2010 Investment Climate Statement - Malaysia

2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010

Openness to Foreign Investment

The Government of Malaysia (GOM) encourages foreign direct investment (FDI) by providing a number of incentives, particularly in export-oriented high-tech industries and "back office" service operations. The GOM also hosts international trade shows and advertises broadly to attract FDI. Many U.S. companies have operations in Malaysia, including ExxonMobil, Intel, Microsoft, Dell, GE, UPS, Mattel, and Motorola, just to name a few.

Malaysia’s current Prime Minister Najib Razak took office in April 2009 and quickly signaled his administration’s intention to further liberalize investment regulation to stimulate new foreign investment. The government removed foreign ownership limits for 27 non-controversial services subsectors, repealed Foreign Investment Committee (FIC) guidelines on mergers and acquisitions, reduced Bumiputra ownership requirements for new listings of foreign owned corporations from 30% to 12.5%, and reduced FIC approval requirements for foreign ownership of properties to only those above RM 20 million (USD 8 million). In his 2010 budget speech, the PM called for additional economic and investment reform measures.

Inflows of actual FDI to Malaysia decreased by 2.4% from USD 8.4 billion in 2007 to USD 8.2 billion in 2008, according to the UN Conference on Trade and Development (UNCTAD). However, conversations with Malaysian investment officials portend a substantial decrease in actual FDI during 2009, as much as 80% below 2008 figures, due to financial crisis-related implementation delays in previously approved projects. Malaysian investment outflows continued during the same period, rising from USD 6.04 billion in 2006 and USD 10.98 billion in 2007 to USD 27 billion from mid 2008 to mid 2009, during the height of the global financial crisis (GFC). One GOM official attributed the substantial increase in outward flows largely to cross-border assets acquisitions and USD 15 billion of portfolio investment outflows as a result of a “flight to safety” during the global financial crisis. There are reports or portfolio investment inflows in November and December 2009.

As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years of steady economic growth have made it a middle-income country. The GOM seeks to move the economy “up the value chain” by promoting specific sectors. In its 2006-2020 Third Industrial Master Plan, the GOM identified specific higher-tech industries it wanted to attract and develop. In the manufacturing sector these included electrical & electronics; medical devices; textiles & apparel; machinery & equipment; metals; and transportation equipment. The GOM has recently targeted “green” industries, and succeeded in attracting three large investments by U.S. and German solar panel manufacturers. Also targeted for growth were a number of resource-based industries and some services sub-sectors including logistics; however, the extent to which foreign investors are allowed to participate in these sectors is limited.

The Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. Investors in industries targeted by the GOM often can negotiate favorable terms with the ministry or other regulatory body. This can include assistance in navigating a complex web of regulations and policies, a few of which can be waived on a case-by-case basis. In general, the GOM welcomes foreign investment; however, investors in non-targeted industries tend to receive less GOM assistance in obtaining the necessary approvals from the various regulatory bodies and therefore face more bureaucratic obstacles.

Nevertheless, the GOM actively reaches out to targeted industries and negotiates terms that successfully attract FDI. According to the Malaysian Industrial Development Authority (MIDA), the total value of foreign projects approved in 2009 was $6.5 billion, a 51% decrease from the $13.3 billion approved in 2008. The value of approved projects from Australia, the U.S. and Germany declined significantly in 2009 as effects of the global financial crisis took hold. U.S. investment plummeted by 72% from $2.5 billion to $0.7 billion, though still ranking third after Japan and Hong Kong for total approved foreign investment projects. (Note: Approval statistics are not directly comparable to actual FDI statistics. Also, manufacturing investment statistics do not capture investments in non-manufacturing-related services or upstream oil and gas production.)

Malaysia has been working on an export control law since 2005 and plans to present legislation to Parliament in 2010. Implementation of an export control law will qualify Malaysian exports for expedited customs handling upon import to the U.S. and to other countries. An export control law also will be essential if Malaysia is to achieve its goal of becoming a “logistics hub,” particularly in light of the international trade system’s growing emphasis on secure supply chains and transparent cargo movements throughout the manufacturing and shipping process.

Regulatory Burden

The World Bank compiles an annual “Doing Business” report comparing regulations affecting ten areas of everyday business across the globe. In its Doing Business 2010 report, which covers the period through June 2009, Malaysia moved down from 21st to 23rd place overall among the 181 economies covered in this survey.[1] Malaysia’s best rankings were in the standardized indicators “getting credit” and “protecting investors,” where it ranks first and fourth, respectively. Malaysia’s worst ranking at 109th place is in “dealing with construction permits” which, in the standardized example of obtaining the approvals necessary to build a warehouse, involves 25 procedures and takes 261 days, at a cost of 7.1% of per capita income, all before construction can begin. The 2009 ranking is marginally better than last year, when the cost was 7.9% of per capita income.

Malaysia’s other rankings in the report slipped. Starting a business dropped from 75th to 88th place, closing a business, moved from 54th to 57th place, and enforcing contracts remained at 59th place. Malaysia’s ranking also declined in employing workers, registering property, and trading across borders, where it now ranks 61st, 89th, and 35th, respectively.

To improve business conditions in Malaysia, former Prime Minister Abdullah Badawi established the PEMUDAH committee in 2007. PEMUDAH consists of 23 high-level government and private sector leaders with a mission to identify and evaluate bureaucratic impediments to conducting business in Malaysia and to make recommendations to the PM on how to address them. PEMUDAH’s focus is specifically on administrative reforms designed to enhance the efficiency of the government bureaucracy’s interaction with the private sector. It does not have the authority to make deeper reforms needed to address policy-level structural inefficiencies in Malaysia’s economy. PEMUDAH efforts did not result in as many category improvements in the Doing Business 2010 report as improved in the previous year’s report. More information about the committee is available at www.pemudah.gov.my.

One significant impediment to Malaysia’s economic growth is its complex network of racial preferences to promote the acquisition of economic assets by ethnic Malays and other indigenous groups (bumiputera). The details of implementation are largely left to the various ministries. Policies and practices vary greatly. Some practices are explicit while others are informal, leaving much ambiguity for potential investors.

The initial public aim of these programs when they were implemented in 1970 was to establish a more even distribution of wealth among races to rectify a situation whereby bumiputra made up nearly 60 percent of the nation’s population but held less than three percent of the nation’s wealth. Despite a stated goal of poverty alleviation, these race-based policies are not subject to upper income limitations; in practice wealthy and well-connected bumiputera receive the lion’s share of the benefits. The resulting economic distortions in the property, labor, and stock markets inhibit growth and deter both foreign and domestic investment.[2]

The GOM set a target of 30 percent of the nation’s wealth to be held by bumiputera. Several studies have demonstrated that the 30 percent equity target has been reached or exceeded; however, official government figures place bumiputera equity at 18.9 percent. The GOM has not responded to public requests to make its methodology fully transparent, but does admit to including government-owned corporate equity in its calculations, placing it squarely on the non-bumiputera side of the ledger. This approach weighs heavily on the result, as the government owns more than a third of publicly traded corporate equity. A further distortion in the government figure is the practice of measuring equity based on par value rather than market value. However, increasing discussion of the race-based policies in both private and public sector circles, as well as several government-commissioned studies on how best to enhance the country’s business and investment climate, may be indicators that the government recognizes the high social and economic costs of these policies and may be open to efforts to re-focus the policies on poverty reduction as originally intended. This year, approximately 41% of federal revenue came from Petronas, the national oil company, and oil related taxes and fees. Fewer oil-based revenues will be available to support government poverty reduction programs, as Malaysia is expected to become a net importer of oil over the next few years, and may stimulate further movement toward economic reform.

