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 You are in: Under Secretary for Economic, Energy and Agricultural Affairs > Bureau of Economic, Energy and Business Affairs > Finance and Development > Organization > Investment Affairs > Investment Climate Statements: 2006

Malaysia

2006 Investment Climate Statement -- Malaysia



Openness to Foreign Investment Return to top


The Malaysian government encourages foreign direct investment, particularly in export-oriented manufacturing and high-tech industries, and in "back office" service operations, but retains considerable discretionary authority in approving individual investment projects. The government caps foreign investment shares in most sectors, but does permit 100% foreign ownership in the manufacturing sector. This is handled through 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).

In keeping with long-standing public policies designed to increase "Bumiputera" (Bumiputera are literally "sons of the soil" but, in practical terms, this refers to the government's affirmative action policies favoring the majority Malay race) participation in the economy, the Malaysian government encourages or requires joint ventures between Malaysian and foreign companies in most sectors and, in many areas, limits foreign equity and employment. In most cases, international firms seeking to bid on Malaysian government tenders are only eligible to do so if their company has 30% Bumiputera ownership, or if they engage a Bumiputera middleman for the tendering process.

Malaysia actively woos foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research and development, and other high technology activities in Malaysia. Foreign investors who obtain MSC status receive a host of tax and regulatory exemptions in exchange for a commitment of substantial technology transfer. Many corporations are now using the MSC to outsource call center and back office operations, including HSBC and BMW, among others. In 2005, Malaysia announced that firms in the Bayan Lepas area of Penang may now apply for MSC status.

In the services sector, the government promotes foreign investment in information technology, hotels and tourism, environmental management, research and development (R&D), and training. Malaysia also welcomes foreign investment in biotechnology. Prime Minister Abdullah repeatedly has expressed strong interest in using biotechnology to help invigorate the agricultural sector in Malaysia. Investment in biotechnology figured prominently in the 2006 budget and is expected to be a lynch pin in the 9th Malaysia Plan (the government’s five-year economic development plan), which will start in 2006.

Malaysia does not actively seek foreign investment in financial or professional services (other than "back office" operations that support foreign business activities) or foreign participation in agriculture (unless it is an agro-tourism linked project) or construction. Foreign investment also is restricted in the oil and gas industries. All foreign energy investment is conducted through production sharing contracts between foreign operators (including ExxonMobil, ConocoPhillips, Amerada Hess, Baker Hughes, Newfield, and Murphy Oil from the U.S., as well as Royal Dutch Shell) and Malaysia’s national petroleum company, Petronas.

The Malaysian Industrial Development Authority (MIDA) screens all proposals for manufacturing projects in Malaysia, both foreign and domestic. MIDA determines whether a project is consistent with the Second Industrial Master Plan (1996-2005) and with other government strategic and social policies. MIDA opened a new Business Information Center this year that has 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 is attempting to offer one-stop-shopping to potential investors. Still, applications for investment in other sectors are handled by the relevant regulatory agencies and may 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 this. The PIA does not address services investment. The Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Takeovers and Mergers. The Foreign Investment Committee also formulates policy guidelines for foreign participation in non-manufacturing sectors. In an effort to streamline the investment approval process and to stimulate foreign investment, the Government reduced the oversight and approval authority of the Foreign Investment Committee (FIC) in 2003.

Foreigners may now hold 100% equity in any new manufacturing project, whether export-oriented or not, for which MIDA approves a license. This policy applies only to new projects (both green-field and expansion). In June 2003, MIDA announced that the policy permitting 100% foreign ownership in manufacturing had been extended indefinitely. Manufacturing investments approved under the liberalized measures are not subject to a divestment or dilution requirement. Those with prior investments must honor the initial conditions to which they agreed but may request that they be changed.
However, the private sector has new concerns about proposed guidelines for the Distributive Trade sector, put forward by the Ministry of Domestic Trade & Consumer Affairs (MDTCA) in 2005. These guidelines could mandate that foreign manufacturing, trading, etc. firms in Malaysia establish separate marketing/distribution arms of their companies for local sales purposes, and that these entities be subject to 30% Bumiputera ownership requirements, and other restrictions. The proposed guidelines would even be applicable to firms brought into Malaysia under a MIDA license as noted above, and thus could be in conflict with earlier investment agreements facilitated with international firms in Malaysia.

