THE global drive towards cost reduction will not impede the flow of foreign direct investment (FDI) into the local information and communications technology (ICT) sector, despite growing concerns of a softer global economy in the second half of the year.

In addition to the mature electronics segment, new growth areas such as shared services and outsourcing (SSO) are expected to benefit from the continued flow of FDI, according to industry observers.

Frost & Sullivan’s industry manager, economic research and analytics Asia-Pacific J. Sivan told Tech&U that the global economic slowdown is less likely to affect hi-tech investments as these are driven by innovation and competitiveness.

He said although FDI dependence on the economic conditions of developed countries such as the United States, Europe and Japan is likely to decrease gradually in this decade, intra-regional investments are expected to increase from Japan, China, Taiwan and South Korea. Hence, Southeast Asia is expected to keep its position as one of the fastest-growing regions in the world because it has one of the highest growth potential.

Sivan also believes that Malaysia is expected to remain one of the key FDI destinations in the region, especially in the electronics and SSO segments.

This is because of the country’s better energy and ICT infrastructure, availability of skilled labour force and relatively lower labour costs.

Besides, Malaysia has established herself as one of the major electronics producers in the region.

“Going by the recent trends globally, SSO contracts are expected to have high growth in 2006, with Malaysia emerging as an attractive outsourcing destination,” Sivan said.

The American Malaysian Chamber of Commerce (Amcham) also believes that FDI for ICT will continue to be good this year because Malaysia is increasingly getting on the radar screens of US investors.

“Since the joint announcement on the launch of the US Malaysia Free Trade Agreement negotiations in March, there have been various Government-led missions to North America. (Malaysian International Trade and Industry Minister) Datuk Seri Rafidah Aziz, who recently led a trade mission to San Francisco, US, further encouraged American companies to invest in Malaysia’s ICT sector while taking advantage of the expected increase in the ICT workforce,” said Amcham’s president Vince Leusner.

(Malaysia’s ICT workforce is expected to increase 10.4 per cent per year to reach 300,000 in 2010, from 183,204 last year.)

“Rafidah also indicated that American ICT companies could engage in R&D, SSO and creative multimedia areas,” he added.

In meetings with potential US investors in the last couple years, Amcham has seen the majority of potential new investments being considered for SSO. Leusner said the Malaysian Government is also encouraging US companies to invest in biotechnology branches such as food and agro-biotechnology, bio-pharmaceuticals (antibodies and vaccines), nutraceuticals, bio-diagnostics, bio-active compounds for healthcare and industrial enzymes.

“Amcham believes that Malaysia can be successful in her biotechnology ambitions through a greater emphasis on intellectual property rights, including the country’s adoption of data exclusivity, which protects data from companies’ clinical trials for a certain period, in order that they can recoup the costs on their tremendous investments and provide world-class medicines to the Malaysian people.”

Meanwhile, the Association of the Computer and Multimedia Industry Malaysia sees a shift from low-cost-production-based FDI to knowledge-based FDI, which has resulted in increased demand for the right human capital.

“Malaysia must have adequate trained human resources to meet the expectations of foreign investors,” said the association’s deputy chairman David Wong Nan Fay.

“The Government is already taking major steps in addressing the education system to meet demand for knowledge workers. Specialised skills in specific domains will be in high demand.”

The recently launched Outsourcing Malaysia plans to help the country position herself as a niche player and provider of high-value services at an affordable cost. Currently, Malaysia is strong in five key areas of outsourcing, namely financial services, logistics, energy, technology and manufacturing.

According to Wong, who is also co-chair of Outsourcing Malaysia, Government support has given the industry a good headstart, including the recent Dell investment in Malaysia.

“The Government has also allowed outsourcing companies to apply for MSC (Multimedia Super Corridor) status. This will help spur the Malaysian outsourcing industry as they would qualify for a host of incentives by the Government.

“The marketing of our capabilities is also being enhanced. Outsourcing Malaysia will play a key role in complementing the efforts of MDeC (Multimedia Development Corporation) in branding Malaysia as a preferred location for high-value outsourcing. With strong country branding, individual companies will find it easier to offer their services to the global market.”

Wong added that further initiatives such as the introduction of knowledge worker policies and incentives will help nurture local skilled knowledge workers and that there should also be policies and incentives for outsourcing service providers as well as the development of the outsourcing industry.