Corporate Equity
One of the government’s racial preference policies is a requirement that foreign and domestic non-manufacturing firms take on bumiputera partners (with a minimum of 30% of share capital). If a company seeks public listing on the Bursa Malaysia (formerly Kuala Lumpur Stock Exchange), it is required to reserve at least 30% of its initial public offering (IPO) for purchase by bumiputera. In 2003 the GOM ended a formal requirement that corporations issue additional stock to bring bumiputera equity back up to 30% if those shareholders had sold their stock. This was a welcome change, especially in light of critics’ complaints that individual bumiputera taking advantage of these offers often sold the stocks immediately for a quick profit, thus reducing the company’s bumiputera equity to below 30% almost immediately. However, bumiputera equity remains a consideration when companies apply for an array of required permits and licenses, many of which must be renewed either annually or biennially. In November 2008, the government announced that it would relax the minimum 30% bumiputera equity requirement for domestic companies seeking listing on Bursa Malaysia. However, the IPO must first be offered to bumiputera-controlled institutional investors and then to bumiputera individuals. If neither is interested, the requirement can be waived.

The government caps foreign investment shares in most sectors. To alleviate the effects of the regional economic crisis, in 1998 Malaysia temporarily relaxed foreign-ownership and export requirements in the manufacturing sector for companies that did not compete directly with local producers. In June 2003, the government extended this policy indefinitely, permitting expansion of existing investments in manufacturing concerns to be foreign-owned. Manufacturing investments approved under the liberalized measures are not subject to racial preference requirements for divestment or dilution. Those with prior investments must honor the initial conditions to which they agreed but may request that they be changed. Malaysia’s 2003 liberalization of foreign equity ceilings in manufacturing led to a spike in both foreign and domestic investment in the sector.

In 2004, the government announced that venture capital firms could be 100 percent foreign-owned, in addition to manufacturing and information technology firms, subject to government approval. The Securities Commission approved the establishment of the first foreign venture company in Malaysia, Japan Asia Investment Co Ltd (JAIC), in September 2008. Approvals are handled by the Malaysian Industrial Development Authority (MIDA) for most manufacturing projects and the Multimedia Development Corporation (MDC) for Multimedia Super Corridor (MSC) status companies (see below). Especially in the case of investments focused toward the domestic market and those in sectors other than manufacturing, the GOM has used this authority to restrict foreign equity (normally to 30 percent) and to require foreign firms to enter into joint ventures with local partners. The GOM often approves investments in high-tech industries, but is less inclined to approve lower-wage manufacturing and in some cases will not renew tax abatement agreements to existing manufacturers that rely heavily on low-wage foreign workers or are not perceived as sufficiently high-tech.

MIDA screens all proposals for manufacturing and related projects in Malaysia, both foreign and domestic, to determine the extent to which they contribute to the government’s goals and objectives. These are outlined in the Third Industrial Master Plan (2006-2020), the various regional initiatives (Iskandar Development Region and the Northern, Eastern, Sabah and Sarawak Economic Regions) as well as other strategic economic and social development initiatives and policies. Project approval depends on many other factors as well. MIDA may consider the size of an investment, the export-orientation of production, the type of financing required (both local and offshore), capital/labor ratio, the potential for technological diffusion into the local economy, the ability of existing and planned infrastructure to support the effort, and the existence of a local or foreign market for the output. If both local and foreign firms propose similar projects, the local firm will be given preference. All requests are handled on a case-by-case basis. MIDA has the authority to issue or renew licenses for most manufacturing companies, eliminating a second layer of approval from MITI. A RM 50 fee also has been eliminated and tariffs on 48 raw materials and intermediate goods have been reduced or eliminated. MIDA maintains a Business Information Center which provides information on investment, productivity, trade, and financing, as well as staff who can discuss a variety of manufacturing sectors. The center also has space for business meetings. MIDA established an on-site immigration unit in 2007 which has helped expedite the processing of expatriate work visas. Applications for investment in sectors other than manufacturing are handled by the relevant regulatory agencies and sometimes require multiple approvals.

Investment regulations are specified in the Promotion of Investments Act of 1986 (PIA) and the Industrial Coordination Act of 1975. The government pledged in 2004 to replace the PIA with a more concise law covering investments in both manufacturing and services, but has yet to do so. The PIA does not address services investment. The Securities Commission and the Foreign Investment Committee (FIC) implement the regulations specified in the Malaysian Code on Takeovers and Mergers. The FIC also formulates policy guidelines for foreign participation in non-manufacturing sectors. Private entities, both foreign and domestic, may acquire, merge with, and take over business enterprises. However, the acquisition or disposal of five percent or more of interests in any local financial institution requires the prior approval of the Minister of Finance.

Historically, non-export-oriented foreign firms that had negotiated temporary exemptions from general equity limits were required to restructure within a definite timeframe. A restructuring program could involve taking on new local partners, giving existing local partners a greater equity share, or floating shares on the Bursa Malaysia. The government's goal at that time was to reduce foreign ownership of most firms producing for the domestic market to 30%.

Distribution Services, including Direct Selling
Malaysia’s requirements for the licensing and operation of direct selling companies include a provision that a locally incorporated direct selling company must allow for 30 percent bumiputera equity. The Ministry also “recommends” local content targets. Local companies that seek multi-level direct selling licenses require paid-in capital of RM 1.5 million ($423,700), while companies with foreign shareholders must have paid-in capital of RM 5 million ($1.4 million).

The Malaysian government also included local content requirements in "Guidelines on Foreign Participation in the Distributive Trade Services" that came into effect in December 2004. Among other provisions, department stores, supermarkets and hypermarkets are required to reserve at least 30 percent of shelf space in their premises for goods and products manufactured by bumiputera-owned small and medium sized industries. The guidelines also require that at least 30 percent of a store’s sales consist of bumiputera products, a rule that does not take into account discretionary behavior on the part of consumers.

Regional Distribution Centers and International Procurement Centers (CPC 87909) were two of the 27 service sectors from which the government removed 30% Bumiputra ownership requirements in 2009.

Legal Services
Foreign lawyers may not practice Malaysian law, nor may they affiliate with local firms or use their international firm’s name. Foreign law firms may not operate in Malaysia except as minority partners with local law firms, and their stake in any partnership is limited to 30 percent. Under the Legal Profession Act of 1976, the practice of Malaysian law normally is restricted to Malaysian citizens or permanent residents who have apprenticed with a Malaysian lawyer, are competent in Bahasa Malaysia (the official language), and have a local law degree or are accredited British Barristers at Law. The Attorney General has authority to grant limited exceptions on a case-by-case basis, provided the applicant has seven years of legal experience. Malaysian law does not allow for foreign legal consultancy except on a limited basis in the Labuan International Offshore Financial Center. Malaysia limits such foreign attorneys’ scope of services to advice concerning home country and international law. Persons not licensed as lawyers are subject to criminal penalties if they directly or indirectly undertake activities relating to the Malaysian legal system, including drafting documents.

During 2009, the government approved authorization of five international legal firms for the specific purpose of providing legal services for Islamic financial institutions in Malaysia.

Architectural Services
A foreign architect may operate in Malaysia only as a joint-venture participant in a specific project with the approval of the Board of Architects. Foreign architectural firms are not permitted to operate in Malaysia, either independently or as partners of Malaysian architectural firms. Foreign architects may not be licensed in Malaysia but are allowed to be managers, shareholders, or employees of Malaysian firms. Only licensed architects may submit architectural plans. Architectural services are governed by the Architects Act of 1967 and are regulated by the Ministry of Works.