The Malaysian government has loosened foreign-held equity restrictions in some other industries. The GOM increased the level of foreign ownership allowed in telecommunications firms from 30% to 61% in 1998. The government stated at that time that foreign equity must be reduced to 49% after 5 years, but to date it has not required foreign divestment from telecommunications holdings. Foreigners are permitted to hold a 70% stake in shipping companies, 49% in forwarding agencies, and 51% in insurance companies (note: new companies entering the market may own up to 49% equity but those already in the market can request that their equity be increased to 51%).


The Malaysian government promotes the acquisition of economic assets by Bumiputera to encourage a more even distribution of wealth among races. The government often requires foreign and domestic non-manufacturing firms to take on Bumiputera partners (usually 30% of share capital) and to maintain a workforce that proportionately reflects Malaysia's ethnic composition. If a company issues publicly traded stock on the Bursa Malaysia (formerly the Kuala Lumpur Stock Exchange), it is required to issue at least 30% of its initial offering to Bumiputera shareholders. The government relaxed requirements for subsequent issuances in August 2003.

Malaysia offers a number of incentives to foreign manufacturing investors, such as Pioneer Status and the Investment Tax Allowance. Historically these incentives have been linked to performance criteria such as export-percentage requirements, as specified in individual manufacturing licenses. For further detail on incentives for various sectors, check MIDA's website (http://www.mida.gov.my)

Project approval depends on many factors. MIDA may consider the size of an investment, the export-orientation of production, the type of financing (both local and offshore) required, 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. The criteria are applied in a non-discriminatory manner, except in instances where both local and foreign firms propose identical projects. All requests are handled on a case-by-case basis.

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. Over the past 7 years, the government gradually relaxed controls on foreign direct investment flows, wages, dividends, interest, and rental income earned in Malaysia. In May 2001, the government eliminated one of the most controversial measures when it abolished a 10% tax on foreign investors’ portfolio investment profits taken out of the country. On July 21, 2005, Bank Negara removed the ringgit from its peg of RM 3.80 to the dollar and shifted to a managed float based on a trade-weighted basket of currencies. As of December 2005, the ringgit is trading at approximately RM 3.77 to the dollar. To date, the ringgit has appreciated less than 1% against the dollar and many analysts believe that it is still undervalued by approximately 5%.

The only major remaining capital control is the restriction on the flow of currency across borders. Further information on the remaining capital controls, and economic and monetary policy developments in Malaysia, is available on Bank Negara Malaysia’s website.

13 wholly foreign-owned commercial banks operate in Malaysia, and enjoy considerable market share. The government has expressed a desire to reduce the number of local commercial banks; common wisdom suggests that Bank Negara intends to reduce local commercial banks to between 4 and 6. Yet Bank Negara has continued to increase the number of Islamic banks for both local and foreign players: issuing 3 new foreign Islamic banking licenses in 2004; encouraging local banks to open Islamic subsidiaries; and, allowing foreign banks to take up to 49% equity in these subsidiaries. Foreign participation in new commercial banking operations otherwise remains restricted, with foreign equity limited to an aggregate 30% in any single domestic bank.

For many publicly listed local companies, only a minority portion of stock is available for trading. The principal shareholders (who are often government-linked agencies) frequently hold the majority portions of stock. Malaysia's privatization program slowed as a result of the 1997-1999 economic downturn. Since then the government has re-acquired a number of privatized entities, including the national air carrier, MAS, and Kuala Lumpur's light rail transit system. The government has made little movement towards restarting its privatization efforts, and its investment arm, Khazanah, now controls the majority of its shares in government-linked companies and is supposedly injecting more efficiency into the mix. Foreign participation in the last round of privatization was generally welcome. Foreign firms are able to participate in government-financed research and development programs.

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. Resident companies pay an income tax of 28% on all income, 38% in the petroleum industry. 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%. The U.S. and Malaysia have not concluded a bilateral tax agreement and no negotiations are anticipated at this time. In 2005, the government passed legislation mandating a new Goods and Services Tax that is scheduled for implementation in 2007. Currently, very little is known about the government plans for that implementation and some observers are calling for its delay into force until more public discussion is possible.

Conversion and Transfer Policies Return to top


Despite the imposition of selective capital controls, Malaysia’s currency remains fully convertible. Importers and exporters have sufficient access to foreign exchange. Ringgit earned by foreigners in the form of salaries, interest payments, and dividends may be converted into foreign currency for repatriation abroad. All payments to other countries must be made through authorized foreign exchange dealers in foreign currency.

