2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report

Overview

The Government of Malaysia (GOM) in general strongly encourages foreign direct investment (FDI), although it maintains restrictions or limits on investment in some sectors. It provides 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 extensive operations in Malaysia, including ExxonMobil, ConocoPhillips, Intel, Microsoft, Dell, GE, Mattel, First Solar, Sun Power, Agilent, and Motorola. Prime Minister Najib Razak (Najib) has made generating new private investment a centerpiece of his economic reform program introduced in March 2010 as the New Economic Model (NEM). The National Economic Advisory Council (NEAC), a blue ribbon panel of experts on Malaysia’s economy, in 2010 issued two reports identifying shortcomings in Malaysia’s investment climate and proposing policies necessary to improve Malaysia’s competitiveness as a foreign investment destination. The Najib administration embarked on four different economic programs during 2010 to spur additional investment: the NEM economic policy reform platform, the Economic Transformation Program (ETP) intended to stimulate foreign and domestic private investment, the Government Transformation Program (GTP) to decrease corruption and improve Malaysia’s social safety net, and the Tenth Malaysia Plan (10MP) to guide public sector capital expenditures.

The GOM actively reaches out to targeted industries and negotiates terms that successfully attract FDI. According to the Malaysian Industrial Development Authority (MIDA), total value of foreign manufacturing projects approved in 2010 was $9.5 billion, of which $5.3 billion was approved during the fourth quarter. The surge in fourth quarter investment could be a result of the ETP stimulating private investment. 2010 manufacturing FDI approvals were 50% higher than the 2009 annual total of $6.5 billion, but less than the $13.3 billion approved in 2008. The U.S., Japan and Hong Kong are the top three countries investing in Malaysia. U.S. investment soared to $3.8 billion in 2010, recording a substantial increase from $0.7 billion in 2009; a value that plummeted by 72% from $2.5 billion in 2008. (Note: Approval statistics are not directly comparable to actual FDI statistics and can be found at www.mida.gov.my. Also, manufacturing investment statistics do not capture investments in non-manufacturing-related services or upstream oil and gas production.)

Inflows of actual FDI to Malaysia in 2010 increased to $7 billion, a 409.7% increase from $1.4 billion in 2009, while the inflows for 2008 were $8.1 billion, according to the UN Conference on Trade and Development (UNCTAD). PM Najib announced over $10 billion of new investments in January 2011, including a new $3 billion investment by ExxonMobil in upstream oil production.

Malaysia has experienced negative net FDI in 13 of the past 14 years. GOM officials attribute the consistent outward investment flows largely to cross-border assets acquisitions and portfolio investment outflows as a result of a “flight to safety” during the global financial crisis.

As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years of steady economic growth have increased average wage levels making Malaysia a middle-income country. The NEM seeks to move the economy “up the value chain” by promoting investment in higher value added manufacturing and service sectors. The ETP identified 13 specific sectors that the GOM is encouraging foreign and domestic investment, including: electrical & electronics; medical devices; green energy, machinery & equipment; oil and gas, and transportation equipment. 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 highly controlled by the government.

Openness to Foreign Investment

Malaysia has one of the world’s most trade-dependent economies with trade reaching 200% of annual GDP. The GOM values foreign investment as a powerful force for the continued economic development of the country, but is hampered by an overly burdensome regulatory regime. In 2010, the GOM removed Foreign Investment Committee (FIC) investment guidelines, enabling transactions for acquisitions of interests, mergers, and takeovers of local companies by domestic or foreign parties without FIC approval. The FIC accepted investment in commercial properties valued greater than at RM20 million (approximately $6.5 million) from Bumiputras (ethnic Malays and other indigenous ethnicities). 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 bodies. 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. Foreign investors in non-targeted industries tend to receive less GOM assistance in obtaining the necessary approvals from the various regulatory bodies and therefore face greater bureaucratic obstacles.

