Executive Summary

The peaceful transition of power from the ruling Barisan Nasional (BN) coalition to the opposition Pakatan Harapan (PH) following Malaysia’s May 9, 2018 elections marked the first change in government since the country’s independence in 1957. Since taking office, the new government, led by Prime Minister Mahathir Mohamad, has focused on tackling many domestic challenges, with an emphasis on reforming the country’s institutions and addressing a large amount of debt accrued by the previous administration. In advance of the election, the PH coalition published a 149-page Manifesto (http://kempen.s3.amazonaws.com/manifesto/Manifesto_text/Manifesto_PH_EN.pdf) laying out its party platform, including ten promises to be delivered in the first 100 days of its administration, as well as 60 promises and five special pledges to be honored within five years. priority promises for the near term focus on cost of living and economic issues, such as the abolishment of the Goods and Services Tax (GST) and tackling corruption. Prime Minister Mahathir Mohamad, who also served as Prime Minister from 1981-2003, has established high-level committees to address these issues, and as of July 2, 2018, formed a Cabinet amongst the four parties in his coalition.

The Government of Malaysia has traditionally encouraged foreign direct investment (FDI), and the new government has made public statements encouraging FDI. previous governments had placed restrictions or limits on investment in some sectors. Malaysia historically has actively targeted industries and negotiated incentive packages to attract FDI. A number of incentives have traditionally focused on export-oriented high-tech industries and “back office” service operations. It is likely that the incoming Prime Minister will focus on new domestic and foreign investment to drive his economic policies. Under the previous administration, inbound FDI had been steady in nominal terms, and Malaysia’s performance in attracting FDI relative to both earlier decades and the rest of the Association of Southeast Asian Nations (ASEAN) had slowed.

According to the 2013 Organization for Economic Cooperation and Development (OECD) Investment Policy Review of Malaysia, FDI to Malaysia began to decline in 1992, and private investment overall started to slide in 1997 following the Asian financial crises. In the intervening years, domestic demand has increasingly been the source of Malaysia’s economic performance, with foreign investment receding as a driver of GDP growth. The OECD concluded in its Review that Malaysia’s FDI levels in recent years had reached record high levels in absolute terms, but were at low levels as a percentage of GDP.

As a destination for FDI, Malaysia’s attractiveness for lower-wage manufacturing has diminished as years of steady economic growth have boosted average wage levels, contributing to Malaysia’s status as an upper middle-income country. New Finance Minister Lim Guan Eng said he understands that the new GOM’s economic success will be determined ultimately by its credit ratings, GDP growth, and ability to sustain and attract FDI. He believes Malaysia “can overcome the [fiscal] crisis, with economic fundamentals remaining strong.” While the new government has stated it will review all mega-projects, it will likely continue to promote investment in higher value-added manufacturing and service sectors.

It is still too early to tell if Prime Minister Mahathir will announce a new economic program, however, it is expected that the new government will continue to support the acceleration of growth in these key economic areas: the Greater Kuala Lumpur/Klang Valley region; oil, gas and energy; palm oil and rubber; wholesale and retail operations; financial services; tourism; the electrical and electronics (E&E) sector; business services; communications content and infrastructure; education; agriculture; and health care.

The business climate in Malaysia has been conducive to U.S. investment. Increased transparency and structural reforms that will prevent future corrupt practices could in the long run make Malaysia a more attractive destination for FDI. largest U.S. investments are in the oil and gas sector, manufacturing, and financial services. Firms with significant investment in Malaysia’s oil and gas and petrochemical sectors include: ExxonMobil, Caltex, ConocoPhillips, Murphy Oil, Hess Oil, Halliburton, Dow Chemical and Eastman Chemicals. Major semiconductor manufacturers, including ON Semiconductor, Texas Instruments, Intel, and others have substantial operations in Malaysia, as do electronics manufacturers Western Digital, Honeywell, St. Jude Medical Operations (medical devices), and Motorola. In recent years Malaysia has attracted significant investment in the production of solar panels, including from U.S. firms. Many of the major Japanese consumer electronics firms (Sony, Fuji, Panasonic, Matsushita, etc.) have facilities in Malaysia.

Table 1

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2017 62 of 180 http://www.transparency.org/
research/cpi/overview
World Bank’s Doing Business Report “Ease of Doing Business” 2017 24 of 190 http://doingbusiness.org/rankings
Global Innovation Index 2017 37 of 127 https://www.globalinnovation
index.org/analysis-indicator
U.S. FDI in partner country (M USD, stock positions) 2015 USD 13,900 http://www.bea.gov/
international/factsheet/
World Bank GNI per capita 2016 USD 9,860 http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

Policies Towards Foreign Direct Investment

Malaysia has one of the world’s most trade-dependent economies with exports and imports of goods and services reaching about 130 percent of annual GDP according to the World Trade Organization. The Malaysian government values foreign investment as a driver of continued national economic development, but has been hampered by restrictions in some sectors and an at-times burdensome regulatory regime. Some of these restrictions may be lifted by the new government in an effort to attract FDI.

In 2009, Malaysia removed its former 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. Although the FIC itself still exists, its primary role is to review of investments related to distributive trade (e.g., retail distributors) as a means of ensuring 30 percent of the equity in this economic segment is held by the bumiputera (ethnic Malays and other indigenous ethnicities in Malaysia).

Since 2009, the government has gradually liberalized foreign participation in the services sector to attract more foreign investment. Following removal of certain restrictions on foreign participation in industries ranging from computer-related consultancies, tourism, and freight transportation, the government in 2011 began to allow 100 percent foreign ownership across the following sectors: healthcare, retail, education as well as professional, environmental, and courier services. Some limits on foreign equity ownership remain in place across in telecommunications, financial services, and transportation.

Foreign investments in services, whether in sectors with no foreign equity limits or controlled sub-sectors, remain subject to review and approval by ministries and agencies with jurisdiction over the relevant sectors. A key function of this review and approval process is to determine whether proposed investments meet the government’s qualifications for the various incentives in place to promote economic development goals. Nevertheless, the Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. Investors in industries targeted by the Malaysian government often can negotiate favorable terms with ministries, or other bodies, regulating the specific industry. This can include assistance in navigating a complex web of regulations and policies, some of which can be waived on a case-by-case basis. Foreign investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from the various regulatory bodies and therefore can face greater bureaucratic obstacles.