Effective April 1, 2004, the government increased the allowable maximum of retained foreign currency export proceeds held in foreign currency accounts by resident exporters and approved operational headquarters to U.S. $100 million from the previous U.S. $70 million. 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 RM 10,000 (U.S. $ 2,632). Non-residents may carry in any amount of foreign currency, but are required to declare currency amounts in excess of USD $2500. Non-residents may carry out any amount of foreign currency up to the amount they carried in.

Expropriation and Compensation Return to top


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, which has proved capable of enforcing property and contractual rights.

Dispute Settlement Return to top


Malaysia is a signatory to the UN-sponsored Convention on the Settlement of Investment Disputes and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The domestic legal system is open and accessible. Past cases of foreign investment disputes, which have been rare, have generally been handled satisfactorily by existing dispute settlement mechanisms. Many firms choose to include mandatory arbitration clauses in their contracts. 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.

Should local administrative and judicial facilities fail to satisfy claimants, the dispute is submitted to the International Center for Settlement of Investment Disputes (ICSID) under the aegis of the United Nations. 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.

Performance Requirements and Incentives Return to top


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.

The major tax incentives for companies investing in the manufacturing sector are the Pioneer Status or Investment Tax Allowance. Eligibility for Pioneer Status or Investment Tax Allowance is based on certain priorities, including the levels of value-added, technology used and industrial linkages. Such eligible projects are termed as "promoted activities" or "promoted products". Applications for Pioneer Status should be submitted to the Malaysian Industrial Development Authority (MIDA).

The government gives major incentives to companies that locate in the Multimedia Super Corridor (MSC), mainly in high technology sectors and Back Office Operations. The incentives include: Pioneer Status or Investment Tax Allowances and eligibility for R&D grants. Applications should be made through the Multimedia Development Company (MDC).

In the May 2003 Economic Stimulus Package, the Malaysian government extended the full tax exemption incentive to firms with "Pioneer Status" (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority) to fifteen years from ten years and those with "Investment Tax Allowance" status (companies promoting products or activities in industries or parts of Malaysia to which the government places a priority, but not as high as Pioneer Status) to ten years from five years. In general, however, 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. In extreme cases, 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.

The 2006 budget made some modifications to the general rules, including provisions for carrying forward unabsorbed losses for companies with Pioneer status, extending the application period for incentives for promoted areas, and extending the scope of incentives for multimedia activities.

To find details for particular incentives for various manufacturing and service sectors, please look at the Incentives for Investment section of the MIDA website (http://www.mida.org.my). For more detailed information on the Multimedia Super Corridor, see its website (http:// www.mdc.com).

Right to Private Ownership and Establishment Return to top


In June 2003, MIDA announced that the policy permitting 100% foreign ownership in manufacturing had been extended indefinitely for new projects (both expansion and Greenfield). Those with prior investments must honor the initial conditions to which they agreed but may request that they be changed. 70% foreign ownership is permitted in local fund management companies working with both local and foreign clients and dealing with both institutional and unit trust funds. 49% foreign ownership is permitted in brokerage companies. The government issued five licenses to foreign global fund managers in 2005. It also allowed one foreign brokerage house to enter the Malaysian market (In 2004, the government had announced it would issue a total of 5 foreign brokerage licenses).

Malaysia has also temporarily eased equity restrictions on licensed telecommunications companies. Under measures announced in May 1998, foreign ownership in telecommunications companies may reach as high as 61%, but the government also had stated that foreign ownership in the sector must be reduced through divestiture or dilution to no more than 49% after 5 years. Presently, we have not seen government efforts to enforce any such divestitures or dilution.

Under the Insurance Act of 1996, foreign insurance subsidiaries were required to incorporate their operations locally by June 30, 1998. However, the government has granted individual extensions to this deadline and has yet to move against companies not in compliance. Foreign shareholding exceeding 49% is not permitted unless the Malaysian government approves higher shareholding levels. As part of the 1997 WTO Financial Services Agreement, Malaysia committed itself to allowing existing foreign shareholders of locally incorporated insurance companies to increase their shareholding to 51%. Currently, new entry by foreign insurance companies is limited to equity participation in locally incorporated insurance companies at a maximum of 49%.