While electronics remained the main sector for FDI in 2010, the oil and gas sector is expected to be the new focus with off shore development and two new storage and services hubs in Johor. In 2009, the electronics sector received the largest share of FDI and in 2008 basic metal manufacturing attracted the largest investment share. For the past three years, manufacturing FDI has centered on projects in Selangor, Johor and Penang – with manufacturing investment in Johor increasing the fastest due to the Iskandar Development Region attracting investment from Singapore.

Regulatory Burden

In the World Bank’s global Doing Business 2011 report, Malaysia moved up from 23rd to 21st place overall among the 183 economies covered in the survey. Malaysia’s best rankings were in the standardized indicators “getting credit” and “protecting investors,” where it ranks first and fourth, respectively. Malaysia’s worst rankings are in “dealing with construction permits” at 109th and starting a business at 113th, down from 88th in 2010. The survey gave a Malaysian 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. Starting a business involves 9 procedures, takes an average of 17 days and costs a whopping 17.5% of per capita income.


If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2010

56/178 (4.4 score)

Heritage Economic Freedom

2011

53

World Bank Doing Business

2011

21/183

To improve the business climate in Malaysia, the GOM in 2007 established the PEMUDAH committee, consisting 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. The Doing Business 2011 report cited PEMUDAH efforts to streamline starting a business through putting several procedures on-line. More information about the committee is available at www.pemudah.gov.my.

Ethnic Preferences

One significant impediment to Malaysia’s economic growth is the country’s complex network of preferences to promote the acquisition of economic assets by ethnic Malays and other indigenous groups (Bumiputra). The details of implementation are largely left to the various ministries. Policies and practices vary greatly. Some practices are explicit and contained in law or regulation while others are informal, leaving much ambiguity for potential investors. The NEM proposes reforming ethnic biases in business ownership and social safety net programs. These proposals have met strong opposition from conservative Bumiputra groups.

In the early 1970s, the GOM set a target of 30% of the nation’s wealth to be held by ethnic-Malay Bumiputra. Several studies have concluded that the 30% equity target has been reached or exceeded; however, the topic is very sensitive and official government figures place Bumiputra equity at 18.9%. The government’s methodology has been criticized as not fully transparent, and there has been considerable debate over how to account for the value of government-linked companies or how to measure equity (par value versus market value). The NEM reforms are meant to re-focus the policies on poverty reduction as originally intended.

One of the government’s racial preference policies has been a requirement that foreign non-manufacturing and all domestic firms take on Bumiputra partners. Prior to 2009, if a company sought public listing on the Bursa Malaysia (formerly Kuala Lumpur Stock Exchange), it was required to reserve at least 30% of its initial public offering (IPO) for purchase by Bumiputra. In 2009, the government removed foreign ownership limits for 27 non-controversial services subsectors, repealing FIC guidelines on mergers and acquisitions, reducing Bumiputra ownership requirements for new listings of foreign owned corporations from 30% to 12.5%, and reducing FIC approval requirements for foreign ownership of real properties to only those above RM 20 million (USD 7 million). However, Bumiputra 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.

Manufacturing

The Malaysian Industrial Development Authority (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 the ETP and the 10MP.

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 now has the authority to issue or renew licenses for all manufacturing companies, eliminating a second layer of approval from MITI. 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 ministries 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 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 5% or more of interests in any local financial institution requires the prior approval of the Minister of Finance and Bank Negara Malaysia (BNM, central bank).

Malaysia no longer requires the licensing and operation of direct selling companies to have 30% Bumiputra equity. 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, the Guidelines require that department stores, supermarkets and hypermarkets reserve at least 30 % of shelf space in their premises for goods and products manufactured by Bumiputra-owned small and medium sized industries. The guidelines also require that at least 30 % of a store’s sales consist of Bumiputra products, a rule that does not appear to take into consideration 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.

Professional Services

Malaysia restricts foreign participation in professional services (other than "back office" operations that support foreign business activities).

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 %. 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 it 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.