Limits on Foreign Control and Right to Private Ownership and Establishment

The legal framework for foreign investment in Malaysia grants foreigners the right to establish businesses and hold equity stakes across all parts of the economy. However, despite the progress of reforms to open more of the economy to a greater share of foreign investment, limits on foreign ownership remain in place across many sectors.

Telecommunications

Malaysia began allowing 100 percent foreign equity participation in Applications Service Providers (ASP) in April 2012. However, for Network Facilities Providers (NFP) and Network Service Provider (NSP) licenses, a limit of 70 percent foreign participation remains in effect. In certain instances, Malaysia has allowed a greater share of foreign ownership, but the manner in which such exceptions are administered is non-transparent. Restrictions are still in force on foreign ownership allowed in Telekom Malaysia. The limitation on the aggregate foreign share is 30 percent or 5 percent for individual investors.

Oil and Gas

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by Petroleum Nasional Berhad (PETRONAS), a wholly state-owned company and the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign participation tends to take the form of production sharing contracts (PSCs). PETRONAS regularly requires its PSC partners to work with Malaysian firms for many tenders. Non-Malaysian firms are permitted to participate in oil services in partnership with local firms and are restricted to a 49 percent equity stake if the foreign party is the principal shareholder. PETRONAS sets the terms of upstream projects with foreign participation on a case-by-case basis.

Financial Services

Malaysia’s 10-year Financial Sector Blueprint envisages further opening to foreign institutions and investors, but does not contain specific market-opening commitments or timelines. For example, the services liberalization program that started in 2009 raised the limit of foreign ownership in insurance companies to 70 percent. However, Malaysia’s Central Bank (Bank Negara Malaysia (BNM)), would allow a greater foreign ownership stake if the investment is determined to facilitate the consolidation of the industry. The latest Blueprint, 2011-2020, helped to codify the case-by-case approach. Under the Financial Services Act passed in late 2012, issuance of new licenses will be guided by prudential criteria and the “best interests of Malaysia,” which may include consideration of the financial strength, business record, experience, character and integrity of the prospective foreign investor, soundness and feasibility of the business plan for the institution in Malaysia, transparency and complexity of the group structure, and the extent of supervision of the foreign investor in its home country. In determining the “best interests of Malaysia,” BNM may consider the contribution of the investment in promoting new high value-added economic activities, addressing demand for financial services where there are gaps, enhancing trade and investment linkages, and providing high-skilled employment opportunities. BNM, however, has never defined criteria for the “best interests of Malaysia” test, and no firms have qualified. While under the previous administration and BNM Governor, insurance companies at 100 percent foreign ownership had to sell down their stakes by 30 percent by June 30, 2018, as of July 2, 2018, no 100 percent foreign owned insurance company had decreased its ownership, pending new direction from BNM. A new BNM Governor took office July 2, and as of that date, BNM has made no official statements regarding whether to uphold the previous Governor’s deadline, but it has passed with no discernable impact.

BNM currently allows foreign banks to open four additional branches throughout Malaysia, subject to restrictions, which include designating where the branches can be set up (i.e., in market centers, semi-urban areas and non-urban areas). The policies do not allow foreign banks to set up new branches within 1.5 km of an existing local bank. BNM also has conditioned foreign banks’ ability to offer certain services on commitments to undertake certain back office activities in Malaysia.

Other Investment Policy Reviews

Malaysia’s most recent Organization for Economic Cooperation and Development (OECD) investment review occurred in 2013. Although the review underscored the generally positive direction of economic reforms and efforts at liberalization, the recommendations emphasized the need for greater service sector liberalization, stronger intellectual property protections, enhanced guidance and support from Malaysia’s Investment Development Authority (MIDA), and continued corporate governance reforms.

Malaysia also conducted a WTO Trade Policy Review in February 2018, which incorporated a general overview of the country’s investment policies. The WTO’s review noted the Malaysian government’s action to institute incentives to encourage investment as well as a number of agencies to guide prospective investors. Beyond attracting investment, Malaysia had made measurable progress on reforms to facilitate increased commercial activity. Among the new trade and investment-related laws that entered into force during the review period were: the Companies Act, which introduced provisions to simplify the procedures to start a company, to reduce the cost of doing business, as well as to reform corporate insolvency mechanisms; the introduction of the goods and services tax (GST) to replace the sales tax; the Malaysian Aviation Commission Act, pursuant to which the Malaysian Aviation Commission was established; and various amendments to the Food Regulations. Since the WTO Trade Policy Review, however, the new government has already eliminated the GST, and has announced the revival of the sales and services tax, to be implemented starting September 1, 2018. http://www.oecd.org/investment/countryreviews.htm 

https://www.wto.org/english/tratop_e/tpr_e/tp466_e.htm 

Business Facilitation

The principal law governing foreign investors’ entry and practice in the Malaysian economy is the Companies Act of 2016 (CA), which entered into force on January 31, 2017 and replaced the Companies Act of 1965. Incorporation requirements under the new CA have been further simplified and are the same for domestic and foreign sole proprietorships, partnerships, as well as privately held and publicly traded corporations. According to the World Bank’s Doing Business Report 2018, Malaysia strengthened access to credit by adopting a new law that establishes a modern collateral registry; strengthened minority investor protections by requiring greater corporate transparency; and made importing and exporting easier by improving the infrastructure, equipment and facilities at Port Klang.

In addition to registering with the Companies Commission of Malaysia, business entities must file: 1) Memorandum and Articles of Association (ie, company charter); 2) a Declaration of Compliance (ie, compliance with provisions of the Companies Act); and 3) a Statutory Declaration (ie, no bankruptcies, no convictions). The registration and business establishment process takes two weeks to complete, on average. While GST has been eliminated, the law governing GST has not yet been repealed. As a result, businesses with an annual revenue of over RM 500,000 must still register as a GST payer. The new government has promised a repeal of GST and an installment of a new sales and services tax (SST), which will require the passage of a new law. The government said SST will begin implementation on September 1, 2018.