Certain financial sectors have additional barriers to entry. For example, the government severely restricts establishment in the financial service industry. No new conventional banking or insurance licenses are being issued, other than those for re-insurance firms. (In December 2000, the government reissued a banking license to the Bank of China. That license had been surrendered in 1959.) Foreign banks wishing to enter this market may purchase equity in existing financial institutions but that equity is limited to an aggregate of 30%. In February 2000, the government fostered substantial consolidation of the banking industry into 10 "anchor" banks in an effort to create stronger, more competitive domestic institutions that might better withstand future fluctuations in the global financial market. All financial institutions completed their merger plans into 10 anchor banks by March 2002. Analysts believe that in the years ahead there will be further consolidation among domestic banks, bringing the number of anchor banks down to between 4 and 6.

In a recent development, Bank Negara has hinted that it might allow foreign banks to open more branches, and it may announce a new policy in late December 2005. However, most observers believe that any liberalization for banks in this area would come with certain requirements. For example, for each additional branch that Bank Negara allows a foreign bank to open in a major urban area, they also might be required to open a certain number of branches in rural areas.

Malaysia has a significant Islamic banking sector, accounting for 11% of assets in the banking system. Almost all banks, both local and foreign, offer Islamic products. On October 14, 2004, the government issued three new Islamic banking licenses to Middle Eastern Islamic banks. The government encourages all commercial banks operating in Malaysia to set up full-fledged Islamic banking subsidiaries in which foreigners may take a 49% equity stake. Similarly, the government is currently evaluating proposals for up to 4 new licenses for Islamic insurance (Takaful) and foreign investors are allowed up to 49% equity in local companies that win these licenses.

The Malaysian government maintains broadcast content quotas on both radio and television programming. 80% of television programming must originate from local companies owned by ethnic Malays. However, in practice, local stations have been granted substantial latitude in programming because of a lack of suitable local programming. Radio programming must also consist of 60% locally originated content. The Communications and Multimedia Act of 1998 transferred responsibility for regulating broadcasting from the Ministry of Information to the Ministry of Energy, Telecommunications, and Multimedia, now renamed the Ministry of Energy, Water and Communications. Foreign ownership of radio and television stations is not expressly forbidden but not likely to be approved.

International firms have concerns about the lack of advertising content guidelines, and how some advertisers misrepresent their products and services through advertising. 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.

The government's recent actions regarding content quotas also have not been consistent. In October 2004, the Malaysian Communications and Multimedia Commission introduced new content code for advertising, hoping it would perhaps lead to relaxation of the 80% rule for television advertising. There was, however, no change in overall content rules for television advertising. Also, in 2005, the Minister of Culture made calls for a new tax on foreign films to aid the local film industry.

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 contracts (PSCs). 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. Ownership of agricultural land is restricted to Malaysian citizens.

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 Bursa Malaysia, formerly the Kuala Lumpur Stock Exchange (KLSE). The government's goal at that time was to reduce foreign ownership of most firms producing for the domestic market to 30%. However, as mentioned previously, in June 2003, the government extended indefinitely the policy permitting 100% foreign ownership in new investment and expansion of existing investments in manufacturing.

Private entities, both foreign and domestic, have the right to acquire, merge with, and take over business enterprises according to the Foreign Investment Committee (FIC) guidelines of 1974. 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.

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, due to a shortage of qualified personnel in the Patents and Trademarks Department of the Ministry of Domestic Trade and Consumer Affairs. The Malaysian government has hired more patent examiners, with a goal of reducing average registration time to three years. Although the processing time for trademark registration may be as long as 2 years, industry groups have not complained widely about infringement. Copyright protection extends to computer software and lasts for the author’s lifetime and 50 years after his or her 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 Return to top


Malaysia is a member of the World Intellectual Property Organization (WIPO), the Berne Convention, and the Paris Convention for the Protection of Industrial Property. In 2003 Malaysia amended its laws to allow it to join the Patent Cooperation Treaty (PCT). Malaysian law provides copyright protection to all works published in Berne Convention member countries regardless of when the works were first published in Malaysia. Malaysia is also a member of the WTO and a party to the Trade Related Intellectual Property (TRIPS) agreement.

