZs have a positive impact on the national companies' development due to their involvement in the international production activities of multinational enterprises, which, of course, contributed to increasing competitiveness of the products and services provided by the national manufacturers and the country as a whole.

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