Beyond these requirements, foreign investors must obtain licenses. Under the Industrial Coordination Act of 1975, an investor seeking to engage in manufacturing will need a license if the business claims capital of RM 2.5 million (approximately USD 641,000) or employs at least 75 full-time staff. The Malaysian Government’s guidelines for approving manufacturing investments, and by extension, manufacturing licenses, are generally based on capital-to-employee ratios. Projects below a threshold of RM 55,000 (approximately USD 14,100) of capital per employee are deemed labor-intensive and will generally not qualify. Manufacturing investors seeking to expand or diversify their operations will need to apply through MIDA.

Manufacturing investors whose companies have annual revenue below RM 50 million (approximately USD 12.8 million) or with fewer than 200 full-time employees meet the definition of small and medium size enterprises (SMEs) and will generally be eligible for government SME incentives. Companies in the services or other sectors that have revenue below RM 20 million (approximately USD 5.1 million) or fewer than 75 full-time employees will meet the SME definition.

References:

As a member of ASEAN, Malaysia is a party to trade agreements with Australia and New Zealand; China; India; Japan; and the Republic of Korea. During the review period, the ASEAN-India Agreement was expanded to cover trade in services. Malaysia also has bilateral FTAs with: Australia; Chile; India; Japan; New Zealand; Pakistan; and Turkey.

Malaysia has bilateral investment treaties with 36 countries, but not yet with the United States. Malaysia does have bilateral investment guarantee agreements with over 70 economies, including the United States. The Government reports that 65 of Malaysia’s existing investment agreements contain Investor State Dispute Settlement (ISDS) provisions. Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Malaysia has double taxation treaties with over 70 countries, though the double taxation agreement with the U.S. currently is limited to air and sea transportation.

Transparency of the Regulatory System

In July 2013, the Malaysian Government initiated a National Policy on Development and Implementation of Regulations (NPDIR). Under this policy, the federal government embarked on a comprehensive approach to minimize redundancies in the country’s regulatory framework. The benefits to the private sector thus far have largely been reduced licensing requirements, fees, and approval wait-times for construction projects. The main components of the policy have been: 1) a regulatory impact assessment (a cost-benefit analysis of all newly proposed regulations); and 2) the creation of a regulations guide, PEMUDAH (similar to the role MIDA plays for prospective investors), to aid businesses and civil society organizations in understanding regulatory requirements affecting their organizations’ activities. Under the NPDIR, the government has committed to reviewing all new regulations every five years to determine with the new regulations need to be adjusted or eliminated.

Despite this effort to make government more accountable for its rules and to make the process more inclusive, many foreign investors continue to criticize the lack of transparency in government decision making. The implementation of rules on government procurement contracts are a recurring concern. Non-Malaysian pharmaceutical companies claim to have lost bids against bumiputera (ethnic Malay)-owned companies despite offering more effective medicines at lower cost.

International Regulatory Considerations

Malaysia is one of 10 Member States that constitute the Association of Southeast Asian Nations (ASEAN). On December 31, 2015, the ASEAN Economic Community formally came into existence. For many years ahead of that date, and since, ASEAN’s economic policy leaders have met regularly to discuss promoting greater economic integration within the 10-country bloc. Although trade within the 10-country bloc is robust, Member States have prioritized steps to facilitate a greater flow of goods, services, and capital. No regional regulatory system is in place. As a member of the WTO, Malaysia provides notification of all draft technical regulations to the Committee on Technical Barriers to Trade.

Legal System and Judicial Independence

Malaysia’s legal system generally reflects English Law in that it consists of written and unwritten laws. Written laws include the federal and state constitutions as well as laws passed by Parliament and state legislatures. Unwritten laws are derived from court cases and local customs. The Contract Law of 1950 still guides the enforcement of contracts and resolution of disputes. States generally control property laws for residences, although the Malaysian government has recently adopted measures, including high capital gains taxes, to prevent the real estate market from overheating. Nevertheless, through such programs as the Multimedia Super Corridor, Free Commercial Zones, and Free Industrial Zones, the federal government has substantial reach into a range of geographic areas as a means of encouraging foreign investment and facilitating ownership of commercial and industrial property.

In 2007 the judiciary introduced dedicated intellectual property (IP) courts that consist of 15 “Sessions Courts” that sit in each state, and 6 ‘High Courts’ that sit in certain states (i.e. Kuala Lumpur, Johor, Perak, Selangor, Sabah and Sarawak). Malaysia launched the IP courts to deter the use of IP-infringing activity to fund criminal activity and to demonstrate a commitment to IP development in support of the country’s goal to achieve high-income status. These lower courts hear criminal cases, and have the jurisdiction to impose fines for IP infringing acts. There is no limit to the fines that they can impose. The higher courts are designated for civil cases to provide damages incurred by rights holders once the damages have been quantified post-trial. High courts have the authority to issue injunctions (i.e., to order an immediate cessation of infringing activity) and to award monetary damages.

Labor Courts, which the Ministry of Human Resources describes as “a quasi-judicial system that serves as an alternative to civil claims,” provide a means for workers to seek payment of wages and other financial benefits in arrears. Proceedings are generally informal but conducted in accordance with civil court principles. The High Court has upheld decisions which Labor Courts have rendered.

Certain foreign judgments are enforceable in Malaysia by virtue of the Reciprocal Enforcement of Judgments Act 1958 (REJA). However, before a foreign judgment can be enforceable, it has to be registered. The registration of foreign judgments is only possible if the judgment was given by a Superior Court from a country listed in the First Schedule of the REJA: the United Kingdom, Hong Kong Special Administrative Region of the People’s Republic of China, Singapore, New Zealand, Republic of Sri Lanka, India, and Brunei.

To register a foreign judgment under the REJA, the judgment creditor has to apply for the same within six years after the date of the foreign judgment. Any foreign judgment coming under the REJA shall be registered unless it has been wholly satisfied, or it could not be enforced by execution in the country of the original Court.

If the judgment is not from a country listed in the First Schedule to the REJA, the only method of enforcement at common law is by securing a Malaysian judgment. This involves suing on the judgment in the local Courts as an action in debt. Summary judgment procedures (explained above) may be used to expedite the process.