The Optical Disc Act of 2000 established a licensing and regulatory framework for manufacturing copyrighted work and controlling piracy. Manufacturers of optical discs are required to obtain licenses from both the Ministry of International Trade and Industry and the Ministry of Domestic Trade and Consumer Affairs. Malaysia’s production capacity for optical discs far exceeds local demand plus legitimate exports, and pirated products believed to have originated in Malaysia have been identified throughout the Asia-Pacific region, North America, South America, Africa, and Europe. Malaysia has remained on the USTR Special 301 Watch List since October 2001, in particular due to its failure to substantially reduce pirated optical disc production and export. The International Intellectual Property Association (IIPA) estimates 2004 industry losses in Malaysia due to piracy at $188 million, with piracy rates at 63% for business software, 52% for music, and 50% for movies.

A special task force, chaired by the Minister of Domestic Trade and Consumer Affairs and including representatives from all ministries and agencies with responsibility for IPR, has overseen the expansion of enforcement staff and a more vigorous program of raids on sellers of pirated products. The Ministry is expected to add over 700 more enforcement officers in 2006 to complement the existing 1400 officers. Government and industry cooperation also has expanded. The government also made some headway in tackling the judicial backlog for infringement cases. Malaysian courts have imposed deterrent sentences, fines and/or penalties for the offenders. The Minister of Domestic Trade and Consumer Affairs has pledged the creation of a specialized IP court by mid-2006.

A number of U.S. consumer product companies also have suffered significant losses due to the manufacture and sale of counterfeit products in Malaysia. The volume is difficult to determine because of the broad range of products affected, which includes printer cartridges, motor oil, household cleaning agents, shampoo and skin care items, herbicides, and 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.

The Malaysian government has mandated the use of hologram stickers as a primary tool in helping its enforcement agents identify counterfeit goods. The Ministry of Domestic Trade and Consumer Affairs began requiring their placement on optical disc products in 2003, and, in 2005, the Ministry of Health implemented a similar requirement for pharmaceuticals and traditional medicines. U.S. industry groups opposed the mandatory requirement schemes because of concerns about cost and efficacy of this "one-size-fits-all" approach, and have called on the Ministry of Health to continually review the effectiveness of the directive.

Transparency of Regulatory System Return to top


Malaysia has an open system of government, economic, and business regulation. For tax purposes, local and foreign enterprises are treated essentially the same.

One of the biggest complaints from foreign companies is the difficulty in obtaining work visas for expatriate personnel. The Malaysian government restricts the number of expatriate personnel employed by both foreign and domestic firms. A new foreign-invested project is allotted a certain number of "key posts," determined by the size of the investment, which may be occupied by foreigners in perpetuity. Beyond these 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 a difficult showing for firms to make. Manufacturing companies with foreign paid-up capital of at least U.S. $2 million receive automatic approval for up to ten expatriate posts. Manufacturing companies with paid-up capital of U.S. $200,000 to $2 million will receive automatic approval for up to five expatriate posts.

Foreign firms have complained that the procedures for obtaining work permits are time-consuming and burdensome. Due to the acute shortage of highly qualified professionals, scientists and academics, Malaysia has made some progress in simplifying permit approval for these categories of foreign personnel. With the present procedure, the foreign investor submits permit applications simultaneously with the project proposal to the relevant ministry (for example, MIDA for manufacturing, Bank Negara for financial services, Petronas for petroleum industry, etc). The ministry approves the applications with the project then forwards them directly to the Immigration Department for immediate issuance of the required documents. Permit-approval bodies now convene more often and have successfully computerized their operations, reducing the processing time. Nevertheless, anecdotal evidence suggests that significant problems remain. Furthermore, many companies complain about the lack of skilled labor and the difficulty in getting approval to bring in expatriates.

Industry also has concerns regarding the treatment of expatriate male spouses in Malaysia. When expatriate women are employed in Malaysia on legitimate work visas, their children are usually given proper 2-year dependent pass visas, but their expatriate husbands are often not given the same dependent pass visas. In several cases, expatriate husbands are only given the standard 90-day visitor visas, and are required to leave Malaysia and return, in order to get their visas extended. Department of Immigration officials responded to concerns about this policy by indicating that it was a "cultural issue" in Malaysia, and that "…men should be in the workplace and women should be at home."