Energy

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, 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.

Telecommunications

Malaysia has offered in the context of the WTO Doha Round negotiations 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 continue to 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.

Broadcasting and Audio-Visual

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

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. 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. These regulations are 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.

Financial Services

Malaysia restricts foreign investment in the financial services and insurance sectors, as described below.

Banking

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 2010. 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 included the removal of many restrictions on incumbent foreign financial institutions, leveling the playing field and increasing competition. Implementation of such reforms was slow, but is mostly now completed. The government began implementing Phase III during 2009 by introducing new foreign competition. In 2010, the government issued new banking licenses to five new foreign commercial banks, two new foreign Islamic banks and two new Islamic insurers (takaful). No U.S. banks applied for the new commercial licenses. China’s ICBC Bank and a consortium of Indian banks also separately received new commercial bank licenses during 2010.

In 2009, the equity stake in investment banks foreign institutions are allowed to hold increased from 49 % to 70 %. Currently, foreign participation in domestic commercial banks is still restricted to an aggregate maximum stake of 30 %. By 1994 BAFIA required all foreign banks operating in Malaysia to incorporate locally. Locally incorporated foreign banks currently operating in Malaysia can be 100% foreign-owned but 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 2011, foreign banks were allowed to join Malaysia’s domestic ATM network, clearing a major competitive barrier to foreign banks competing with domestic banks for the retail banking market.

Insurance

The life insurance industry remains dominated by foreign providers, including some U.S. firms, and domestic firms control the general insurance industry. As part of Malaysia’s response to the 1997-1998 Asian financial crisis, all branches of foreign insurance companies were required to incorporate locally. The 2001 Financial Sector Master Plan set 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.

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. The government has allowed five foreign stock brokerage firms and a foreign fund management company to set up operations in Malaysia. Maximum foreign ownership in Malaysian stock brokerage firms was increased during 2009 from 49% to 70% and in unit trusts increased from 30% to 70%. There are no restrictions to fund management companies 100 % foreign-ownership. Futures brokerage firms may be 100% 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. Malaysia has five international Islamic fund management firms. The government provides tax incentives for existing stock brokerage firms to set up Islamic brokerage subsidiaries and recently issued three new licenses to brokers that the government hopes will attract Middle Eastern funds to Malaysia, including U.S. firms Goldman Sachs and Citibank Securities.

The Federal Territory of Labuan was declared 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 (Islamic insurance) 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 % 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.

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. BNM uses its Malaysia International Islamic Financial Center (MIFC) Initiative to provide special tax and regulatory treatment, scholarships, and efforts to work toward mutual recognition of Islamic banking and takaful (Islamic insurance) practices. This offers a ten-year tax exemption on Islamic financial products in foreign currencies and tax relief for Islamic Finance studies. Expatriate Islamic finance experts are exempted from paying Malaysian income tax in an effort to better enable Malaysia to attract foreign talent. Foreign institutions can hold 70% equity ownership in domestic Islamic banks.

The Government continues to promote takaful as part of its strategy to make Malaysia a global hub for Islamic financial services, including through tax breaks and incentives. There are four joint venture takaful companies, of which foreign investors were permitted to own up to 49%. International takaful operators, both domestic and foreign, may apply for licenses to conduct business in international currencies, either as incorporated entities or as branches. International takaful operators are not subject to foreign equity capitalization requirements. Currently, AIA Takaful International Bhd is the sole foreign-owned international takaful operator in Malaysia. Bank Negara is working with qualified local and foreign insurers 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.

Maritime and Logistics

Foreigners are permitted to hold a 70% stake in shipping and logistics companies and 49% in forwarding agencies. According to MIDA officials, requirements would vary for single purpose and multipurpose port facilities.

Land and Agriculture

Ownership of agricultural land is restricted to Malaysian citizens. Malaysia also restricts foreign participation in agriculture (unless it is an agro-tourism linked project), and construction.