Post is not aware of instances in which political figures or government authorities have interfered in judiciary proceedings involving commercial matters.

Laws and Regulations on Foreign Direct Investment

The Government of Malaysia established the Malaysia Investment Development Authority (MIDA) to attract foreign investment and to serve as a focal point for legal and regulatory questions. Organized as part of the Ministry of International Trade and Industry (MITI), MIDA serves as a guide to foreign investors interested in the manufacturing sector and in many services sectors. Regional bodies providing support investors include: Invest Kuala Lumpur, Invest Penang, Koridor Utara Malaysia (Malaysia’s Northern Corridor), the East Coast Economic Region Development Council, the Iskandar Regional Development Authority (IRDA), the Sabah Economic Development and Investment Authority (SEDIA), and the Sarawak Economic Development Corporation.

As noted, the Ministerial Functions Act authorizes government ministries to oversee investments under their jurisdiction. Prospective investors in the services sector will need to follow requirements set by the relevant Malaysian Government ministry or agency over the sector in question.

Competition and Anti-Trust Laws

Identify which agencies review transactions for competition-related concerns (whether domestic or international in nature). Generally describe any significant competition cases on which there have been developments over the past year. Please limit your description to only those which have had an effect on or involved foreign investment.

On April 21, 2010, the Parliament of Malaysia approved two bills, the Competition Commission Act 2010 and the Competition Act 2010. The Acts took effect January 1, 2012. The Competition Act prohibits cartels and abuses of a dominant market position, but does not create any pre-transaction review of mergers or acquisitions. Violations are punishable by fines, as well as imprisonment for individual violations. Malaysia’s Competition Commission has responsibility for determining whether a company’s “conduct” constitutes an abuse of dominant market position or otherwise distorts or restricts competition. As a matter of law, the Competition Commission does not have separate standards for foreign and domestic companies. Commission membership consists of senior officials from the Ministry of International Trade and Industry (MITI), the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC), the Ministry of Finance, the Prime Minister’s Economic Planning Unit and, on a rotating basis, representatives from academia and the private sector.

In addition to the Competition Commission, the Acts established a Competition Appeals Tribunal (CAT) to hear all appeals of Commission decisions. In the largest case to date, the Commission imposed a fine of RM 10 million on Malaysia Airlines and Air Asia in September 2013 for colluding to divide shares of the air transport services market. The airlines filed an appeal in March 2014. In February 2016, the CAT ruled in favor of the airlines in its first-ever decision and ordered the penalty to be set aside and refunded to both airlines.

Expropriation and Compensation
The Embassy is not aware of any cases of uncompensated expropriation of U.S.-held assets, or confiscatory tax collection practices, 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

ICSID Convention and New York Convention

Malaysia signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) on October 22, 1965, coming into force on October 14, 1966. In addition, it is a contracting state of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards since November 5, 1985.

Malaysia adopted the following measures to make the two conventions effective in its territory:

The Convention on the Settlement of Investment Disputes Act, 1966. (Act of Parliament 14 of 1966); the Notification on entry into force of the Convention on the Settlement of Investment Disputes Act, 1966. (Notification No. 96 of March 10, 1966); and the Arbitration (Amendment) Act, 1980. (Act A 478 of 1980).

Although the domestic legal system is accessible to foreign investors, filing a case generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. Post is unaware of any U.S. investors’ recent complaints of political interference in any judicial proceedings.

References:

Investor-State Dispute Settlement

Malaysia’s investment agreements contain provisions allowing for international arbitration of investment disputes. Malaysia does not have a Bilateral Investment Treaty with the United States.

Post has little data concerning the Malaysian Government’s general handling of investment disputes. In 2004, a U.S. investor filed a case against the directors of the firm, who constituted the majority shareholders. The case involves allegations by the U.S. investor of embezzlement by the other directors. The case remains in the appeals process.

The Malaysian government has been involved in three ICSID cases — in 1994, 1999, and 2005. The first case was settled out of court. The second, filed under the Malaysia-Belgo-Luxembourg Investment Guarantee Agreement (IGA), was concluded in 2000 in Malaysia’s favor. The 2005 case, filed under the Malaysia-UK Bilateral Investment Treaty, was concluded in 2007 in favor of the investor. However, the judgment against Malaysia was ultimately dismissed on jurisdictional grounds, namely that ICSID was not the appropriate forum to settle the dispute because the transaction in question was not deemed an investment since it did not materially contribute to Malaysia’s development. Nevertheless, Malaysian courts recognize arbitral awards issued against the government. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Malaysia’s Arbitration Act of 2005 applies to both international and domestic arbitration. Although its provisions largely reflect those of the UN Commission on International Trade Law (UNCITRAL) Model Law, there are some notable differences, including the requirement that parties in domestic arbitration must choose Malaysian law as the applicable law. Although an arbitration agreement may be concluded by email or fax, it must be in writing: Malaysia does not recognize oral agreements or conduct as constituting binding arbitration agreements.

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. Arbitration held in a foreign jurisdiction under the rules of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1965 or under the United Nations Commission on International trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur can be enforceable in Malaysia.

Bankruptcy Regulations

Malaysia’s Department of Insolvency (MdI) is the lead agency implementing the Insolvency Act of 1967, previously known as the Bankruptcy Act of 1967. On October 6, 2017, the Bankruptcy Bill 2016 came into force, changing the name of the previous Act, and amending certain terms and conditions. The most significant changes in the amendment include — (1) a social guarantor can no longer be made bankrupt; (2) there is now a stricter requirement for personal service for bankruptcy notice and petition; (3) introduction of the voluntary arrangement as an alternative to bankruptcy; (4) a higher bankruptcy threshold from RM 30,000 to RM 50,000; (5) introduction of the automatic discharge of bankruptcy; (6) no objection to four categories of bankruptcy for applying a discharge under section 33A (discharge of bankrupt by Certificate of Director General of Insolvency); (7) introduction of single bankruptcy order as a result of the abolishment of the current two-tier order system, i.e. receiving and adjudication orders; (8) creation of the Insolvency Assistance fund.