The government also rigorously monitors hiring practices to ensure that all foreign employers strive to meet guidelines designed to ensure a racial balance in employment, especially in the areas of technology, management and the like. Malaysia’s manufacturing and construction industries have, however, relied heavily on unskilled guest workers from Indonesia and, to a lesser extent, other Southeast Asian countries. In February 2002, the government instituted new regulations governing the employment of foreign workers in certain industries, including construction, manufacturing, and plantations, as part of an effort to reduce employment of illegal aliens. In 2005, the government repatriated about 400,000 workers illegally present in Malaysia.

U.S. companies have indicated that they would welcome improvements in the transparency of government decision-making and procedures, and limits on anticompetitive practices. For example, the government has not provided details of its proposed competition policy to local and foreign industry and has not sought public comment; despite the significant impact such legislation may have on business and consumers. A considerable proportion of government projects and procurement is awarded without transparent, competitive bidding.

Efficient Capital Markets and Portfolio Investment Return to top


The government is committed to broadening and deepening domestic capital markets. With that in mind, the government released in 2001 the 10-year Financial Sector Master Plan and Capital Markets Master Plan. (Please see the following website links for more information: www.bnm.gov.my and www.sc.com.my). The Financial Sector Master Plan, produced by the central bank, Bank Negara, aims to develop a more competitive and resilient financial system by building competitive domestic banks. The Plan defers the introduction of new foreign competition in conventional banking until after 2007. (As of end 2005, established foreign companies held approximately one quarter of all banking assets). The Plan provides for some liberalization in the insurance industry, including lifting existing restrictions on employment of expatriate specialists, raising caps on foreign equity, and opening the reinsurance industry to foreign competition.

The Capital Markets Master Plan, released by the Securities Commission in February 2001, stipulated that foreign participation limits would be liberalized by 2003, at which time foreigners would be permitted to purchase a limited number of existing stock-broking licenses and take a majority stake in unit trust management companies. Despite this pledge, the government has not changed the rules to permit foreign majority ownership in local companies in this sector. The maximum foreign equity stakes remains fixed at 49% in stock-broking firms and 30% in unit trust management companies. Foreigners may hold up to 70% in fund management companies managing both local and foreign funds. The government issued 5 licenses to foreign brokerage houses in 2005. It also allowed one global fund manager to enter the Malaysian market (In 2004, the government had announced it would issue a total of 5 fund management licenses).

Since 1998, the Central Bank had progressively lowered deposit and lending rates. Daily average interbank deposit rates fell from 10.74% in January 1998 to 2.70% in November 2005. On November 30, 2005, Bank Negara raised the overnight policy rate by 30 basis points to 3.0%. This was the first rate increase since 1998 and was enacted in response to rising inflation. (In April 2004, Bank Negara implemented a new interest rate framework, reflecting a move towards a more market-based approach in determining interest rate. The overnight policy rate replaced the three-month intervention 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). As of December 2005, the average lending rate is 6.25%. The average lending rate has dropped from 11.51% in January 1998 to 6.0% at the end of 2004.

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. On April 1, 2005, the government abolished the 3:1 gearing ratio requirement imposed on foreign-controlled companies for domestic borrowing. It has also allowed foreign-controlled companies to seek any amount of ringgit credit without Bank Negara’s approval

Though the government has significantly relaxed capital controls since their imposition in September 1998, and the ringgit remains fully convertible, the government continues to control the flow of currency. Local currency may not be sent abroad to purchase imports, nor may it be received from abroad in compensation for exports. Unless prior permission is sought, no one may carry more than one thousand ringgit into or out of the country with the exception of border traders, who may carry up to RM 10,000 (U.S. $2,631) or the equivalent in foreign currency. A resident of Malaysia may carry no more than U.S. $2,500 or the equivalent in any foreign currency out of the country, although a non-resident may carry out any amount of foreign currency up to the amount he or she brought in.

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 regional 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. Companies must submit audited annual accounts for public scrutiny within four months of each year’s end. To promote professionalism, the number of corporate directorships any individual may hold has been limited to 25. 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 (formerly the Kuala Lumpur Stock Exchange or KLSE) must now be deposited in the CDS. Short selling of stocks is not permitted, though the government is considering lifting this ban.