Engineering Services
Foreign engineers may be licensed by the Board of Engineers only for specific projects, and must be sponsored by the Malaysian company carrying out the project. The license is valid only for the duration of the project. In general, a foreign engineer must be registered as a professional engineer in his or her home country, have a minimum of 10 years experience, and have a physical presence in Malaysia of at least 180 days in one calendar year. To obtain temporary licensing for a foreign engineer, the Malaysian company often must demonstrate to the Board that they cannot find a Malaysian engineer for the job. Foreign engineers are not allowed to operate independently of Malaysian partners, or serve as directors or shareholders of an engineering consulting company. A foreign engineering firm may establish a commercial presence, subject to meeting government requirements on Malaysian citizen participation. Foreign engineering companies may collaborate with a Malaysian firm, but the Malaysian company is expected to design the project and is required to submit the plans for domestic approval. Engineering services are governed by the Registration of Engineers Act and regulated by the Ministry of Works.

Accounting and Taxation Services
Foreign accounting firms may provide accounting and taxation services in Malaysia only through affiliates. All accountants who wish to provide auditing and taxation services in Malaysia must register with the Malaysian Institute of Accountants (MIA) before they may apply for a license from the Ministry of Finance. Citizenship or permanent residency is required for registration with MIA. Malaysian citizens or permanent residents who received degrees from local universities or are members of at least one of the 11 overseas professional bodies recognized by Commonwealth countries may apply for registration. The American Institute of Certified Public Accountants (AICPA) is not recognized by Commonwealth countries.

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by the parastatal, Petroleum Nasional Berhad (Petronas), the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign investment takes the form of production sharing agreements (PSAs). Foreign operators include ExxonMobil, ConocoPhillips, Amerada Hess, Baker Hughes, Newfield, and Murphy Oil from the U.S., as well as Royal Dutch Shell. Non-Malaysian firms are permitted to participate in oil services either in partnership with local firms or as contractors. They are restricted to a 30% equity stake if they are incorporated locally.

Under the WTO Basic Telecommunications Agreement, Malaysia made limited commitments on most basic telecommunications services and partially adopted the reference paper on regulatory commitments. Foreign companies are limited to a 30 percent equity stake in existing fixed line operations, an investment ceiling codified as part of Malaysia's WTO services offer which limits market access commitments to facilities-based providers. These restrictions constitute one of the most restrictive regimes for an economy of Malaysia’s level of development. Value-added service suppliers are similarly limited to 30 percent foreign equity. Restrictions on these activities tend to benefit the dominant provider, government-controlled Telekom Malaysia, and hamper the development of a more efficient information infrastructure.

In December 2005, Malaysia issued its revised WTO services offer, which offers to increase foreign equity limits to 49% in "application service providers" (ASP); however, precisely what this category encompasses is unclear. Foreign ownership of "network facilities providers" (NFP) and "network service providers" (NSP) would be limited to 30% under the revised offer. One foreign NSP negotiated a five-year exemption which allowed the company a temporary 61% stake with a requirement that the foreign equity holding be reduced to 49% over a 5-year period commencing on the date of incorporation.

The government removed 30% Bumiputra ownership requirements from computer hardware installation consultancy services (CPC 841), software implementation services (CPC 842), data processing services (CPC 843), database services (CPC 844), computer repair services (CPC 845), and other computer related services (CPC 849) during 2009.

Private broadcasting companies are regulated by the Ministry of Energy, Water, and Communications and the Malaysian Communications and Multimedia Commission. Foreign ownership of radio and television stations is not permitted.Foreign investment in terrestrial broadcast networks is prohibited. As a condition for obtaining a license to operate, video rental establishments are required to have 30 percent local content in their inventories. Malaysia maintains a Censorship Board under the Ministry of Home Affairs that regularly censors movies and television shows deemed inappropriate on religious or sexual grounds.

Advertising falls under the purview of multiple ministries and agencies, complicating the adoption of a single set of advertising regulations and enforcement procedures for all stakeholders in this process. International firms have concerns about the lack of clear and consistent advertising content guidelines, and how some advertisers misrepresent their products and services through advertising. The Government of Malaysia has an informal and vague guideline that commercials cannot “promote a foreign lifestyle.”

In 2007, the government required that at least 70% of television commercials must be made in Malaysia, feature local actors, and be shot in locations within the country. The same percentage would be required for post-production of the commercials and for the usage of equipment and facilities available. This regulation is not routinely enforced.

Product labeling also is weak; for example, products can be found on store shelves with no indication of the manufacturer or country of origin.

Other industries
The GOM also restricts foreign investment in the financial services and insurance sectors (see section on capital markets below). Foreigners are permitted to hold a 70% stake in shipping companies and 49% in forwarding agencies. In 2009, the government announced that it would allow foreign financial institutions to hold up to a 70% stake in local insurers. Malaysia restricts foreign participation in professional services (other than "back office" operations that support foreign business activities), agriculture (unless it is an agro-tourism linked project), and construction. Ownership of agricultural land is restricted to Malaysian citizens.

Corporate taxes
For tax purposes, local and foreign enterprises are treated essentially the same. Resident petroleum companies pay 38% income tax; all other resident companies currently pay an income tax of 25% for 2009, reduced from 26% in 2008. The 2010 budget keeps a 25% tax rate for non-petroleum resident companies. Dividends are taxed at the corporate rate. A company is resident in Malaysia for tax purposes if its management and control is exercised in Malaysia, that is, if directors’ meetings are held in Malaysia. Payments made to non-residents for technical or management services and rental of movable properties are subject to withholding tax at the rate of 10%. In the 2010 budget, the income tax rate for non-resident individuals was reduced to 26% from 27%. The U.S. and Malaysia have not concluded a bilateral tax agreement and no negotiations are anticipated at this time. The government is considering implementing Goods and Services Tax (similar to a value-added tax) at 4% to broaden the overall tax base.

Human Resources
Beyond the heavy regulatory burden and the investment restrictions resulting from the buimputera policies, Malaysia’s shortage of skilled labor is its most oft-cited impediment to economic growth. (See sections on labor and performance requirements).

Conversion and Transfer Policies

In an effort to insulate the Malaysian economy from risks posed by volatile short-term capital flows and to eliminate offshore trading of the ringgit, the government imposed selective capital controls on September 1, 1998. The selective capital controls measures have been removed in a series of sequenced and progressive liberalization initiatives, with major and significant liberalizations made in 2005 and 2007, gradually relaxing controls on foreign direct investment flows, wages, dividends, interest, and rental income earned in Malaysia.

In 2008, the government further liberalized the foreign exchange administration rules on borrowing in foreign currency by residents as well as borrowing and lending in ringgit between residents and non-residents. More information on Malaysia’s foreign exchange administration can be found at www.bnm.gov.my/fxadmin.

All payments to other countries must be made through authorized foreign exchange dealers. Banks must record the amount and purpose of each cross-border transfer over RM 200,000 (approximately $58,000).

Resident and non-resident travelers may carry no more than RM 1,000 into or out of Malaysia. Residents may not carry out foreign currency more than the equivalent of USD 10,000 without prior permission. Non-residents may carry in any amount of foreign currency, but are required to declare currency amounts in excess of USD $10,000. Non-residents may carry out foreign currency up to the amount they carried in.