The distribution of proceeds from the liquidation of a bankrupt company’s assets generally adheres to the “priority matters and persons” identified by the Companies Act of 2016. After the bankruptcy process legal costs are covered, recipients of proceeds are: employees, secured creditors (i.e., creditors of real assets), unsecured creditors (i.e., creditors of financial instruments), and shareholders. Bankruptcy is not criminalized in Malaysia. The country ranks 46th on the World Bank Group’s Doing Business Rankings for Ease of Resolving Insolvency.

Investment Incentives

The Malaysian Government has codified the incentives available for investments in qualifying projects in target sectors and regions. Tax holidays, financing, and special deductions are among the measures generally available for domestic as well as foreign investors in the following sectors and geographic areas: information and communications technologies (ICT); biotechnology; halal products (e.g., food, cosmetics, pharmaceuticals); oil and gas storage and trading; Islamic finance; Kuala Lumpur; Labuan Island (off Eastern Malaysia); East Coast of Peninsular Malaysia; Sabah and Sarawak (Eastern Malaysia); Northern Corridor.

Foreign Trade Zones/Free Ports/Trade Facilitation

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. 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. 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, although the project has been dogged by corruption allegations related to the land acquisition for the site. The government launched a prosecution in 2009 of the former Transport Minister involved in the land purchase process, though he was later acquitted in October 2013.

The Digital Free Trade Zone (DFTZ) is an initiative by the Malaysian Government, implemented through MDEC, launched in November 2017 with the participation of China’s Alibaba. DFTZ aims to facilitate seamless cross-border trading and eCommerce, and enable Malaysian SMEs to export their goods internationally. According to the Malaysian government, the DFTZ consists of two components:

  • An eFulfilment Hub to help Malaysian SMEs export their goods with the help of leading fulfilment service providers;
  • An eServices Platform to efficiently manage cargo clearance and other processes needed for cross-border trade
  • For more information, please visit https://mydftz.com 

Raw materials, products and equipment may be imported duty-free into these zones with minimum customs formalities. Companies that export not less than 80 percent 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 percent of its international trade by volume is seaborne. Malaysia is also a major transshipment center.

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 percent 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.

Performance and Data Localization Requirements

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 requirements. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

The Malaysian government extends a full tax exemption incentive of 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 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 New Economic Model stated that in the long term, the government 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 http://www.mida.gov.my/home/ .

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.mdec.my. The Malaysia Digital Economy Corporation (MDEC) approves all applications for MSC status. For more information please visit: https://www.mdec.my/msc-malaysia 

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, university and graduate education, 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 and local campuses of foreign universities. For example, GE and Honeywell maintain regional offices for ASEAN in Malaysia. In 2016, McDermott moved its regional headquarters to Malaysia and Boston Scientific broke ground on a medical devices manufacturing facility.

Malaysia seeks to attract foreign investment in biotechnology, but sends a mixed message on agricultural and food biotechnology. On July 8, 2010, the Malaysian Ministry of Health posted amendments to the Food Regulations 1985 [P.U. (A) 437/1985] that require strict mandatory labeling of food and food ingredients obtained through modern biotechnology. The amendments also included a requirement that no person shall import, prepare or advertise for sale, or sell any food or food ingredients obtained through modern biotechnology without the prior written approval of the Director. There is no ‘threshold’ level on the labeling requirement. Labeling of “GMO Free” or “Non-GMO” is not permitted. The labeling requirements only apply to foods and food ingredients obtained through modern biotechnology but not to food produced with GMO feed. The labeling regulation was originally scheduled to be enforced beginning in July 2012. However, a Ministry of Health circular published on August 27, 2012 announced that enforcement would be deferred until July 8, 2014. However, there has not been any announcement to date of its enforcement. A copy of the law and regulations respectively can be found at: http://www.biosafety.nre.gov.my/law_regulation.shtml 

Malaysia has not implemented measures amounting to “forced localization” for data storage. The government has provided inducements to attract foreign and domestic investors to the Multimedia Super Corridor but does not mandate use of onshore providers. Companies in the information and communications technology sector are not required to hand over source code.

Real Property

Land administration is shared among federal, state, and local government. State governments have their own rules about land ownership, including foreign ownership. Malaysian law affords strong protections to real property owners. Real property titles are recorded in public records and attorneys review transfer documentation to ensure efficacy of a title transfer. There is no title insurance available in Malaysia. Malaysian courts protect property ownership rights. Foreign investors are allowed to borrow using real property as collateral. Foreign and domestic lenders are able to record mortgages with competent authorities and execute foreclosure in the event of loan default. Malaysia ranks 42nd (ranked 40th in 2017) in ease of registering property according to the Doing Business 2018 report, right behind China and ahead of Palau.

Intellectual Property Rights

In December 2011, the Malaysian Parliament passed amendments to the copyright law designed to, inter alia, bring the country into compliance with the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty, define Internet Service Provider (ISP) liabilities, and prohibit unauthorized recording of motion pictures in theaters. Malaysia subsequently acceded to the WIPO Copyright Treaty and the WIPO Performance and Phonogram Treaty in September 2012. In addition, the Ministry of Domestic Trade, Cooperatives, and Consumerism (MDTCC) took steps to enhance Malaysia’s enforcement regime, including active cooperation with rights holders on matters pertaining to IPR enforcement, ongoing training of prosecutors for specialized IPR courts, and the 2013 reestablishment of a Special Anti-Piracy Taskforce.

In response to trends of rising internet piracy, the interagency Special Anti-Piracy Task Force established a Special Internet Forensics Unit (SIFU) within MDTCC. The SIFU team’s responsibilities include monitoring for sites suspected of being, or known as, purveyors of infringing content. This organization follows MDTCC’s practice of launching investigations based on information and complaints from legitimate host sites and content providers. Capacity building remains a priority for the SIFU. Coordination with the Malaysian Communications and Multimedia Commission (MCMC), which has responsibility for overall regulation of internet content, has been improving, according to many rights holders in Malaysia. Our contacts at MDTCC have told Post that the process of developing investigative leads that would support a case for the Attorney General’s Chambers (equivalent to the U.S. Department of Justice) is a work in progress.