The domestic banking system came under acute stress as a result of the regional economic crisis of 1997-98. In 1998, the government undertook measures to re-capitalize distressed banks, to remove non-performing loans from banks' books, and to restructure loan agreements. The government established a national asset management company, Danaharta, in June 1998 to purchase, manage, and dispose of non-performing loans (NPLs) in the banking sector. By March 2001, Danaharta had acquired some RM 48 billion (U.S. $12.6 billion) in non-performing loans, equal to approximately 44% of NPLs in the banking system. In March 2004, Danaharta indicated its plans to recover some RM 30.94 billion (U.S. $ 8.1 billion) from restructured NPLs. Danharta ceased purchasing NPLs in 2001 and has since been focusing its efforts on implementing debt recovery plans. In December 2005, Danaharta announced that it had completed its goals and closed up shop. System-wide, the risk-weighted capital adequacy ratio of banks was 13.3% as of September 2005.

Political Violence Return to top


Malaysia has experienced little political violence since ethnic rioting in 1969, which led to the establishment of the National Economic Policy, a program designed to give the Bumiputera majority a larger stake in the economy. Prime Minister Abdullah Badawi assumed power in late 2003 on the retirement of his predecessor, Mahathir Mohamad, and was returned with a large parliamentary majority in peaceful elections in March 2004.

Corruption Return to top


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, but does not play a significant role. 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. 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 Abdullah declared after assuming office that the fight against corruption was one of his priorities, but by 2005 the battle had slowed. There were a few high profile prosecutions in 2004 but little more in 2005. For example, by the end of 2005 the government has done little to implement recommendations from an April 2005 royal commission on police reform. Complaints of police abuse and corruption remain widespread, prompting Abdullah to order another independent commission to conduct hearings.

Transparency International, a nonprofit organization, ranked Malaysia 39th among 158 countries in its 2005 Corruption Perceptions Index. Malaysia's score of 5.1 on a scale of 0 (corrupt) to 10 (clean) was an improvement from the 5.0 in 2004 (Malaysia's ranking was also 39th last year). Nonetheless, Malaysia placed ahead of such countries as South Korea, China, Thailand, the Philippines, Vietnam and Indonesia, though well behind others such as Singapore, Hong Kong, Taiwan and most of Western Europe. The Malaysian chapter of Transparency International is the Kuala Lumpur Society for Transparency and Integrity.

Bilateral Investment Agreements Return to top


Malaysia has bilateral investment guarantee agreements with over 70 economies and has double taxation treaties with 60 countries. Malaysia’s double taxation agreement with the U.S. is currently limited to air and sea transportation. Malaysia has a limited investment guarantee agreement with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program. 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.

OPIC and Other Investment Insurance Programs Return to top


Since 1959, Malaysia has qualified for the U.S. Overseas Private Investment Corporation (OPIC) insurance programs. However, given Malaysia's political stability, attitude toward foreign investors, and available dispute settlement mechanisms, few investors have sought OPIC insurance in Malaysia.

Labor Return to top


The government of Malaysia reported that labor market conditions in 2004 remained about the same as the year before with 3.6% unemployment (the official full employment rate is 4.0%). Unemployment for 2005 is slightly better at 3.5%. Still, the government announced in November 2005 that Malaysia has approximately 60,000 unemployed university graduates.

The regional economic downturn in 1997-1998 had led to retrenchments that mostly affected Malaysia’s substantial foreign workforce. At that time, the government put a freeze on hiring new foreign workers. In February 2000, the government lifted the freeze on foreign workers except for some specific jobs. During the slowdown of 2001, the government again announced it would reduce hiring of foreign workers. In 2004, the government announced it would forcibly repatriate all illegal workers in Malaysia and the repatriation program was implemented in early 2005.

At the end of May 2005, total registered foreign workers numbered 1.62 million -- a 10.2% increase over 2004. They were employed in the following sectors: 31% were employed in manufacturing sector, 27% in plantations, 26.5% in services, and 15.5% in construction. The majority of the foreign workers are from Indonesia (69.4%), followed by Nepal (10.2%), India (6.2%), and Vietnam (4.6%). In July 2005, the government increased the levy on foreign workers in the services and plantation markets by 50%. The real rate of wage increases in the manufacturing sector was 1.8% in 2004 as compared to 2.8% in 2003. 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.

Malaysia is a member of the International Labor Organization 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 10.2 million workers as of December 2004. 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 Return to top


Malaysia has Free Zones (FZ’s) in which export-oriented manufacturing and warehousing facilities may be established. Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. The zones are divided into Free Industrial Zones (FIZ), where manufacturing and assembly takes place, and Free Commercial Zones (FCZ), generally for warehousing commercial stock. Companies that export not less than 80% of their output and depend on imported goods, raw materials, and components may be located in these FZ’s.

