Already one of the most trade-oriented economies in the world and an established regional leader in attracting foreign investment, Malaysia now aims to compete with Singapore as an alternative regional trade and investment hub for the rapidly developing Association of South-East Asian Nations (ASEAN) bloc.
For a growing number of multinationals, Malaysia serves as both a regional administrative centre and a middle or final step in production chains that begin in lower-wage ASEAN countries and lead to consumers in advanced economies. Malaysia’s relatively well-capitalised banks and corporations are also actively investing throughout South-east Asia and further abroad, turning Malaysia into a net exporter of foreign direct investment (FDI) even as inward FDI has continued to grow. Malaysia aggressively recruits foreign investment, especially into export-oriented manufacturing, but the government is prioritising capital-intensive investments that create high-paying jobs or fulfil other social goals.
Malaysia has a relatively open trade regime and free trade agreements (FTAs) with most of its regional trading partners, including the ASEAN bloc, Australia, China, Japan, South Korea and India. The government hopes next to expand the reach of its FTAs across the Pacific to the US and other countries in the Trans-Pacific Partnership (TPP), but as of June 2014 there were still a number of issues that had not yet been agreed.
Selectively Seeking FDI
The government seeks to drive the economy’s progress by drawing up detailed development plans and often multiple overlapping agendas. Government agencies and ministries then seek out foreign investors to undertake projects that fit in with the plans, offering substantial tax holidays (see analysis). Foreign investors can also apply for incentives for their own project proposals, which are judged on such criteria as the ratio of capital to labour, the extent of technology transfer and an assessment of demand. The government favours advanced technology and export-oriented manufacturing and has had considerable success turning Malaysia into one of the world’s largest centres for the manufacturing of semiconductors and other electronics components.
There are no restrictions on foreign exchange or repatriation of profits. Malaysia has special tax regimes for companies registered in its Labuan province, which are subject to minimal taxes on foreign-earned income. Labuan-registered holding companies can pass indirect income from foreign subsidiaries on to foreign shareholders untaxed.
Since 2009 the government has been carrying out liberalisation that has ended restrictions on foreign investment in most service sectors. However, access to some sectors remains limited. Foreign investment in agriculture, television and radio are the most protected, with no foreign investment allowed in terrestrial broadcasters and a 20% cap on foreign ownership of cable networks and satellite television providers.
Independent television production is also effectively restricted through a requirement that 80% of television programming be produced by local companies owned by ethnic natives, known as bumiputeras.
The energy sector is highly protected. Foreign ownership of oil services providers is capped at 49% and procurement by the state-owned Petronas favours companies or joint ventures with bumiputera ownership. Electric power is also restricted with no foreign ownership of transmission, a 30% cap on distribution and a 49% limit on generation. Foreign investment in agriculture is restricted by a prohibition of foreign ownership of farmland, and foreign investment in construction is limited due to favouritism toward local firms.
Foreign ownership of commercial banks is capped at 30% except with special permission, and the foreign-owned banks that are allowed face severe restrictions on branch numbers and locations that practically keep them out of retail banking. Foreign ownership is limited to 49% for Islamic insurers and to 70% for Islamic banks, investment banks and stockbrokers. There is a 70% cap for standard insurers except with special permission, a 70% cap for telecommunications network operators, and providers of shipping, forwarding and logistics are subject to foreign ownership caps that range from 30% to 70%, depending partly on the foreign investor’s nationality due to FTAs. Direct sellers and hypermarkets with more than 5000 sq metres of floor space must be at least 30% bumiputera-owned. Universities can be 100% foreign-owned if they commit to enrol at least 30% foreign students within five years.
A big component of Malaysia’s strategy for attracting foreign investment is to follow in the footsteps of Singapore. The island city-state has been extraordinarily successful in attracting FDI and with less than 1% of ASEAN’s population, it received 52% of cumulative FDI into the bloc through 2012, according to UN data. Some of that merely passed through Singapore holding companies on its way elsewhere. Singapore’s strategy was to provide a secure, business-friendly environment where multinationals felt comfortable making large-scale investments. As development progressed and costs rose, Singapore focused on attracting capital-intensive manufacturers and financial companies, and the island city-state’s financial sector became actively involved in the development of the rest of South-east Asia.
Although Singapore retains large advantages and momentum, its costs have risen sharply, prodding some companies to consider other options. Malaysia’s government is seizing that opportunity, first by promoting an urban sprawl north from Singapore into the neighbouring Malaysian region of Johor, and second by inviting multinationals to relocate some or all of their offices in Singapore to Kuala Lumpur (KL).
As part of Prime Minister Najib Razak’s Economic Transformation Programme (ETP), a special agency called InvestKL was set up with the main task of persuading multinationals to locate in the city. Linked to that effort, the government has been conducting a systematic reform of business regulations, especially simplifying the process of opening new businesses, which earned Malaysia a sixth-place ranking in the World Bank’s 2014 “Ease of Doing Business” international survey (see Economy chapter). The government has set a target for InvestKL to attract 100 multinationals from the Forbes 2000 list to invest in the Greater KL area by 2020. While InvestKL’s ultimate aim is to bring in multinationals’ regional headquarters, for now it is focusing on drawing in administrative, treasury and other service centres, which support regional headquarters in Singapore or company operations globally. InvestKL has said that it attracted investments from 40 global companies in 2011-14, including Schlumberger, Vale, IBM and Cargill. Separately, the government has allocated a large parcel of land in downtown KL to be developed as a new financial centre called the Tun Razak Exchange, and is seeking to draw international financial firms to locate there.