Despite Malaysia’s success in improving IPR enforcement, key issues remain, including relatively widespread availability of pirated and counterfeit products in Malaysia, high rates of piracy over the Internet, and continued problems with book piracy. In the 2018 U.S. Special 301, the U.S. Trade Representative (USTR) Office announced it will conduct an Out-of-Cycle Review of Malaysia, which will consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. The United States continues to encourage Malaysia to accede to the WIPO Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure. In addition, the United States continues to urge Malaysia to provide effective protection against unfair commercial use, as well as unauthorized disclosure, of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products, and to provide an effective system to address patent issues expeditiously in connection with applications to market pharmaceutical products.

For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Foreigners may trade in securities and derivatives. Malaysia houses one of Asia’s largest corporate bond markets, and is the largest sukuk (Islamic bond) market in East Asia. Both domestic and 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 bumiputera ownership requirements of 12.5 percent if the majority of their operations are in Malaysia. Listing requirements for foreign companies are similar to that of local companies. There are additional criteria for foreign companies wanting to list in Malaysia including, among others: approval of regulatory authorities of foreign jurisdiction where the company was incorporated, 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 or 2016.

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 prohibited.

Money and Banking System

International investors generally regard Malaysia’s banking sector as dynamic and well regulated. Although privately owned banks are competitive with state-owned banks, the state-owned banks dominate the market. The five largest banks – Maybank, CIMB, Public Bank, RHB, and Ambank – account for an estimated 75 percent of banking sector loans. According to the Ministry of Finance Report for 2016-2017, total banking sector lending as of August 2016 was 132 percent of GDP. According to the World Bank, 1.5 percent of the Malaysian banking sector’s loans were non-performing for 2017.

Bank Negara prohibits hostile takeovers of banks, but the Securities Commission has established non-discriminatory rules and disclosure requirements for hostile takeovers of publicly traded companies.

Foreign Exchange and Remittances

Foreign Exchange Policies

In December 2016, the central bank, began implementing new foreign exchange management requirements. Under the policy, exporters are required to convert 75 percent of their export earnings into Malaysian ringgit. The goal of this policy was to deepen the market for the currency, with the goal of reducing exchange rate volatility. The policy remains in place, with the Central Bank giving case-by-case exceptions. All domestic trade in goods and services must be transacted in ringgit only, with no optional settlement in foreign currency. The Central Bank has demonstrated little flexibility with respect to the ratio of earnings that exporters hold in ringgit. Post is unaware of any instances where the requirement for exporters to hold their earnings in ringgit has impeded their ability to remit profits to headquarters.

Remittance Policies

Malaysia imposes few investment remittance rules on resident companies. Incorporated and individual U.S. investors have not raised concerns about their ability to transfer dividend payments, loan payments, royalties or other fees to home offices or U.S.-based accounts. Tax advisory firms and consultancies have not flagged payments as a significant concern among U.S. or foreign investors in Malaysia. Foreign exchange administration policies place no foreign currency asset limits on firms that have no ringgit-denominated debt. Companies that fund their purchases of foreign exchange assets with either onshore or offshore foreign exchange holdings, whether or not such companies have ringgit-denominated debt, face no limits in making remittances. However, a company with ringgit-denominated debt will need approval from the Central Bank for conversions of RM50 million or more into foreign exchange assets in a calendar year.

The Treasury Department has not identified Malaysia as a currency manipulator.

Sovereign Wealth Funds

The Malaysian Government established government-linked investment companies (GLICs) as vehicles to harness revenue from commodity-based industries and promote growth in strategic development areas. Khazanah is the largest of the GLICs, and the company holds equity in a range of domestic firms as well as investments outside Malaysia. The other GLICs – Armed Forces Retirement Fund (LTAT), National Capital (PNB), Employees Provident Fund (EPF), Pilgrimage Fund (Tabung Haji), Public Employees Retirement Fund (KWAP) – execute similar investments but are structured as savings vehicles for Malaysians. Khazanah follows the Santiago Principles and participates in the International Forum on Sovereign Wealth Funds

Khazanah was incorporated in 1993 under the Companies Act of 1965 as a public limited company with a charter to promote growth in strategic industries and national initiatives. As of January 18, 2018, Khazanah reported “realizable” assets of RM 157.2 billion (USD 39.3 billion) and a pre-tax profit of RM 2.89 billion (USD 723 million). The sectors comprising its major holdings include telecommunications and media, airports, banking, real estate, health care, and the national energy utility. According to the company’s 2017 annual review, 78 percent of Khazanah’s assets are invested in Malaysian-headquartered companies. Although the company generally manages its investments with the objective to produce strong companies and high returns, Khazanah often undertakes investments that are deemed government policy priorities.

State-owned enterprises play a very significant role in the Malaysian economy. Such enterprises have been used to spearhead infrastructure and industrial projects. As of July 2017, the government owns approximately 42 percent 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. Khazanah, often considered the government’s sovereign wealth fund, owns stakes in companies competing in many of the country’s major industries. Until May 31, 2018, former Prime Minister Najib Tun Razak chaired Khazanah’s Board of Directors. PETRONAS, the state-owned oil and gas company, is Malaysia’s only Fortune Global 500 firm.

As part of its Government Linked Companies (GLC) Transformation Program, the Malaysian Government embarked on a two-pronged strategy to reduce its shares across a range of companies and to make those companies more competitive. Among the notable divestments of recent years, Khazanah, the largest Government-Linked Investment Company (GLIC), offloaded its stake in the national car company Proton to DRB-Hicom Bhd in 2012. In 2013, Khazanah divested its holdings in telecommunications services giant Time Engineering Bhd. In 2015, Khazanah cut its equity ownership of national utility company Tenaga Nasional from 31 percent to 29 percent. Khazanah’s annual report for 2017 noted only that the fund had completed 12 divestments that produced a gain of RM 2.5 billion (USD 625 million).