Goods sold into the Malaysian economy by companies within the FZ’s 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 FZ’s, 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 a 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.

Ports, shipping and maritime-related services play an important role in Malaysia since 90% of its international trade is sea borne. Currently there are 13 FIZs and 12 FCZs in Malaysia. In June 2006, the Port of Klang Free Zone will open as the nation's first fully integrated FIZ and FCZ.

Foreign Direct Investment Statistics Return to top


The U.S. has consistently been 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. According to the Malaysian Industrial Development Authority, the U.S. accounted for the third greatest number of new manufacturing foreign investment project applications in terms of value by September 2005, with approved projects valued at U.S. $478 million. (Note: Manufacturing investment statistics do not capture investments in services or upstream oil and gas production.)

U.S. firms with significant investment in Malaysia’s petroleum sector include: Exxon/Mobil (which participates in upstream and downstream activities), Caltex, ConocoPhillips, Dow Chemical and Eastman Chemicals (all of which have investments in downstream activities). Major semiconductor manufacturers, including Freescale, Texas Instruments, Intel, Western Digital, StatsChipPac, National Semiconductor, and others have substantial operations in Malaysia, as does Dell Computers. Virtually all major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, Hitachi, etc.) have facilities in Malaysia.

Table One: Sources of Approved Manufacturing Investment in Malaysia (New Projects and Expansions)
(Value in U.S. Dollars Millions)

Total Investment

2001

2002

2003

2004

Foreign

4,827

3,047

4,116

3,459

Domestic

1,684

1,658

3,554

4,113


Foreign Investment Sources
(Value in U.S. Dollars Millions; Share in Percent)

2001

2002

2003

2004

Germany

127

1,330

45

1,243

United States

870

702

574

279

Singapore

574

268

322

399

Netherlands

572

160

83

26

Japan

865

155

341

266

China including Hong Kong

781

32

92

62

U.K.

27

44

1,019

40

Switzerland

22

7

4

32

Australia

16

29

28

31

Korea

446

97

118

85

India

2

5

12

77

France

17

18

11

36

Others

506

200

1,467

883

Total Foreign U.S. $

4,287

3,047

4,116

3,459

U.S. Share of Total Foreign

18.0%

14.9%

13.9%

8.0%

Foreign Share of Total

74.1%

64.8%

53.7%

45.7%


-Source: Malaysian Industrial Development Authority; values represent approved, not actual investment.
-Exchange Rates: U.S. $1.0=RM 3.80
-Note: Manufacturing investment only, does not include the upstream oil and gas industry or services.

Table Two: Foreign Manufacturing Investment by Sector
(U.S. Dollars Millions)

Sector

2001

2002

2003

2004

Chemicals

163

130

94

146

Petroleum Products

8

1,261

115

214

Electronics

2,479

1,054

955

1,796

Basic Metal

110

42

1,112

70

Textiles

12

8

20

97

Food Manufacturing

134

113

116

101

Paper, Print

811

47

27

358

Rubber Products

59

58

28

29

Non-Metal

420

26

86

100

Fabricated Metal

91

56

157

194

Transport

129

37

1050

67

Other

400

--

356

287

Total

4,816

3,047

4,116

3,459


Source: Malaysian Industrial Development Authority

Table Three: Malaysian Investment Abroad
(U.S. Dollars Millions)

Country

2001

2002

2003

2004

Singapore

548

283

222

666

United States

1,054

1,502

262

203

United Kingdom

71

216

130

38

Thailand

35

12

59

181

Indonesia

443

237

94

102

Hong Kong

26

108

137

296

Australia

80

45

44

23

Sudan

4

33

158

66

China

82

82

64

107

Netherlands

140

246

23

66

Chad

--

289

36

252

Others

965

1,387

1,572

5,448

Total

3,448

4,440

2,801

7,448


-Sources: Cash BOP Reporting System, Bank Negara Malaysia.
-Investment data include equity investment, purchase of real estate abroad and extension of loans to non-residents.

Table Four: Net Foreign Direct Investment Flows to Malaysia
(U.S. Dollars Millions)

2001

2002

2003

2004

FDI

553

3,158

2,470

4,711

Percentage of GNP

0.7%

3.6%

2.5%

4.2%


-Source: Bank Negara Annual Report 2001-2004

Web Resources Return to top


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 Commerce 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.


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