Should foreign firms be wary of investing in Malaysia now?

Today's Straits Times reported that "Two investors from Taiwan have held back their plans to invest in Selangor following street demonstrations recently". Are they justified?

Perhaps. But not because the protesters are likely to create too much trouble. It seems unlikely that this current wave of Malaysian protests will dampen foreign enthusiasm too much. After all, the police have already started rounding up protesters, justly or not. 'Order' should return soon.

Rather, the investors should be worried because inter-ethnic tensions are rife in Malaysia. Underneath the veneer of respect and cooperation, deep distrust, jealousy, and a sense of unfairness underlies all interracial relations in Malaysia.

Companies should never underestimate the effects that discrimination and resentment can have on workplace dynamics in Malaysia. Throughout our journeys in Malaysia, we have met dissatisfied Indians, unhappy at their second-class citizen status. With these Hindraf-led protests, they now have a public spectacle and cause to latch onto. Foreign investors, be wary.

On a separate note, it is quite ironic how companies from democratic countries where unions, strikes and protests are common, often have no stomach for similar chaos in far-off investment locations. Many Western executives crave the political stability that authoritarianism brings, whether in Malaysia, Singapore or Vietnam.

Perhaps as companies fragment their supply chain across many countries, they prefer authoritarianism and state control in those countries where their low-value, labour-intensive work is done--say, assembling an iPod in China. And rather have an open, free-wheeling, democracy where their innovative, high-value, knowledge work is done--like the Apple campus in Silicon Valley.

It's interesting to think about the influence and power that big companies have on the rate of democratisation and liberalisation in countries, simply by virtue of their investment decisions.

Did the decision by the Taiwanese companies to pull back cause the Malaysian government to adopt a harder stance towards the protesters? Probably. Did the decision slow the pace of democratisation in Malaysia? Probably.

Is all that good or bad for development in Malaysia? Ah, there's the interesting question...