On July 21, 2005, Bank Negara ended its policy of pegging the ringgit at a fixed rate of RM 3.80 to the dollar and shifted to a managed float against a trade-weighted basket of currencies. The ringgit’s lowest level against the USD in 2009 was RM3.7255 on March 2, while its highest level was RM3.3475 on October 15.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of foreign-held assets by the Malaysian government. The government's stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

Malaysia has signed and ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Malaysia became a Contracting State on October 14, 1966 when the Convention entered into force, granting jurisdiction over investment disputes between the Government of Malaysia and non-Malaysian citizens to the International Center for Settlement of Investment Disputes (ICSID, www.worldbank/org/icsid). ICSID is affiliated with but independent of the World Bank.
Malaysia also is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The domestic legal system is accessible but generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts (i.e., $100,000), and can be slow and bureaucratic. The U.S. Embassy is aware of an ongoing case where a U.S. investor plaintiff reports that it took 44 months and 26 hearings before the Malaysian court took action to address the merits of his case. The plaintiff claims to have provided the court with documentation both from Malaysia and from a U.S. court case involving the same company that the company’s assets continue to be drained through ongoing fraud. However, the court stayed his petition that the company be put in receivership until the matter is resolved. The court also stayed plaintiff’s petition for discovery. Progress has been made in the case over the past 12 months as a trial is now ongoing. One local law firm reports that cases involving intellectual property rights generally take five to eight years, with more complex patent infringement cases taking ten to fifteen years.

Many firms choose to include mandatory arbitration clauses in their contracts. The government has set up the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my) under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. The U.S. Embassy is aware of one contractual dispute with a U.S. company where the Malaysian firm chose not to honor mandatory arbitration clauses as stated in their contract. Resolution of that case is pending.

Performance Requirements and Incentives

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

In the May 2003 Economic Stimulus Package, the Malaysian government extended the full tax exemption incentive from ten to fifteen years for firms with "Pioneer Status" (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and from five to ten years for companies with "Investment Tax Allowance" status (those on which the government places a priority, but not as high as Pioneer Status). Government priorities generally include the levels of value-added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. Potentially, a firm could lose its manufacturing license. The government has stated that in the long term, it intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia. Foreign investors who obtain MSC status receive tax and regulatory exemptions as well as public service commitments in exchange for a commitment of substantial technology transfer. For further details on incentives, see www.mdc.com. Some corporations have used the MSC to outsource call center and back office operations, including Dell, HSBC, AIG, and BMW. The Multimedia Development Corporation (MDeC) approves all applications for MSC status.

In the services sector, the government’s stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarters, research and development, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management. To date, the GOM has had some success in attracting regional distribution centers; however, there has been little progress in the other targeted areas. Some industry contacts cite Malaysia’s poor record in protecting intellectual property rights as one of their reasons for not bringing their R&D to the country.

Malaysia also has stated that it would welcome foreign investment in biotechnology; however, to date no U.S. biotech companies are operating here except representative offices of some pharmaceutical companies. The Agriculture Minister repeatedly has expressed strong interest in using biotechnology to help invigorate the agricultural sector in Malaysia. Investment in biotechnology figures prominently in the national budget and is a lynch pin in the 9th Malaysia Plan (the government’s five-year economic development plan), launched in March 2006. Malaysia is developing implementing regulations for its Bio Safety Act of 2007. Major concerns include: the undefined adherence to the "precautionary principle"; socio-economic, religious, and cultural norms that would be a part of the regulatory process; stringent penalties hindering modern biotechnology development; and mandatory labeling resulting in non-tariff trade barriers, higher costs of production for biotech manufacturers, and encouragement of negative public attitudes toward GM products.

Employing Expatriates
Despite broad recognition of Malaysia’s shortage of skilled labor, most foreign firms face restrictions in the number of expatriate workers they are allowed to employ. Foreign workers are categorized as follows: “expatriates” (anyone earning at least RM 5000, or USD 1429, per month); “foreign skilled workers,” and “foreign unskilled and semi-skilled workers.”

Employing expatriates involves two phases. First, the company must be granted approval for the expatriate post; then the individual must be approved by receiving a “reference visa” from the Malaysian embassy in the expatriate’s home country and approval from the Immigration Department. More details can be found at www.pemudah.gov.my/guidebook.pdf.
Companies in different sectors must apply for approval for expatriate posts through the respective government authority: manufacturing and manufacturing-related companies apply through MIDA; companies with “Multimedia Super Corridor” status through the Multimedia Development Corporation; banking and insurance companies through the central bank (Bank Negara Malaysia); securities brokers through the Securities Commission; biotechnology companies through Biotech Corp; and companies in other sectors through the Expatriate Committee. Each authority has its own set of requirements and decisions are made on a case-by-case basis.

MSC-status companies are not restricted as to the number of expatriates they can bring into the country. In 2008 the GOM unveiled three “e-Xpats” centers in the Penang and Kulim industrial parks and announced its intention to establish a third in Cyberjaya. Only applicants from select countries working for companies with MSC-status are eligible to use the services of the centers, which process a work visa in six days.

Manufacturing companies that are 100% foreign-owned must have a minimum paid-up capital of RM 500,000 (as of January 1, 2009) to be allowed to employ expatriates. Companies with joint foreign and Malaysian ownership must have a minimum paid-up capital of RM 350,000 while Malaysian-owned companies must have a minimum of RM 250,000. Manufacturing-related companies in sub-sectors targeted by the government for development are given priority. These include regional establishments (operational headquarters, international procurement centers, regional distribution centers); support services (integrated logistics services, integrated market support services, central utility facilities, cold chain facilities); research and development; software development; hotel and tourism projects; technical and vocational training; some environment-related services; and film or video production. Except manufacturing companies with automatic allowances, a firm wishing to employ expatriate personnel generally must demonstrate that there is a shortage of qualified Malaysian candidates and that a Malaysian citizen is being trained. In practice this is difficult for firms to document. Expatriate visas are issued for a period of two years, with possible – but not guaranteed – renewals for up to a maximum of ten years. The uncertainty of whether investors will be permitted to remain in the country after their businesses become profitable remains a significant barrier to foreign direct investment. Unskilled foreign workers receive a three-year work permit, renewable annually up to five years, and foreign skilled workers can qualify for up to 12 months. If an unskilled worker acquires “skills certificates,” he/she may apply for a permit as a skilled worker after exhausting the five-year maximum as an unskilled worker. Only foreign domestic helpers are permitted to remain in Malaysia on a work permit beyond ten years. Malaysia’s freeze on permanent resident visas remains in place; however, it has launched the “Malaysia, My Second Home” program that provides long-term resident visas for well-off expatriates.

The government has made significant progress in simplifying and expediting permit approvals for some categories of foreign personnel. In 2007 it established four additional immigration units intended to expedite visa approvals for expatriates, and the Pemudah Committee developed a guidebook clarifying the various procedures and requirements. Processing times have been shortened considerably. The spouse of an expatriate holding a Dependent Pass is allowed to take up paid employment without converting the Dependent Pass to an “Employment Pass” or to a “Visit Pass for Temporary Employment” on the condition that permission to take up the paid employment is endorsed on his/her passport by an authorized Immigration officer. In 2009 the GOM began issuing Dependent Passes to husbands of Expatriates holding Employment Passes. Previously husbands of professionals were issued a six-month “social visit pass” which required them to leave the country and return.

Right to Private Ownership and Establishment

The World Bank ranks Malaysia 86th among 181 countries for the ease of registering property, which takes an average of 144 days, and 88th in starting a business, which involves 9 government-required procedures and takes an average of 11 days.

Patents registered in Malaysia generally have a 20-year duration from date of filing, which can be extended under certain circumstances. The length of time required for patent registration averages five years and trademark registration averages two years. Registrations are handled by the Patents and Trademarks Department of the Ministry of Domestic Trade and Consumer Affairs. Copyright protection extends to computer software and lasts for 50 years after the author’s death. The Copyright Act includes enforcement provisions allowing government officials to enter and search premises suspected of infringement and to seize infringing copies and reproduction equipment.

