Structural Transformation of Malaysia's FDI: Implications for India from the Plunge in Manufacturing Investment

Malaysia's 2025 foreign direct investment (FDI) data reveals a striking structural divergence: net FDI soared 41.2% to RM65.9 billion, but manufacturing FDI plummeted to just RM2.6 billion, plunging over 70% from the previous year. Meanwhile, services FDI reached RM59.5 billion, dominating the overall growth. This phenomenon has sparked discussions about "premature deindustrialization," but for economists observing the restructuring of global supply chains, it serves more as a mirror reflecting the shift of FDI from traditional manufacturing toward digital infrastructure, high-end services, and AI-related capital-intensive sectors.

The True Logic Behind the Shrinking Manufacturing FDI

On the surface, manufacturing FDI income (RM55.5 billion) far exceeds its inflows (RM2.6 billion), indicating that existing factories are still operating efficiently and generating returns, but new capital has not entered on a large scale to expand capacity. Yeah Kim Leng, economics professor at Sunway University, notes that fixed investment is highly cyclical and "lumpy" in nature; after absorbing substantial investment in previous years, the decline in 2025 may be a cyclical trough. Mohd Sedek Jantan, Investment Strategy Director at IPPFA, offers a deeper explanation: this is more like a "value chain migration" than a manufacturing retreat. Capital is shifting toward data centers, engineering services, design capabilities, and regional headquarters—activities statistically categorized under services but closely tied to manufacturing as high-value-added segments.

Moreover, Malaysia's export performance remains strong: exports grew 45.3% year-on-year in May 2025, indicating high utilization of existing manufacturing assets and a solid position in global supply chains. Therefore, the slump in manufacturing FDI is not a capacity outflow but rather multinational corporations adopting a wait-and-see attitude toward trade tariffs, supply chain restructuring, and the sustainability of AI investment cycles, postponing the next phase of capital expenditure.

Drivers of Services FDI: Digital Economy and AI Infrastructure

The concentration of services FDI is striking: information and communication, finance and insurance/takaful sub-sectors have absorbed the bulk of funds. Lee Heng Guie, Executive Director of the Socio-Economic Research Centre, points out that services' share of approved foreign investment has risen from 30.8% in 2023 to 50.2% in 2025, primarily driven by investments in data centers, cloud infrastructure, and digital ecosystems. This aligns perfectly with the global trend of FDI shifting from manufacturing to services. Leveraging its infrastructure, talent, and geographical advantages, Malaysia is becoming a hub for digital infrastructure investment in Southeast Asia.

Implications for India: Avoiding the Deindustrialization Trap, Embracing High-Value-Added ManufacturingIndia's FDI structure has also undergone similar changes in recent years: the services sector (especially computer software, financial services) accounts for a large proportion of FDI inflows, while manufacturing FDI, despite growth, is more volatile. Malaysia's experience shows that an increase in total FDI does not automatically guarantee a solid manufacturing foundation. India is implementing the "Production Linked Incentive Scheme" (PLI) and the "National Semiconductor Mission," aiming to attract large-scale investment in electronics manufacturing and chips. However, if policies overly emphasize digital infrastructure or service outsourcing while neglecting the deepening of the manufacturing ecosystem, India may face risks similar to Malaysia's: although manufacturing FDI revenue is high, insufficient new investment weakens the long-term impetus for industrial upgrading.

Malaysia's semiconductor ecosystem has been deeply cultivated for decades and is globally competitive in areas such as packaging and testing. The sluggishness of its manufacturing FDI is not due to declining attractiveness, but rather because multinational corporations tend to upgrade and optimize existing assets rather than build new factories. India is still in a catch-up phase in semiconductors, electronics manufacturing, and other fields, requiring more proactive policies to attract new production capacity while preventing the "crowding out" effect of services FDI on manufacturing FDI.

Outlook: Recovery Expectations for Manufacturing FDI

Most analysts expect Malaysia's manufacturing FDI to rebound in 2026. Yeah Kim Leng predicts that manufacturing FDI will recover to the long-term trend level of approximately 12 billion ringgit per year. Mohd Sedek believes that as the AI investment cycle expands from chip design to advanced packaging, semiconductor materials, and AI server infrastructure, Malaysia will benefit from its unique position in the global semiconductor supply chain. Similarly, if India can consolidate policy certainty in semiconductor design, electronics manufacturing, and new energy, while continuously improving the ease of doing business, it stands to attract more high-quality manufacturing FDI amidst the global supply chain restructuring.

Conclusion

Malaysia's 2025 FDI data reveals a key trend: assessing a country's FDI health cannot rely solely on total volume; it is essential to dissect industry distribution and revenue quality. The rise of services FDI is not inherently detrimental, but when manufacturing FDI shrinks sharply, policymakers must beware of the risk of "industrial hollowing out." As India advances its "China+1" strategy, it should learn from Malaysia's cyclical and structural lessons to ensure that manufacturing-led high-quality growth proceeds in parallel with the expansion of the digital economy.