Weak manufacturing, strong services: Malaysia's FDI structural change reveals the upgrade path of Asia's supply chain.

The Digital Divide: The Story Behind 65.9 Billion Ringgit

In 2025, Malaysia's net foreign direct investment (FDI) surged 41.2% year-on-year to 65.9 billion ringgit, continuing the strong momentum of recent years. However, beneath the impressive aggregate, a structural fault line is emerging: manufacturing FDI inflows were only 2.6 billion ringgit, down more than 70% year-on-year; while the services sector absorbed 59.5 billion ringgit, accounting for over 90% of the total.

This stark disparity has immediately sparked debates about "premature deindustrialization." But a deeper analysis suggests that this is not a "retreat" of manufacturing, but rather a profound upgrade underway in Malaysia's—and indeed the entire Asian—supply chain: shifting from traditional manufacturing to digital infrastructure, high-end services, and knowledge-intensive activities.

Divergence Between Income and Inflows: The True Profitability of Manufacturing

Surprisingly, despite the sharp decline in inflows, manufacturing still generated 55.5 billion ringgit in FDI income for Malaysia, nearly three times that of the services sector (about 20 billion ringgit). Yeah Kim Leng, economics professor at Sunway University, points out that this reflects the high productivity and value-added of manufacturing. Mohd Sedek Jantan, strategy director at IPPFA Sdn Bhd, interprets this divergence as multinational corporations prioritizing value extraction and asset optimization over large-scale capacity expansion. In other words, capital is being redeployed to higher-value segments—data centers, digital infrastructure, engineering services, design capabilities, and regional headquarters—activities that are statistically classified under services rather than manufacturing.

From "Manufacturing Base" to "Digital Hub"

The explosive growth in Malaysia's services FDI is no accident. The information and communications, finance, and insurance sub-sectors have become major magnets, especially the surge in investment in data centers and cloud computing infrastructure. Lee Heng Guie, executive director of the Socio-Economic Research Centre, notes that the share of the services sector in approved foreign investment has risen from 30.8% in 2023 to 50.2% in 2025. This trend aligns with the global shift of FDI from traditional manufacturing to services, and Malaysia, leveraging its stable political environment, mature semiconductor ecosystem, and digital infrastructure advantages, has become a popular location for regional data centers.

Notably, the semiconductor industry itself is undergoing a qualitative transformation. Vincent Lau, head of equity sales at Rakuten Trade, emphasizes that Malaysia's electrical and electronics (E&E) industry remains robust, but the competitive focus has shifted from "low-cost assembly" to "higher value-added activities." The National Semiconductor Strategy (NSS) and the New Industrial Master Plan (NIMP 2030) are driving investment toward wafer fabrication and IC design—activities that may be classified under services statistically but are essentially extensions of the manufacturing industry.

Deindustrialization or Value Upgrading?Economists generally maintain cautious optimism about the weak manufacturing FDI inflows. Yeah Kim Leng attributes it to the inherent cyclicality and "lumpiness" of fixed asset investment, and expects future manufacturing FDI to fluctuate around a long-term trend level of approximately RM12 billion per year. Mohd Sedek believes that as the AI investment cycle expands from chip design to advanced packaging, semiconductor materials, AI servers, and other areas, Malaysia's position as a key node in the global semiconductor supply chain will attract more capital. "The stronger signal is not the current FDI flow, but the approved investment pipeline and the increasing number of multinational corporations expanding their regional footprint in Malaysia."

Lee Heng Guie adds that as of the end of 2025, Malaysia's total cumulative manufacturing foreign investment stock reached RM419.3 billion, with approved manufacturing investments from 2023 to 2025 accounting for an average of 56.2%. This means that despite short-term fluctuations in inflows, the long-term capital base is solid. Sub-sectors such as chemicals, pharmaceuticals, and aerospace also show considerable growth potential.

Malaysia’s positioning from an Asian perspective

The shift in Malaysia’s FDI structure is not isolated but a microcosm of Asia's supply chain restructuring. As China’s labor costs rise and geopolitical risks intensify, multinational corporations are implementing the "China+1" strategy, making ASEAN countries alternative production bases. However, Malaysia is not merely taking over low-end manufacturing transfers; it is moving up the value chain within the inland region, leveraging its years of accumulated technology and talent.

Data shows that Malaysia's exports surged 45.3% year-on-year in May 2025, indicating that existing manufacturing assets remain highly utilized and competitive in the global supply chain. Meanwhile, most of the FDI in the services sector is directed toward digital infrastructure, which will enhance Malaysia's attractiveness as a regional digital economy hub and, in turn, support the intelligent upgrade of manufacturing.

Key challenges and future outlook

Despite the optimism, the persistent weakness in manufacturing FDI inflows warrants caution. If manufacturing investment remains sluggish for an extended period, it could weaken technology spillover effects, reduce job opportunities, and trigger premature deindustrialization. Yeah Kim Leng warns that a deeper analysis of the causes, consequences, and policy responses to investment slowdown is needed. At the same time, the impact of AI and new technologies on employment is also worth noting—Malaysia's national statistics department estimates that up to 697,000 jobs are at risk.

Looking ahead, Malaysia must continue to balance the development of services and manufacturing. While the digital economy is important, manufacturing remains the core engine of growth for Asian economies outside of China. By advancing the semiconductor supply chain toward the high end through NIMP 2030 and NSS, and leveraging FDI inflows to develop digital service exports, Malaysia has the potential to forge an upgrade path driven by both services and manufacturing.

*This article is based on The Star report and analysis from multiple economists*