Contrary to popular belief, an academic said a controversial racial-based affirmative action policy in Malaysia - which gives favourable treatments to locals over foreigners - had indeed promoted more foreign direct investment (FDI) from the United States.

The action plan, known as the New Economic Policy (NEP) introduced in the 1970s, was meant to reduce socio-economic disparity among different races in Malaysia. It also targeted at a 30 percent share of the economy for ethnic Malays and other bumiputeras

While numerous quarters have called for the NEP spirit to be dismantled in light of today's global competitiveness, Universiti Malaya business historian Dr Shakila Yacob however argued it should stay.

'External factors' caused divestment

From her historical analysis on the impact of the NEP on US FDI from colonial Malaya to post-colonial Malaysia, she opined that although economic nationalism exercised through the NEP was perceived as an anti-colonial backlash, it however was not necessarily hostile to foreign interests.

"While the NEP may be seen as a 'protectionist ideology' due to its pre-occupation with transforming the Malay underclass into entrepreneurs by reducing the share of existing foreign capital, the Malaysian government did pursue a liberal economic policy," she said.

This include offering favourable conditions to export-led and import-substitution industries and the introduction of pro-business policies or legislation such as the Free Trade Zone Act 1971 to countervail the perception of nationalistic tendencies after the implementation of NEP.

Shakila argued the NEP's concerns of localisation were largely embraced by US firms, which was later witnessed through statistics on the growth of US FDI from some RM6,534.3 million in 1997 to RM108.6 billion in 2003.

"It is probably right to assert that it is through the economic roadmap laid out by the Malaysian government which promoted these US investments," said the academic at a seminar on 'The impact of the NEP on US FDI in Malaysia' held at UM campus in Kuala Lumpur yesterday.

She cited three case studies - Pacific Tin Consolidated Corporation, Uniroyal (formerly US Rubber Company) and Ford-Malaysia - in examining why US businesses divested from or continued to invest in Malaysia through joint ventures during the NEP implementation period.

From there, she concluded that major factors in decisions for divestment of foreign capital and acquisition of foreign enterprises were somehow due to "external factors" - such as geographical distance - and not the NEP.

On the other hand, Shakila, also UM's International Institute of Public Policy and Management deputy director, said a significant number of foreign firms that opted for localisation through the NEP managed to survive and prosper.

Barrier should remain

So what is the impact of NEP on US foreign investment today as Malaysia was negotiating the Free Trade Agreement (FTA) with the US while domestically, there has been dispute over the 30 percent bumiputera equity ownership?

Shakila answered when met after the seminar: "I think the NEP as a barrier (for the bumiputeras) should remain. We should re-look at the NEP and we can remove it gradually by stages. But if we were to remove it totally, it will raise tension in the country."

Under the on-going FTA talks, Malaysia will have to open up its government procurement markets which has been protected due to the affirmative action policies to help the bumiputeras to reach the 30 percent equity ownership target.

In view of that, the US FTA trade mission has pressed for transparency in the tendering processes and has brought up the lack of procurement opportunities.

But Shakila argued: "Malaysia is not ready (to open up the government procurement). It will raise a lot of concerns among the Malays, especially like the recent Asli report. When we have a sector of the society which is not happy, we might have problems like racial tension later on."

Local think-tank Asian Strategic and Leadership Institute (Asli) has challenged the official statistic and put the bumiputera equity ownership at around 45 percent, more than double the official figure of 18.9 percent.

Asked on how long should the NEP stay in force, Shakila did not provide an answer but she asked local government-linked companies to buck up and reduce their reliance on the affirmative action policy as compared to what they did in the 70s.

"Like (national car maker) Proton, they shouldn't rely on government subsidy and protection. They should now learn to be more competitive by now, they should be able to compete," she asserted.

The academic pointed out that the dilemma of the NEP remains: "While I agree the NEP is important for local entrepreneurs, sometime it has also become like a stranglehold, it didn't allow the local entrepreneurs to be more competitive."