OECD Guidelines on Corporate Governance of SOEs

State-owned enterprises (SOEs), which in Malaysia are called government-linked companies (GLCs), with publicly traded shares must produce audited financial statements every year. These SOEs must also submit filings related to changes in the organization’s management. The SOEs that do not offer publicly traded shares are required to submit annual reports to the Companies Commission. The requirement for publicly reporting the financial standing and scope of activities of SOEs has increased their transparency. It is also consistent with the OECD’s guideline for Transparency and Disclosure. Moreover, many SOEs prioritize operations that maximize their earnings. However, the close relationships SOEs have with senior government officials blur the line between strictly commercial activity pursued for its own sake and activity that has been directed to advance a policy interest. For example, Petroliam Nasional Berhad (Petronas) is both SOE in the oil and gas sector and the regulator of the industry. Malaysia Airlines (MAS), in which the government previously held 70 percent but now holds 100 percent, required periodic infusions of resources from the government to maintain the large numbers of the company’s staff and senior executives. The airline is still undergoing a restructuring, and the stated goal of the country’s largest sovereign wealth fund, Khazanah, which holds all of the airline’s shares, is to re-list the airline in early 2019.

Privatization Program

In several key sectors, including transportation, agriculture, utilities, financial services, manufacturing, and construction, Government Linked Corporations (GLCs) continue to dominate the market. However, the Malaysian Government remains publicly committed to the continued, eventual privatization, though it has not set a timeline for the process and faces substantial political pressure to preserve the roles of the GLCs. The Malaysian Government established the Public-Private Partnership Unit (UKAS) in 2009 to provide guidance and administrative support to businesses interested in privatization projects as well as large-scale government procurement projects. As of July 2, 2018, UKAS, which used to be a part of the Office of the Prime Minister, is now under the Ministry of Finance. UKAS oversees transactions ranging from contracts and concessions to sales and transfers of ownership from the public sector to the private sector.

Foreign investors may participate in privatization programs, but foreign ownership is limited to 25 percent of the privatized entity’s equity. The National Development Policy confers preferential treatment to the bumiputera, which are entitled to at least 30 percent of the privatized entity’s equity.

The privatization process is formally subject to public bidding. However, the lack of transparency has led to criticism that the government’s decisions tend to favor individuals and businesses with close ties to high-ranking officials.

The development of responsible business conduct programs in Malaysia has shifted from a government-led initiative to business-led practices. In 2006, Malaysian stock market regulator, the Securities Commission, published a Corporate Social Responsibility (CSR) Framework for all publicly listed companies, which are required to disclose their CSR programs in their annual financial reports. In 2007 the Women, Family and Community Ministry launched the Prime Minister’s CSR’s Awards to encourage the spread of CSR programs. In 2011, the Malaysian Government launched the 1Malaysia Training Plan (SL1M), an employment incentive that allows businesses to double the tax deduction for expenses to hire and train graduates from rural areas or from low-income families. In 2011, the Board for Corporate Sustainability and Responsibility Malaysia (BCSRM) supplanted the Institute for Corporate Responsibility Malaysia as the focal point for the country’s responsible business conduct programs. The BCSRM is the local affiliate of the World Business Council for Sustainable Development.

Although the Malaysian Government encourages companies to adopt RBC programs, it does not promote adherence to the principles in the OECD Guidelines for Multinational Enterprises or the UN Guiding Principles on Business and Human Rights. Malaysia is not a member of the Extractive Industries Transparency Initiative.

The Malaysian government established the Malaysian Anti-Corruption Commission (MACC) in 2008 and the Judicial Appointments Commission Act (to make judicial appointments more transparent) in 2008 and the Whistleblower Protection Act in 2010. The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Malaysia’s anti-corruption law includes the criminal offense of bribery of foreign public officials, permits the prosecution of Malaysians for offense committed overseas, and also provides for the seizure of properties.

The MACC conducts investigations but prosecutorial discretion remains with the Attorney General’s Chambers (AGC). This combined with no systematic public disclosure of assets held by senior officials and no Whistleblower Act protection for those who disclose allegations to the media, resulted in little effective oversight or enforcement of political corruption. The case was proven when, in 2015, questions surrounding the financial management of state development fund 1 Malaysia Development Berhad (1MDB), chaired by then-Prime Minister Najib, led to an investigation by the Attorney General and a formal inquiry by Parliament. However, after Najib installed a new Attorney General and removed other ministers, the MACC’s investigation closed in late 2015, and the Attorney General declared in January 2016 the Prime Minister innocent of any wrongdoing connected to 1MDB.

The new government, however, has made tackling corruption one of the government’s top 10 priority promises for its first 100 days in office, including setting up Royal Commissions of Inquiry into alleged corruption at 1Malaysia Development Berhad (1MDB) (related to which the U.S. Department of Justice filed complaints in 2016 and 2017), FELDA, the Council of Trust for the People (MARA), and the Hajj Pilgrims Fund (Tabung Haji). On May 21 MACC established a 1MDB taskforce, including the police and central bank, responsible for identifying and seizing assets acquired using funds allegedly removed from the state fund and renewing inquiry into the possible criminal conduct of individuals involved in the management of 1MDB, including Najib.

In a step towards systematic reform, on July 2, 2018, the government announced that the number of agencies and departments under Prime Minister’s Department (PMD) purview would be reduced from over 90 to only 26 entities for greater transparency. Forty will be re-designated to other ministries, while 10 agencies, offices, and task forces will be abolished. Nine have been given the green light to operate as independent entities, reporting directly to Parliament while five other agencies have been merged. Among the nine are the Malaysian Anti-Corruption Commission, the Election Commission, Human Rights Commission of Malaysia and the National Audit Department.

