klee18_Daniel BerehulakGetty Images_shenzhen Daniel Berehulak/Getty Images

Making the Most of FDI

When it comes to converting foreign direct investment into income growth and technological upgrading, Shenzhen, China, has been far more successful than Penang, Malaysia. The reason is simple: Shenzhen, unlike Penang, supported the rise of innovative local businesses.

SEOUL – Few experts doubt that foreign direct investment can bolster economies by bringing in critical know-how, expanding local production, and creating jobs. It is no surprise, therefore, that attracting FDI has long been a top priority for developed and developing economies alike, as reflected in the generous incentives included in the United States’ Inflation Reduction Act. But, when it comes to driving economic growth and development, FDI has a mixed record.

To understand why, it is worth looking at the contrasting experiences of Penang, Malaysia, and Shenzhen, China. Thanks to its strategic location, low labor costs, and favorable taxes, Penang was among the first Asian cities to attract investment from multinationals, including through its Free Industrial Zone, established in 1972. Later, Shenzhen also began courting FDI, establishing its Special Economic Zone in 1980 – and quickly became a hub of labor-intensive manufacturing.

But, when it comes to converting that early FDI into income growth and technological upgrading, Shenzhen has been far more successful than Penang. As the chart shows, in 2017, Shenzhen’s per capita GDP stood at $39,245 in purchasing-power-parity terms (72% that of the US), compared to just $27,569 (about 50% that of the US) in Penang. Whereas Penang has been slow in growing out of low-value-added manufacturing, Shenzhen has cultivated a thriving high-tech sector. The number of US patents registered to inventors with an address in Shenzhen increased from zero in the 1990s to about 2,500 in 2017, whereas Penang had reached just 100.