Land acquisitions by foreign interests that require approval from the GOM are;

  • acquisition of agricultural land valued at RM500,000 (approximately $163,000) and above
  • land of at least five acres in area for following purposes of : commercial scale agricultural activities, agro-tourism projects or agro based industrial activities for production of export goods.
  • acquisition of industrial land valued at RM500,000 (approximately $163,000) and above.

Mining, land ownership and the licensing to mine are under the jurisdiction of each individual State mining departments. The Federal Department of Land and Mines controls the incorporation of mining companies.

There are no restrictions for investing in the fisheries industry, except for owning an aquaculture or deep sea fishing project as they are subjected to the 30% local equity requirement for setting up the company. For an aquaculture project, the size of the pond must be at least two hectares in area.

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%. 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%. The income tax rate for non-resident individuals is 26%. The U.S. and Malaysia have not concluded a bilateral tax agreement and no negotiations are anticipated at this time. The government has delayed plans to implement a Goods and Services Tax (similar to a value-added tax), with an initial rate of 4%, to broaden the overall tax base.

Human Resources

Beyond the heavy regulatory burden and the investment restrictions resulting from the Bumiputra 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. Through 2007, the selective capital controls measures were removed in a series of sequenced and progressive liberalization initiatives, gradually relaxing controls on foreign direct investment flows, wages, dividends, interest, and rental income earned in Malaysia to the point that capital now moves freely in and out of Malaysia.

The government continues to control the use of Ringgits abroad. In 2010, Bank Negara further relaxed its foreign exchange administrative rules allowing greater flexibility for hedging of Ringgit exposure by foreign or domestic entities. There are no restrictions on resident companies with export earnings from paying in foreign currencies to another resident company for the purchase of goods and services. In 2010, BNM also authorized trade to be settled or invoiced in Ringgit. Foreign investors are allowed to buy or sell Malaysian Ringgit on a forward or spot basis with licensed onshore banks to facilitate the settlement of investments in Ringgit.

BNM manages a floating exchange rate against a trade-weighted basket of currencies. The Ringgit appreciated strongly during 2010 as portfolio capital flowed in to the markets. The Ringgit’s lowest level against the USD in 2010 was RM3.4447 on February 8, while its highest level was RM3.0835 on December 31. 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). More information on Malaysia’s foreign exchange administration can be found at www.bnm.gov.my/microsites/fxadmin/index.htm

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).

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, bureaucratic, and is regarded by some observers as politically influenced.

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 is slowly being made in the case as the trial is now continuing. .

Many firms choose to include mandatory arbitration clauses in their contracts. The government actively promotes use of the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my), established 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.

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 May 2003, 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). However, the government appears to have some flexibility with respect to the expiry of these periods, and some firms reportedly have had their pioneer status renewed. 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 headquarter research and development, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management. To date, Malaysia has had some success in attracting regional distribution centers; however, there has been little progress in the other targeted areas.

Malaysia seeks to attract foreign investment in biotechnology. Malaysia gazetted implementing regulations for its Bio Safety Act of 2007 on October 25, 2010, which became effective November 1 and should implement the new regulations over the coming year. 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. A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/BiosafetyAct2007.shtml, and http://www.biosafety.nre.gov.my/BIOSAFETY%20REGULATIONS%202010.pdf.

Right to Private Ownership and Establishment

Malaysia has some of the most liberal regulations in the region when it comes to foreigners buying residential properties. Foreigners may purchase property over RM500,000 (approximately $163,000) without restriction. Although the Federal government no longer requires foreigners to get FIC’s (Foreign Investment Committee) approval for residential property purchase, the State governments at times can be more restrictive than Federal regulation and can delay the purchase.

With regards to commercial property, FIC approval is required for the purchase of property owned directly or indirectly by Bumiputras worth more than RM 20 million (approximately $6.5 million).

Owning a business in Malaysia requires two local directors, though 100% of the shares can be held by foreign owners.