Protection of Property Rights

Malaysia is a member of the World Intellectual Property Organization (WIPO) and is a party to the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property. In 2006 Malaysia acceded to the Patent Cooperation Treaty. Malaysia has not ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty (which extend traditional copyright principles to the digital environment) but has indicated its intention to accede to these conventions eventually.

In 2000, Malaysia’s parliament amended the Copyright Act, the Patents Act, and the Trademarks Act, as well as legislation on layout designs of integrated circuits and geographical indications, in order to bring Malaysia into compliance with its obligations under the WTO TRIPS Agreement. In 2004, Malaysia passed the “Protection of New Plant Varieties Act 2004” in line with the requirements of Article 27.3 (b) of the TRIPS Agreement. Enabling regulations for this law are pending. Malaysia does not prohibit other companies from relying on test and other undisclosed information submitted by another company to the government to obtain marketing approval of pharmaceuticals and agricultural chemicals, as called for under TRIPS Article 39.3. Malaysia plans to update its Copyright and Trademarks Acts during 2010.

Optical Media Piracy
Malaysia has a problem with piracy of copyrighted materials, particularly those stored on optical media. Malaysia’s production capacity for Compact Discs (CDs) and Digital Video Discs (DVDs) significantly exceeds local demand plus legitimate exports. U.S. industry estimates Malaysia’s excess capacity is several times more than needed for the legitimate market.

The International Intellectual Property Association (IIPA) estimates 2008 industry losses in Malaysia due to copyright piracy at $206.2 million. IIPA estimates 2008 piracy rates at 60 percent for business software and for music. Malaysia has remained on the Special 301 Watch List since October 2001.

The Optical Disc Act of 2000 established a licensing and regulatory framework to control the manufacture of optical discs and to fight piracy. Under the Act, manufacturers are required to obtain licenses from both the Ministry of International Trade and Industry and the Ministry of Domestic Trade, Co-operatives, and Consumerism (MDTCC), to place source identification (SID) codes on each disc, and to allow regular inspections of their operations. Malaysia plans to update its Optical Disc Act during 2010.

In 2009, the Malaysian government continued to make progress in IPR enforcement. The number of MDTCC enforcement actions have increased significantly during 2009. Although prosecution continues to be an ongoing challenge, the establishment of a specialized IP court in mid-2007 has alleviated the backlog of infringement cases. Both judges and prosecutors have been assigned full time to handle IPR cases. The court was initially established in Kuala Lumpur, but will eventually have branches throughout Malaysia. U.S industry representatives in Malaysia have been pleased with the pace and outcome of the court's initial cases.

Sales of counterfeit pharmaceuticals are a problem in Malaysia. Counterfeit medicines that have been identified include "drugs" with the wrong ingredients, insufficient active ingredients, and those with fake packaging. The copied drugs are believed to originate in China. Unregistered generic copies of patented products, primarily imported from India, are also available in Malaysia. Both street vendors and health professionals sell the counterfeit products. The Ministry of Health and the MDTCC are improving their enforcement efforts, and share information and collaborate with industry on those efforts.

In April 2007 the Ministry of Health announced that Malaysia would provide data protection for pharmaceuticals for five years for new chemical entities, and three years for new indications. The time periods would be based on a drug's approval date in its country of origin. An interagency committee has been set up to explore all issues related to the implementation of data protection. The Malaysian government does not have an effective patent linkage mechanism to prevent the regulatory approval of copied versions of pharmaceuticals that are still patented; U.S. industry has reported several cases of the registration of generic versions of pharmaceuticals which are still under patent protection.

Trademarked Consumer Products
A number of U.S. consumer product companies also have suffered significant losses due to the manufacture and sale of counterfeit trademarked products. The volume is difficult to determine because of the broad scope of products involved. Counterfeiting in Malaysia includes printer cartridges, plastic container systems, motor oil, household cleaning agents, shampoo and skin care items, herbicides, and penlight batteries. Counterfeiters have improved the quality of packaging and marketing so that consumers are misled into purchasing the products. The products have caused harm to individuals and damage to automobiles and household goods. Some of the pirated goods are produced in Malaysia, while many are brought into the country from China, Thailand, and India.

Enforcement by the local government is hampered by the lack of training and scarcity of information about ongoing counterfeit activities. Complicating enforcement of trademark-related violations is a Malaysian Court of Appeals interpretation of the trademark law that requires enforcement officials to have a “Trade Description Order” to conduct criminal raids when the counterfeit product seized is not identical to the trademarked original. High specificity requirements necessary to seize a shipment suspected of containing pirated or counterfeit products also represent an enforcement obstacle to U.S. industry.

Transparency of Regulatory System

Malaysia’s Official Secrets Act makes it a crime to divulge the contents of any proposed law or regulation before it comes into effect. This denies stakeholders an opportunity for input into the drafting of legislation that affects their interests. U.S. companies have indicated that they would welcome improvements in the transparency of government decision-making and procedures, including government tenders.

In addition to secrecy laws regarding proposed new legislation, Malaysia maintains a complex network of practices for which no documentation is available. In response to U.S. government requests for a list of laws and regulations pertaining to market access in various sectors, one government official responded that ministries and agencies were “not in a position to make available an exhaustive list of the laws and regulations pertaining to their respective sectors,” in part because these were “still being streamlined and in some cases being developed,” and in part because “a number of market access issues are addressed by way of administrative circulars/guidelines/polices which may not be stated explicitly in any document.[3]

In some cases, local private sector associations discriminate against foreign-owned companies. For example, an association of local banks decided to charge foreign banks significantly higher fees for joining an automated clearinghouse (ACH) system. According to one foreign bank contact, the fee for a local bank to join was nominal; the fee for a foreign bank to join was based on the approximate cost of setting up a new branch.

Government Procurement
Malaysia is not a signatory of the WTO Government Procurement Agreement (GPA). Malaysia’s official policy is explicitly discriminatory, calling for procurement to be used to support national public policy objectives. These objectives include encouraging greater participation of bumiputera (ethnic Malays) in the economy, transferring technology to local industries, reducing the outflow of foreign exchange, creating opportunities for local companies in the services sector, and enhancing Malaysia’s export capabilities.

Generally, international tenders are invited only where domestic goods and services are not available. In domestic tenders, preferences are provided for bumiputera suppliers and other domestic suppliers. As a result, foreign companies do not have the same opportunities as local companies to compete for contracts. In most procurements, foreign companies are required to take on a local partner before their bids will be considered.

Another concern with Malaysian government procurement is the lack of transparency and competitive bidding. In October 2003, Prime Minister Abdullah Badawi announced that the Government would introduce open tenders for government procurements and major projects, with direct negotiations limited to special cases; however, little progress has been made. U.S. companies have voiced concerns about the non-transparent nature of the procurement process in Malaysia. The government’s central tender website provides links to other ministries’ websites, but not all of them provide user-friendly information on government tenders. In September 2005, the Ministry of Finance announced that the purchase of roadway, decorative, and outdoor lighting fittings, together with equipment and accessories for all government projects, must be sourced from one of three local bumiputera manufacturers. In October 2007 press reports highlighted several recent government directives instructing relevant ministries to award contracts for certain products only to bumiputera-owned businesses, in one case naming a specific company to receive the contract.