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

Datuk Seri Mohd Shukri Abdull -Chief Commissioner
Malaysia Anti-Corruption Commission
Block D6, Complex D, Pusat Pentadbiran
Kerajaan Persekutuan, Peti Surat 6000
62007 Putrajaya
+6-1800-88-6000
info@sprm.gov.my

Contact at a “watchdog” organization:

Cynthia Gabriel
Director
The Center to Combat Corruption and Cronyism (C4)
C Four Consultancies Sdn Bhd
A-2-10, 8 Avenue,
Jalan Sg Jernih 8/1,
Seksyen 8,
46050 Petaling Jaya,
Selangor, Malaysia
info@c4center.org

Violent communist insurgencies that began prior to Malaysia’s independence affected both peninsular Malaysia and in the East Malaysian state of Sarawak and ended in 1990. Ethnic riots followed the 1969 national elections. The May 9, 2018 national election led to the first transition of power since independence, which was peaceful. In April 2012, the Peaceful Assembly Act took effect, which eliminates the need for permits for public assemblies but outlaws street protests and places other significant restrictions on public assemblies. On April 28 2012, the police disrupted a large protest march that took place despite restrictions the government attempted to impose. Subsequent demonstrations and protest marches took place in 2013 and 2014 without disruption. Following the July 2014 Israeli incursion into Gaza, several Malaysian non-governmental entities organized a boycott of McDonald’s. Over a several week period, protestors picketed at several McDonalds restaurants, at times taunting and harassing employees. Periodically, Malaysian groups will organize modest protests against U.S. policies, usually involving demonstrations outside the U.S. embassy. To date, these have remained peaceful and localized, with a strong police presence. In late-August 2015, the Coalition for Clean and Fair Elections (aka Bersih) organized rallies in Kuala Lumpur, Kuching (Sarawak state), and Kota Kinabalu (Sabah state). Thousands of participants, predominantly Malaysian Chinese, gathered to call upon the Malaysian Government for greater transparency and accountability. Police did not interfere with the demonstrations, and the overall event was largely peaceful.

Malaysia’s 1.78 million documented and 2-4 million undocumented foreign workers make up over 20 percent of the country’s workforce. The new Pakatan Harapan coalition government has pledged to reduce Malaysia’s reliance on foreign labor while bringing the nation’s laws up to international standards, and has already begun taking steps towards reforming a foreign worker recruitment process accused of corrupt practices and leading workers into debt bondage under the former government.

Malaysia’s shortage of skilled labor is the most frequently mentioned impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly qualified professionals, scientists, and academics. The Embassy has heard from some U.S. companies that the shortage of skilled labor has resulted in more on-the-job training for new hires.

The Malaysian labor market operates at essentially full employment, with unemployment for Malaysians at 3.4 percent as of January 2018. 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 and restricts the formation of unions. Some labor disputes are settled through negotiation or arbitration by an industrial court, though cases can be backlogged for years. The new Minister of Human Resources has pledged to reduce this backlog within the new government’s first 100 days. Once a case is referred to the industrial court, the union and management are barred from further industrial action. Labor reforms under the Labor Chapter of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are expected to address many of these concerns. Although the United States has withdrawn from the original TPP, Malaysian authorities have pledged to move forward with amendments to the country’s labor laws as a means of boosting the economy’s overall competitiveness. That being said, the current government has announced its intention to review the CPTPP agreement to ensure it meets the needs of modern Malaysia.

Although national unions are currently proscribed due to sovereignty issues within Malaysia, there are a number of territorial federations of unions (the three territories being Peninsular Malaysia, Sabah and Sarawak). The government has prevented some trade unions, such as those in the electronics and textile sectors, from forming territorial federations. Instead of allowing a federation for all of Peninsular Malaysia, the electronics sector is limited to forming four regional federations of unions, while the textile sector is limited to state-based federations of unions, for those states which have a textile industry. Employers and employees share the costs of the Social Security Organization (SOSCO), which covers an estimated 12.9 million workers. No systematic 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 upon retirement.

The regulation of employment in Malaysia, specifically as it affects the hiring and redundancy of workers remains 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.

Some contacts at U.S. companies have reported that the government monitors the ethnic balance among employees and enforces an ethnic quota system for hiring in certain areas. Race-based preferences in hiring and promotion are widespread in government, government-owned universities and government-linked corporations.

In Peninsular Malaysia, the monthly minimum wage now stands at RM1,000 (USD 250), and in East Malaysia the monthly minimum wage is RM920 (USD 230). One of the new government’s top 10 priority promises for its first 100 days in office include, equalizing the minimum wage across Malaysia and raising it to RM1,500 (USD 375) within five years.

In 2016, the Department of Labor’s Trafficking Victims Protection Reauthorization Act (TVPRA) listing of goods produced with child labor and forced labor included Malaysian palm oil (forced and child labor), electronics (forced labor), and garments (forced labor). Senior officials across the Malaysian interagency have taken this listing seriously and have been working with the private sector and civil society to address concerns relating to the recruitment, hiring, and management of foreign workers in all sectors of the Malaysian economy, including palm oil and electronics.

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. Few investors have sought OPIC insurance in Malaysia.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) (M USD) 2016 USD 297,000 2016 USD 296,536 www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical Source USG or International Statistical Source USG or International Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country (M USD, stock positions) 2016 USD 9,500 2015 USD 13,900 BEA data available at
http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm
 
Host country’s FDI in the United States (M USD, stock positions) 2015 USD 1,300 2015 USD 1,300 BEA data available at
http://bea.gov/international/
direct_investment_multinational_
companies_comprehensive_data.htm
 
Total inbound stock of FDI as % host GDP 2016 44.8% 2015 39.5% NA

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 117,644t 100% Total Outward 136,892t 100%
Singapore 25,052 21% Singapore 19,427 14%
Japan 17,185 14.6% Indonesia 13,086 9.6%
Netherlands 10,224 8.6% Australia 8,384 6%
United States 8,200t 7% Mauritius 8,382 6%
Hong Kong 6,205 5.3% Cayman Islands 6,891 5%
“0” reflects amounts rounded to +/- USD 500,000.

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries 71,845 100% All Countries 47,688 100% All Countries 24,157 100%
Singapore 23,373 32.5% USA 18,788 39% Singapore 8,966 37%
USA 22,784 31.7% Singapore 14,407 30% USA 3,996 16.5%
Hong Kong 3,717 5.2% Hong Kong 2,786 5.8% Australia 1,732 7.2%
Australia 3,076 4.3% Australia 1,344 2.8% Indonesia 1,007 4.2%
Indonesia 2,100 2.9% Indonesia 1,093 2.3% Hong Kong 931 3.9%

Embassy Kuala Lumpur Economic Section
376 Jalan Tun Razak / 50400 Kuala Lumpur Malaysia
+6-03-2168-5153
KualaLumpurEcon@state.gov

2018 Investment Climate Statements: Malaysia
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