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 intends to accede to the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty (which extend traditional copyright principles to the digital environment) during 2011, and the amendments to the Copyright Act doing that were introduced in the parliament in December 2010.

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 has introduced into Parliament updated Copyright legislation in December 2010 and plans to update its Trademarks Act during 2011.

Optical Media Piracy

While there have been significant improvements during last two years, Malaysia still has a problem with piracy of copyrighted materials. Unauthorized photocopying of textbooks remains a particular concern. Malaysia’s production capacity for Compact Discs (CDs) and Digital Video Discs (DVDs) exceeds local demand plus legitimate exports.

The International Intellectual Property Association (IIPA) estimates 2009 business software, records, and music industry losses in Malaysia due to copyright piracy at $250.0 million. IIPA estimates 2009 piracy rates at 58 % for business software and 60 % 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 2011.

In 2010, the Malaysian government continued to make significant progress in IPR enforcement. The number of MDTCC enforcement actions has increased significantly during 2010. 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.

Pharmaceuticals

Despite the increased enforcement, sales of counterfeit pharmaceuticals remain 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.

The Ministry of Health is in the process of revising regulations that 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. The Malaysian law allows for the regulatory approval of generic versions of pharmaceuticals that are still patented, but prohibits marketing and commercial manufacturing during the patent validity period.

Trademarked Consumer Products

A number of U.S. consumer product companies also have suffered 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. 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, but most 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.

Patents

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.

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 limits the ability of stakeholders to have formal opportunities 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 and regulations, Malaysia maintains a complex network of practices for which no documentation is available.

Government Procurement

Malaysia is not a signatory of the WTO Government Procurement Agreement (GPA). Malaysia’s procurement policies are explicitly used to encourage greater participation of Bumiputra in the economy, transfer technology to local industries, reduce the outflow of foreign exchange, create opportunities for local companies in the services sector, and enhance Malaysia’s export capabilities.

Traditionally, international tenders have been invited only where domestic goods and services are not available. In domestic tenders, preferences are provided for Bumiputra 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 government tenders, especially for major infrastructure, foreign companies are required to take on a Bumiputra partner before their bids will be considered.

Another concern with Malaysian government procurement is the lack of transparency and competitive bidding. Prime Minister Najib announced in March 2010 that government procurement reform is an important goal of his administration. U.S. companies have voiced concerns about the non-transparent nature of the procurement process in Malaysia. Prime Minister Najib formed the Performance Management and Delivery Unit, (PEMANDU) to address transparency and competitive bidding in government procurement. PEMANDU has introduced the GOM’s new methods of bidding including the Swiss Challenge and Open Tender processes. Through the Swiss Challenge method, PEMANDU will publish bids for the project and invited third parties to match or exceed the received bids.

Corruption

Malaysia’s ranking in Transparency International’s Corruption Perception Index remained at 56th in 2010 down from 47th place in 2008 and 26th in 2004 among the 178 countries surveyed.

The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Nevertheless, corruption remains a serious concern.

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 previous Anti-Corruption Agency (ACA), has broader powers of investigation and questioning, including of public bodies and extended family members. The law establishing the MACC also provides for the seizure of properties 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 MACC’s ability to effectively address high-level corruption, as all key personnel are appointed directly by the Prime Minister’s office and the MACC has no independent authority to proceed with prosecutions. The Whistleblower Act took effect in December 2010. The law aims to protect those disclosing information on fraud, corruption and abuse from persecution for assisting in investigations and prosecution of crimes..

Prime Minister Najib declared after assuming office and again in the New Economic Model reform plan that the fight against corruption was one of his top priorities. A primary focus of the Government Transformation Program (GTP) is fighting corruption. Senior officials from the Prime Minister’s Office running the GTP recently cited a four point approach to reducing corruption in government procurement: increasing the number and decreasing the size of government procurement contract subject to open tenders, introducing the Transparency International “Integrity Pact” concept to be signed by all vendors that they understand bidding rules and anti-corruption laws prior to engaging in contract negotiations, issuing rules against Ministerial “referral letters” recommending specific contractors for government contracts, and fully implementing the new Whistleblower Act.