Efficient Capital Markets and Portfolio Investment

The Malaysian government limits foreign participation in financial services to encourage the development of domestic financial services providers. Its policies are guided by the Banking and Financial Institutions Act of 1989 (BAFIA) and the ten-year Financial Sector Master Plan, unveiled in 2001, which sets out a three-phase strategy for developing the Malaysian banking sector, and expired at the end of 2009. Phase I focused on capacity building and developing a core set of domestic banking institutions through mergers of commercial banks with merchant banks, discount houses and stock brokerage firms. Within the first four years of the Plan, the number of domestic financial institutions declined from 63 to nine. According to the Plan, Phase II was to include the removal of many restrictions on incumbent foreign financial institutions, leveling the playing field and increasing competition. Implementation of such reforms has been slow. The government began implementing Phase III during 2009 by introducing new foreign competition. In April 2009, the government announced it would issue licenses to up to five new foreign commercial banks, two new foreign Islamic banks and two new Islamic insurers (takaful). Bank Negara announced in November 2009 that China’s ICBC Bank will receive a new license separate from the announced allotment.

During 2009, the equity stake in investment banks foreign institutions are allowed to hold increased from 49 percent to 70 percent. Currently, foreign participation in commercial banks is still restricted to an aggregate maximum stake of 30 percent. By 1994 BAFIA required all foreign banks operating in Malaysia to incorporate locally. Locally incorporated foreign banks currently operating in Malaysia are required to have a minimum of two Malaysian residents on their Boards of Directors. Bank Negara generally requires all banks, including U.S. banks, to maintain their back office and computer operations in Malaysia, citing data secrecy concerns as well as claiming that any operations outside of Malaysia are “outsourcing.” This policy prevented some foreign banks from keeping up with global trends in Internet banking. Bank Negara will consider waiving the requirement on a case-by-case basis for foreign banks willing to reinvest sufficiently in Malaysia.

In 2009, Bank Negara announced that locally incorporated foreign banking institutions currently operating in Malaysia would be allowed to open four additional bank branches in 2010, with one branch in a market center, two in semi-urban centers, and one in a non-urban center. Foreign banks are also allowed to open 10 microfinance branches. Each location must be approved by Bank Negara. Some foreign banks may obtain permission to open more than four, particularly if the new branches will be in underserved areas. Foreign Islamic banks are given much greater latitude in numbers and locations of new branches.

In 2005, the GOM launched the Malaysian Deposit Insurance Company (MDIC) which was designed in accordance with international standards. MDIC insures deposit accounts of up to RM 60,000 (USD 16,950) with separate funds for conventional and Islamic banking institutions. On October 16, 2008 the government announced that all deposits in banks in Malaysia would be guaranteed until end-December 2010.

Islamic Financial Services
On October 14, 2004, Bank Negara issued three new Islamic banking licenses to three Middle Eastern Islamic banks : Kuwait Finance House, Al-Rajhi (Saudi Arabia), and Asian Finance Bank (a consortium of shareholders based in Qatar, Saudi Arabia, and Kuwait), as part of the Government’s initiative to make Malaysia a global hub for Islamic financial services. The GOM provides tax incentives and other measures to encourage commercial banks operating in Malaysia to set up full-fledged Islamic banking subsidiaries in which foreigners may take a 49 percent equity stake. In June 2005, Bank Negara established the Fund for Shariah Scholars in Islamic Finance to provide funding for research grants and scholarships. In August 2006, Bank Negara announced the launch of its three-pronged Malaysia International Islamic Financial Center (MIFC) Initiative, including special tax and regulatory treatment, scholarships, and efforts to work toward mutual recognition of Islamic banking and takaful practices. This was acted upon in part in the Government’s 2007 budget, released September 1, 2006, which proposes a ten-year tax exemption on Islamic financial products in foreign currencies and tax relief for Islamic Finance studies. In its 2008 budget release, the government announced that expatriate Islamic finance experts would be exempted from paying income tax in an effort to better enable Malaysia to attract foreign talent. During 2009, the government announced that foreign institutions could increase their equity ownership in Islamic banks from 49 percent to 70 percent.

The life insurance industry remains dominated by foreign providers, including some U.S. firms, and domestic firms control the general insurance industry. The 2001 Financial Sector Master Plan sets out a timeline for liberalization of the insurance industry in several phases. These include increasing caps on foreign equity, fully opening the reinsurance industry to foreign competition, and lifting existing restrictions on employment of expatriate specialists. In 2009, foreign ownership limits were raised from 49% to 70% for branches of foreign insurance companies. Branches of foreign insurance companies were required to incorporate locally under Malaysian law by June 30, 1998, although a few companies were granted extensions until they could formulate a workable plan for local incorporation.

The Government continues to promote takaful as part of its strategy to make Malaysia a global hub for Islamic financial services, including through new tax breaks announced in the 2007 budget. In January 2006, Bank Negara awarded four new takaful licenses to four joint ventures, of which foreign investors were permitted to own up to 49%.In 2006, Bank Negara announced that international takaful operators, both domestic and foreign, could apply for license to conduct business in international currencies, either as incorporated entities or as branches. International takaful operators will not be subject to foreign equity caps. Currently, AIA Takaful International Bhd is the sole foreign-owned international takaful operator in Malaysia. In 2007, Bank Negara invited qualified local and foreign players to apply for licenses to provide "re-takaful" (reinsurance under Islamic principles) services in Malaysia and to make Malaysia their center for re-takaful activities. New re-takaful operators will be given flexibility to conduct business in the country as a subsidiary or branch.

Investment Services
The Securities Commission’s ten-year Capital Market Master Plan, released in February 2001, established a timetable for liberalizing foreign participation limits. According to this plan, foreigners would be permitted to purchase a limited number of existing stockbrokerage licenses and to take a majority stake in unit trust management companies, beginning in 2003. On March 22, 2005, the government allowed five foreign stock brokerage firms and a foreign fund management company to set up operations in Malaysia. Foreign ownership in Malaysian stock brokerage firms was increased during 2009 from 49% to 70% and in unit trusts increased from 30% to 70%. Restrictions to fund management companies 100 percent foreign-ownership were removed during 2009. Futures brokerage firms may be 100 percent foreign-owned. Wholly foreign-owned Islamic fund management companies are permitted to invest all of their assets abroad. Fees received from the management of Islamic funds are tax-exempt for ten years. In 2008, five international Islamic fund management firms were given licenses. The government provides tax incentives for existing stock brokerage firms to set up Islamic brokerage subsidiaries and will issue three new licenses to brokers that attract Middle Eastern funds. U.S. firms Goldman Sachs and Citibank Securities were issued stock brokerage licenses during 2009.

The Federal Territory of Labuan was established as an International Offshore Financial Center in October 1990. Businesses receive preferential tax treatment for offshore banking activities, trust and fund management, offshore insurance and offshore insurance-related businesses, and offshore investment holding businesses. Islamic banks and takaful operators regulated by the Labuan Offshore Financial Services Authority are given greater flexibility to open operation offices anywhere in Malaysia and are granted a tax exemption for international currency Islamic financial businesses. They retain the favored tax treatment extended to offshore businesses in Labuan, 3 percent or RM 20,000 (approximately $5,650), whether or not they maintain a physical presence in Labuan. This option is not available for conventional banks, which are required to maintain a physical presence in Labuan in order to retain the favorable tax treatment.

The overnight rate as of December 2009 was 2.00% and the base lending rate 5.5%. In November 2008, Bank Negara announced a reduction of the overnight policy rate by 25 basis points from 3.5% to 3.25%, and continued reducing the rate throughout 2009 to its current level. Expectations are that BNM will increase base interest rates by .25% to .50% in 2010 as the economy continues to improve.

In April 2004, Bank Negara replaced the three-month intervention rate with the overnight rate as the indicator of the Central Bank’s stance on monetary policy, and as the target rate for the day-to-day liquidity operations of the Bank. Bank Negara also relaxed certain rules on how banks compute their lending rates, namely removing the cap on lending rates for most lending products. The new framework was enacted to give banks more flexibility to create structured and customized products. Bank Negara still prescribes certain limits on interest rates used by banks, specifying a minimum rate for fixed deposits, and maximum rates for credit cards and certain home loans.

