Since May 2018 elections, the new government has focused on delivering on some of its key campaign promises such as tackling corruption, improving livelihoods for the bottom 40 percent (B40) income earners, and introducing open tenders for infrastructure projects. The Ministry of Finance has also revised Malaysia’s GDP to debt ratio when the government included previously off budgets in their reported figures. A key campaign promise, the abolishment of the Goods and Services Tax (GST) provided for a three-month tax holiday and was then replaced with a Sales and Services Tax (SST).
The Government of Malaysia has traditionally encouraged foreign direct investment (FDI), and the Prime Minister and many Cabinet ministers have engaged with foreign investors a number of times since taking office. The government has encouraged interested investors to meet with relevant government authorities to negotiate incentive packages, actively targeting industries. Government officials have called for investments in high technology and research and development, focusing on artificial intelligence, Internet of Things device design and manufacturing, Smart Cities, electric vehicles, automation of the manufacturing industry, telecommunications infrastructure, and other “catalytic sub-sectors,” such as aerospace. It also seeks further development in sectors such as oil, gas and energy; palm oil and rubber; wholesale and retail operations; financial services; tourism; electrical and electronics (E&E); business services; communications content and infrastructure; education; agriculture; and health care.
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. The current government estimates that GDP will grow at 4.9 percent in 2019.
The business climate in Malaysia has been conducive to U.S. investment. Increased transparency and structural reforms that will prevent future corrupt practices could make Malaysia a more attractive destination for FDI in the long run. The 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, 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: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||61 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2018||15 of 190||http://doingbusiness.org/rankings|
|Global Innovation Index||2018||35 of 127||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$15,100||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$9,650||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
2. Bilateral Investment Agreements and Taxation Treaties
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 “ ” 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.
4. Industrial Policies
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
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 two to eight 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 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. However, since July 1, 2018, the Government decided to put on hold the granting of MSC Malaysia Status and its incentives, including extension of income tax exemption period or adding new MSC Malaysia Qualifying Activities in order to review and amend Malaysia’s tax incentives. While the MSC Malaysia Status Services Incentive has been approved and gazetted on December 31, 2018 and applications are accepted starting on April 2, 2019 for non-Intellectual Property (IP) activities, the MSC Malaysia Status IP Incentive policy is still under review. 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:
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, global shared services offices, 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/BiosafetyAct2007.shtml, and http://www.biosafety.nre.gov.my/BIOSAFETY percent20REGULATIONS percent202010.pdf.
Malaysia has not implemented measures amounting to “forced localization” for data storage. Bank Negara Malaysia has amended its recent Outsourcing Guidelines to remove the original data localization requirement and shared that it will similarly remove the data localization elements in its upcoming Risk Management in Technology framework. 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.
5. Protection of Property Rights
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 29th (ranked 42nd in 2018) in ease of registering property according to the Doing Business 2019 report, right behind Finland and ahead of Hungary, thanks to changes it made to its registration procedures.
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. USTR conducted an Out-of-Cycle Review of Malaysia in 2018 to consider the extent to which Malaysia is providing adequate and effective IP protection and enforcement, including with respect to patents. During this review, the United States and Malaysia have held numerous consultations to resolve outstanding issues. In 2019, USTR extended the Out-of-Cycle Review of Malaysia while asking Malaysia to complete actions to fully resolve these concerns in the near term.
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.
10. Political and Security Environment
There have been no significant incidents of political violence since the 1969 national elections. The May 9, 2018 national election led to the first transition of power between coalitions since independence and was peaceful. In April 2012, the Peaceful Assembly Act took effect, eliminating the need for permits for public assemblies, but outlaws street protests and placing 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. government policies, usually involving demonstrations outside the U.S. embassy. To date, these have remained peaceful and localized, with a strong police presence. Likewise, several non-governmental organizations have organized mass rallies in major cities in peninsular and East Malaysia related to domestic policies that have been peaceful.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Table 3: Sources and Destination of FDI
|Direct Investment From/in Counterpart Economy Data (as of June 2018)|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$140,399||100%||Total Outward||$129,308||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets (as of June 2018)|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$86,675||100%||All Countries||$60,004||100%||All Countries||$26,671||100%|
|United States||$27,515||31.7%||United States||$22,020||36.7%||Singapore||$9,956||37.3%|
|Hong Kong||$5,142||5.9%||Hong Kong||$4,422||7.4%||Australia||$1,682||6.3%|
|United Kingdom||$4,591||5.3%||United Kingdon||$3,781||6.3%||Indonesia||$1.108||4.2%|