Efficient Capital Markets and Portfolio Investments

Banking

Foreign investors and foreign companies have access to credit on the local capital market. Foreign-controlled companies may seek any amount of ringgit credit facilities without Bank Negara’s approval. There are no restrictions on foreign stock brokerage companies obtaining ringgit facilities to facilitate the settlement of transaction on the Malaysian stock and bond markets. There is no limit on the number of residential and commercial property loans allowed to foreigners. In 2008, the government liberalized the foreign exchange administration rules allowing borrowing in foreign currency by residents as well as borrowing and lending in ringgit between residents and non-residents.

The Malaysian Deposit Insurance Company insures deposit accounts of up to RM250,000 ($80,645) with separate funds for conventional and Islamic banking institutions.

Capital Markets and Securities Trading

Malaysia houses Asia’s second largest corporate bond market, only behind Japan in market capitalization. During 2010, extensive foreign capital flowed back in to Malaysian bonds after a $35 billion outflow during the 2008-9 global financial crisis. Foreign companies regularly access capital in Malaysia’s bond market. Malaysia provides tax incentives for foreign companies issuing Islamic bonds and financial instruments in Malaysia.

Malaysia’s stock market (Bursa Malaysia) is open to foreign investment and foreign corporation issuing shares. However, foreign issuers remain subject to Bumiputra ownership requirements as described above. Listing requirements for foreign companies are similar to that of local companies. There additional criteria for foreign ones including, among others : approval of regulatory authorities of foreign jurisdiction where the company was incorporate, valuation of assets that are standards applied in Malaysia or International Valuation Standards and the company must have been registered with the Registrar of Companies under the Companies Act 1965.

Foreigners may trade in securities and derivatives. Malaysia has taken steps to promote good corporate governance by listed companies. 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, Malaysian Airlines and Kuala Lumpur's light rail transit system. The government has indicated increasing interest in restarting its privatization efforts through the New Economic Model reforms. Khazanah, the government’s sovereign wealth fund, owns many of the country’s major infrastructure projects, typically through companies in which it owns a majority stake. The Prime Minister chairs Khazanah’s Board of Directors.

Malaysia passed a new Competition Policy law in 2010, and established a Competition commission to implement the law. The Competition Commission is drafting implementing regulations, reportedly due early 2011. The law provides for protection against anticompetitive practices by a dominant player who is abusing the dominant position to deter competition.

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, the Securities Commission, published a CSR Framework for all publicly listed companies, which are required to disclose their CSR programs in their annual financial reports.

Political Violence

Malaysia has experienced little political violence since ethnic rioting in 1969 and can be characterized as a politically stable country relative to most countries in the region. Najib Razak, peacefully took office as Malaysia’s 6th Prime Minister on April 2, 2009. Although the government has historically denied assembly permits for anti-government street demonstrations and allowed for police to take action against street protestors on the basis of lacking a permit, no such events were reported in 2010.

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, including differing interpretations of national treatment and extended tax holidays offered to new and existing investors in targeted sectors.

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.

Labor

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.

Labor

The government of Malaysia reported that the domestic labor market improved in the 3rd quarter of 2010 with unemployment decreasing to 3.2% compared to 4.0% in 2009.due to slightly improving economic conditions. 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.

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 national labor unions in the electronics sector. However, there are regional and company-wide unions. 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.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers and the rigidity of working hours remain inflexible and a notable impediment to employing workers in Malaysia. The high cost of terminating their employees, even in cases of wrongdoing, is a source of complaint for domestic and foreign employers. The World Bank estimates that the financial cost of firing an employee averages 75 weeks of salary for that worker.

The government monitors the ethnic balance among employees of both foreign and domestic firms, and race-based preferences in hiring and promotion are widespread in government and in government-owned universities and corporations. While Bumiputra 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.