Foreign investors and foreign companies have access to credit on the local capital market. In 2005, the government abolished the 3:1 gearing ratio requirement imposed on foreign-controlled companies in Malaysia for domestic borrowing in ringgit. It also allowed foreign-controlled companies to seek any amount of ringgit credit facilities without Bank Negara’s approval. Beginning 2007, in addition to the purchase and sale of ringgit on a spot basis, foreign investors were allowed to buy or sell Malaysian ringgit on a forward basis with licensed onshore banks to facilitate the settlement of investments in ringgit. Bank Negara abolished restrictions on foreign stock brokerage companies obtaining ringgit facilities to facilitate the settlement of transaction on the Malaysian stock and bond markets. Bank Negara also removed the limit on the number of residential and commercial property loans allowed to foreigners. In October 2007, Bank Negara further relaxed its foreign exchange administrative rules by removing 5 registration requirements, allowing greater flexibility for Islamic funds managed onshore, and on hedging of ringgit exposure by foreigners. In November 2007 Bank Negara lifted restrictions on resident companies with export earnings from paying in foreign currencies to another resident company for the purchase of goods and services.

Though the government has relaxed the post Asian financial crisis capital controls and the ringgit remains fully convertible, the government continues to control the use of ringgits abroad. Settlement for the import and export of goods between residents and non-residents continues to be required to be made in foreign currency.

Foreigners may trade in securities and derivatives. The Malaysian government has an adequate regulatory system to facilitate portfolio investment. In the wake of the 1997-1998 Asian financial crisis, Malaysia took steps to improve accounting transparency and corporate governance. Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter’s end and audited annual accounts for public scrutiny within four months of each year’s end. An individual may hold up to 25 corporate directorships. All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified. A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS. Short selling of stocks is not permitted.

Competition From State Owned Enterprises

The government owns approximately 36% of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies. Only a minority portion of stock is available for trading for some of the largest publicly listed local companies. After the economic crisis of the late 1990s, the government began to re-acquire a number of entities it had privatized earlier, including the national air carrier, MAS, and Kuala Lumpur's light rail transit system. The government has indicated increasing interest in restarting its privatization efforts. Khazanah, the government’s largest GLIC, handles many of the country’s major infrastructure projects, typically through companies in which it owns a majority stake. The Prime Minister sits on Khazanah’s Board of Directors.

New Competition Policy legislation, reportedly due to be tabled to Parliament in early 2010, may provide a more level competitive playing field for new market entrants. Further details are not available at this time. The text of all pending legislation in Malaysia is covered by the Official Secrets Act, thereby making it a crime to divulge its contents before adoption.

Corporate Social Responsibility (CSR)

The development of corporate social responsibility in Malaysia is moving to higher levels and Malaysia is recognized as being among the most active emerging economies in relation to corporate responsibility. In 2006, Malaysian stock market regulator Bursa Malaysia published a CSR Framework for all publicly listed companies, which are required to disclose their CSR programs in their annual financial reports. Companies in Malaysia have expanded their annual reports beyond the traditional reporting by incorporating elements of environmental, social, product and employee information. Malaysian government linked corporations (GLCs) frequently have extensive social responsibility programs including providing scholarships and other social services to their employees and the community at large.

Political Violence

Malaysia has experienced little political violence since ethnic rioting in 1969. Najib Razak, peacefully assumed power as Malaysia’s sixth Prime Minister on April 2, 2009. Malaysia can be characterized as a politically stable country relative to most countries in the region, but it shows sign of rising internal tension. In the past year, the government routinely denied assembly permits for anti-government street demonstrations, allowing police to take action against street protestors on the basis of lacking a permit. This condition did not stop civil society groups and opposition parties from holding a series of public, anti-government street protests in the past year. In some instances, police have used force to disperse otherwise peaceful protestors.


Malaysia’s ranking in Transparency International’s Corruption Perception Index slipped to 56th in 2009 down from 47th place in 2008 and 26th in 2004 among the 180 countries surveyed. The judiciary is regarded as politically influenced.

The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Nevertheless, corruption remains a serious concern. The Anti-Corruption Agency (ACA) began operations in 1967 under the Prime Minister’s department. Since June 1997, senior state-level officials have been required to declare their assets to the ACA upon taking office. Foreign businessmen are asked to report any individuals who ask for payment in return for government services. The ACA is authorized to conduct investigations and prosecute cases with the approval of the Attorney General. ACA investigations are sometimes reported in the newspapers, but are rarely targeted at high-ranking officials or business representatives with well-connected companies. Prime Minister Najib declared after assuming office that the fight against corruption was one of his priorities.

In 2008, Parliament passed the Malaysian Anti-Corruption Commission (MACC) bill and, a day later, a bill intended to make judicial appointments more transparent (the Judicial Appointments Commission Bill). The MACC, which replaced the ACA, widens powers of investigation and questioning to include public bodies and extended family members; provides for the seizure of properties; protects whistleblowers; and permits the prosecution of Malaysians for offense committed overseas as well as the prosecution of "foreign public officials" who abuse their positions to accept or offer bribes. These provisions are consistent with Article 16 of the United Nation's Convention Against Corruption (UNCAC) which Malaysia ratified in September 2008. Critics have questioned the bills’ potential effectiveness, as all key personnel under these bills will be appointed directly by the Prime Minister’s office and the MACC, like the ACA, will not have independent authority to proceed with prosecutions. Four people were indicted in the Port Klang Free Trade Zone scandal, and there have been several other indictments for lower-level corruption incidents.

Bilateral Investment Agreements

Malaysia has bilateral investment guarantee agreements with over 70 economies and has double taxation treaties with over 70 countries. Malaysia’s double taxation agreement with the U.S. currently is limited to air and sea transportation. Efforts to negotiate a more comprehensive bilateral investment treaty would require resolution of several issues, the most important of which is differing interpretations of national treatment.

In April 2002, the GOM passed the Mutual Assistance in Criminal Matters Bill, and in July 2006 concluded a Mutual Legal Assistance Treaty with the United States. Malaysia concluded a similar treaty among like-minded ASEAN member countries in November 2004.

OPIC and Other Investment Insurance Programs

Malaysia has a limited investment guarantee agreement with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program, for which it has qualified since 1959. However, few investors have sought OPIC insurance in Malaysia.


Other than Malaysia’s extensive regulatory burden, its shortage of skilled labor is the most oft-cited impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly qualified professionals, scientists, and academics. An in-depth study of the investment climate, conducted by the GOM in collaboration with the World Bank and published in 2005,[4] identified Malaysia’s top two economic constraints as 1) its regulatory burden, especially for services, and 2) its shortage of skilled labor. Two similar studies, one conducted by UBS and the other by the Institute of International Finance, reached similar conclusions.

Malaysia’s success in achieving near-universal primary enrollment is noteworthy, and its secondary school enrollment has increased rapidly over the past two decades. However, the emphasis in most government-run schools is on rote memorization, not critical thinking skills. Despite increased enrollment in tertiary education made possible by increased government expenditure, the quality of university education is declining, as evidenced by growing numbers of unemployed graduates and decreasing output in terms of research and publications.[5] An earlier shift from English medium curricula to separate vernacular schools for Malays, Chinese, and Tamils (Malaysia’s three main ethnic groups) elicited considerable controversy regarding the quality of education, social cohesion, the global competitiveness of Malaysians, and differentiated funding for Malay vs. non-Malay-medium schools. In 2009, the government announced that by 2011-12, Malaysian primary schools would begin teaching math and science in Malay rather than English, reducing the availability of English instruction in the Malaysian education system. Further complicating the declining quality of tertiary education, Malaysia offers across-the-board racial preferences for university admissions and scholarships, and decisions regarding recruitment and promotion of faculty often are based on racial quotas more than on merit. The Government of Malaysia also awards scholarships to study abroad, primarily through the Jabatan Perkhidmatan Awam (JPA) which consistently has awarded 80% of its international scholarships to bumiputera each year from 2000 to 2005, as well as 70% to local universities each year from 2002-2005.