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.” The NEM and the ETP seek to address this problem by implementing a simpler and streamlined process for hiring expat labor. New streamlined regulations were proposed as a part of the 10MP and reiterated in the 2011 budget. It is unclear what the new procedures for hiring will be beginning in 2011.

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” (MSC) 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. The GOM has three “e-Xpats” centers in the Penang and Kulim industrial parks and 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-in capital of RM 500,000 (as of January 1, 2010) 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. According to a MIDA official, the larger a company’s paid-in capital, the more expatriates the company can employ. 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 for 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. In 2010, the government eliminated the six-month waiting period for determining a shortage of Malaysian candidates.

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 was removed in 2010 with a point system installed for residents living in Malaysia over five years. Malaysia also has 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. The Pemudah task force developed a guidebook clarifying the various procedures and requirements. In 2010, the government successfully implemented new regulations reducing application approval times, removing expatriate age limits, and allowing automatic approval for expatriate employees earning over $2,580 per month. 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. All spouses of expatriate employees now automatically qualify for 5-year Long Term Social Visit visas.

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 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

The U.S. is consistently 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 put cumulative U.S. interest in Malaysia at more than US $30.0 billion, significantly more than some official U.S. and Malaysian statistics, which may not capture or may undercount U.S. investment. U.S. firms with significant investment in Malaysia’s petroleum and petrochemical sector include: Exxon/Mobil (which participates in upstream and downstream activities), Caltex, ConocoPhillips, Murphy Oil, Hess Oil, 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. Tables 1-3 report approved manufacturing investment in Malaysia, as opposed to actual investments, and do not include significant U.S. investment in the petroleum and financial sectors.

Table One: Sources of Approved Manufacturing Investment in Malaysia

(Value in Millions of U.S. Dollars)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.
If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Total Investment

2005

8,173

2006

12,532

2007

17,422

2008

18,146

2009

9,543

2010

15,317

Foreign

4,706

5,512

9,717

13,323

6,475

9,434

Domestic

3,467

7,021

7,705

4,823

3,068

5,883


Table Two: Leading Foreign Investment Sources in the Manufacturing Sector

(Value in Millions of U.S. Dollars; Share in %)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

2005

2006

2007

2008

2009 2010

Germany

102

63

1,092

1,287

124 629

United States

1,357

675

878

2,544

672 3,811

Singapore

768

514

858

565

585 700

Netherlands

441

895

491

526

140 303

Japan

966

1,202

1,896

1,637

2,047 1,308

Australia

41

698

490

3,830

94 N/A

Hong Kong

N/A

N/A

N/A

24

1,550 898

China

N/A

N/A

N/A

10

47 N/A

Korea

N/A

N/A

N/A

58

98 N/A

Total Foreign

4,706

5,512

9,717

13,323

6,475 7,649

U.S. Share of Total Foreign

28.8%

14.3%

9.0%

19.1%

10.4% 49.8%

Foreign Share of Total

57.6%

44.0%

55.8%

73.4%

67.9% 81.0%


-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)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Sector

2005

2006

2007

2008

2009

2010

Chemicals

35

826

454

357

2,058

564

Petroleum Products

193

165

1,551

364

135

354

Electronics

2,979

2,344

3,993

5,068

1,162

3,844

Basic Metal

113

623

1,450

5,978

127

1,167

Food Manufacturing

140

244

107

313

273

N/A

Transport

133

59

89

249

158

N/A

Other

762

685

2,073

994

2,562

N/A

Total

4,706

5,512

9,717

13,323

6,475

5,929


Source: Malaysian Industrial Development Authority

Source: Bank Negara Annual Report 2004-2007

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/

LawNet : http://www.law.net/

E-Warta: http://www.e-warta.com.my/

MITI: http://www.miti.gov.my/

Companies Commission: http://www.ssm.com.my/

MyIPO: http://www.myipo.gov.my/

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.

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