The government of Malaysia reported that the domestic labor market declined in 2009 with unemployment increasing to 4.0% (the official full employment rate is 4.0%) due to the economic slowdown associated with the global financial crisis. Unemployment for 2010 is expected to stay at around 4.0%. The number of unemployed university graduates has increased, accounting for over 15% of total unemployed in the country. In an effort to improve the employability of local graduates, the GOM offers additional training modules at public universities in English language skills, presentation techniques, and entrepreneurship.

The government no longer seeks to entice labor-intensive companies to establish operations in Malaysia, and reserves its fiscal incentives for higher value-added projects. In 2009 the number of registered foreign workers was approximately 2 million, including roughly 35,000 expatriate professionals. Most of the unskilled and semi-skilled foreign workers were employed in the manufacturing (36%) and agricultural (25%) sectors. The majority of the foreign workers are from Indonesia, followed by Nepal, India, and Myanmar. The expatriate professionals were engaged primarily in the services (60%) and manufacturing (33%) sectors. In 2005, the government increased the levy on foreign workers in the services and plantation markets by 50%. In 2007 the GOM reduced the time required to process expatriate work permits to less than 7 days and extended the validity from 2 years to 5-10 years.

The government rigorously monitors the ethnic balance among employees of both foreign and domestic firms, especially in the areas of technology, management and the like. Meeting GOM recommendations is essential for obtaining and renewing any of a multitude of licenses and approvals, which are essential to doing business in Malaysia’s closely-managed economy. However, companies not meeting the racial quotas recommended by the GOM sometimes have been successful in obtaining renewals of their licensing requirements upon clearly demonstrating their inability to attract and hire qualified bumiputera employees.

Race-based preferences in hiring and promotion are widespread in government and in government-owned universities and corporations. While bumiputera represent about 60% of the population, they make up 77% of the civil service, including 84% of the top management group, 85% of the diplomatic service, and over 90% of the military.[6]

With regard to employing workers, Malaysia ranks 61st among 181 countries in the World Bank’s report Doing Business 2010. A notable impediment to employing workers in Malaysia is the high cost of terminating their employment, even in cases of wrongdoing. The World Bank estimates that the financial cost of firing an employee averages 75 weeks of salary for that worker.[7]

Malaysia is a member of the International Labor Organization (ILO). Labor relations in Malaysia are generally non-confrontational. A system of government controls strongly discourages strikes. Some labor disputes are settled through negotiation or arbitration by an industrial court, though cases can be backlogged for years. Once a case is referred to the industrial court, the union and management are barred from further industrial action.

While national unions are proscribed, there are a number of national confederations of unions. The government has prevented some trade unions, such as port workers’ unions, from forming national federations. There are no labor unions in the electronics sector. Employers and employees share the costs of the Social Security Organization (SOSCO), which covered 12.9 million workers as of November 2008. No welfare programs or government unemployment benefits exist; however the Employee Provident Fund (EPF), which employers and employees are required to contribute to, provides retirement benefits for workers in the private sector. Civil servants receive pensions.

Foreign-Trade Zones/Free Ports

The Free Zone Act of 1990 authorized the Minister of Finance to designate any suitable area as either a Free Industrial Zone (FIZ), where manufacturing and assembly takes place, or a Free Commercial Zone (FCZ), generally for warehousing commercial stock. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June 2006, the Port of Klang Free Zone opened as the nation's first fully integrated FIZ and FCZ. The Minister of Finance may appoint any federal, state, or local government agency or entity as an authority to administer, maintain and operate any free trade zone.

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80% of their output and depend on imported goods, raw materials, and components may be located in these FZs. Ports, shipping and maritime-related services play an important role in Malaysia since 90% of its international trade is seaborne.

Goods sold into the Malaysian economy by companies within the FZs must pay import duties. If a company wants to enjoy Common External Preferential Tariff (CEPT) rates within the ASEAN Free Trade Area, 40% of a product's content must be ASEAN-sourced. In addition to the FZs, Malaysia permits the establishment of licensed manufacturing warehouses outside of free zones, which give companies greater freedom of location while allowing them to enjoy privileges similar to firms operating in an FZ. Companies operating in these zones require approval/license for each activity. The time needed to obtain licenses depends on the type of approval and ranges from 2-8 weeks.

Foreign Direct Investment Statistics

Until recently, the U.S. consistently was the largest foreign investor in Malaysia, with significant presence in the oil and gas sector, manufacturing, and financial services. An American Chamber of Commerce 2005 survey puts cumulative U.S. interest in Malaysia at more than US $30.0 billion. U.S. firms with significant investment in Malaysia’s petroleum sector include: Exxon/Mobil (which participates in upstream and downstream activities), Caltex, ConocoPhillips, Murphy Oil, Amerada Hess, Dow Chemical and Eastman Chemicals (all of which have investments in downstream activities). Major semiconductor manufacturers, including Freescale, Texas Instruments, Intel, StatsChipPac, National Semiconductor, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Komag and Dell Computers. Virtually all major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, Hitachi, etc.) have facilities in Malaysia.

Table One: Sources of ApprovedManufacturing Investment in Malaysia
(Value in Millions of U.S. Dollars)

Total Investment




Table Two: Leading Foreign Investment Sources
in the Manufacturing Sector
(Value in Millions of U.S. Dollars; Share in Percent)








United States















Hong Kong









Total Foreign



U.S. Share of Total Foreign



Foreign Share of Total



-Source: Malaysian Industrial Development Authority; values represent approved, not actual investment.
-Exchange Rates: U.S. $1.0=RM 3.42 (2009 rate)
-Note: Manufacturing investment only, does not include the upstream oil and gas industry or services.

Table Three: Foreign Manufacturing Investment by Sector

(U.S. Dollars Millions)
Petroleum Products
Basic Metal
Food Manufacturing

Source: Malaysian Industrial Development Authority
Source: Bank Negara Annual Report 2004-2007

Web Resources

Bank Negara Malaysia: www.bnm.gov.my
Securities Commission: www.sc.com.my
MIDA: http://www.mida.gov.my
World Intellectual Property Organization (WIPO): www.wipo.int/
U.S. exporters seeking general export information/assistance or country-specific commercial information should consult with their nearest Export Assistance Center or the U.S. Department of Commerce’s Trade Information Center at (800) USA-TRADE, or go to the following website: http://www.export.gov.

To the best of our knowledge, the information contained in this report is accurate as of the date published. However, the Department of State does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.

[1] Doing Business in 2009: How to Reform, published by the World Bank Group.
[2] Citigroup Special Report: “Regaining Investor Confidence” October 30, 2006, The Edge Malaysia
[3] December 6, 2006
[4] “Malaysia: Firm Competitiveness, Investment Climate, and Growth,” The World Bank, June 2005
[5] Center for Public Policy Studies, “Achieving Higher Performance in Higher Education,” February 2006
[6] Center for Public Policy Studies, “Toward a More Representative and World Class Malaysian Civil Service,” February 2006
[7] World Bank Doing Business 2009 report.