FDI Rolls In
Malaysia has the highest cumulative FDI relative to population in South-east Asia after Singapore and Brunei, at $4513 per capita through the end of 2012. That compares to $2344 per capita in Thailand and $841 in Indonesia, according to UN data.
After sliding to RM28.5bn ($8.9bn) in 2012 from RM37.3bn ($11.6bn) in 2011, annual FDI inflows bounced back in 2013, reaching RM38.2bn ($11.9bn). By sector the strongest inflows in 2013 were in manufacturing (RM14.3bn, $4.5bn) and oil, gas, mining and quarrying (RM11.2bn, $3.5bn), according to data from Bank Negara Malaysia (BNM), the central bank. Overall investment in the Malaysian economy, measured in gross fixed capital formation, came to RM265bn ($82.7bn) in 2013, and was up 8.5% in real terms in 2013 after 19.2% growth in 2012.
The resurgence of FDI was partly explained by improving sentiment among global investors in the second half of the year, and partly by a ramping-up of investment in offshore oil and gas exploration and development in which international oil companies are playing a growing role. Annual FDI flows into the oil, gas, mining and quarrying sector have more than tripled from RM3.1bn ($967.5m) in 2010. The pace of FDI in upstream oil and gas is expected to keep growing as Shell and ExxonMobil invest in enhanced recovery projects at older oil fields while exploration and development continues deep offshore. The upward trend in FDI looked likely to carry on in 2014, judging from the value of foreign investment projects approved by the Malaysian Investment Development Authority, which was up to RM60bn ($18.7bn) in 2013 from RM35bn ($10.9bn) in 2012.
Tony Collingridge, director of trade and investment at the British High Commission in KL, told OBG that he was seeing a surge of investment activity and interest in Malaysia thanks to liberalisation and more active government promotion. He said UK investors were especially active in education and retail, with universities setting up branches in Malaysia as an alternative to study in the UK and retailers such as Burberry benefitting from KL’s status as a shopping destination for elites from around the region. “The affinity for British culture here is like nothing I’ve ever seen. Malaysians absolutely love UK education,” he said.
Over the longer run, manufacturing has been the dominant foreign investment target, accounting for 46% (RM187bn, $58.3bn) of the total RM405bn ($126.4bn) of cumulative FDI through 2012. Financial services accounted for 22% (RM87bn, $27.1bn), wholesale and retail trade for 8.4% (RM34bn, $10.6bn), information and communications services for 8.3% (RM34bn, $10.6bn), and oil, gas, mining and quarrying, for 6.8% (RM28bn, $8.7bn), according to BNM. The largest sources of FDI through 2012 were Singapore (RM72bn, $22.5bn), Japan (RM57bn, $17.8bn) and the US (RM35bn, $10.9bn). European countries collectively accounted for 32% of FDI (RM130bn, $40.5bn).
FDI Rolls Out
While foreign investment remains crucial to bringing in advanced technology, Malaysia is not dependent on inward FDI flows. Large, albeit recently shrinking, current account surpluses make Malaysia a net exporter of investment to the rest of the world. With little need for additional foreign exchange reserves, which stood at $131bn in mid-May 2014, Malaysia has in the past decade become an increasingly active direct investor abroad. As a result, Malaysia has been a net exporter of FDI since 2007.
The most active Malaysian foreign investors currently are commercial banks, which have invested mainly within ASEAN, and Petronas, the state-owned oil and gas company, which has invested in nearby Myanmar and as far afield as Canada and South Sudan in an effort to diversify globally. Some investors are chasing rapid growth or securing supplies of raw materials in less developed ASEAN and African countries, while others are establishing a high-profile presence in Singapore or other advanced economies.
Outward FDI flows came to RM44bn ($13.7bn) in 2013, while cumulative outward FDI through 2012 reached RM368bn ($114.9bn). The biggest destinations for FDI through 2012 were Singapore (RM60bn, $18.7bn) and Indonesia (RM45bn, $14bn).
Free Trade In Goods
Malaysia has FTAs with most major regional markets. Even for countries that have no FTA with Malaysia, average tariffs are falling. According to a WTO review of Malaysia’s trade policy completed in January 2014, unilateral tariff reductions brought Malaysia’s average applied most-favoured-nation tariff down from 7.4% in 2009 to 5.6% in 2013, similar to the average applied tariff for imports into the EU.
Imports of certain goods from countries without FTAs are subject to high tariffs, especially automobiles, motorcycles and a variety of agricultural and industrial products. Also, some tariffs apply even to goods from FTA countries. The ASEAN bloc’s FTA and bilateral FTAs with Japan, Australia, New Zealand and Chile eliminated tariffs on nearly all goods. However, FTAs between ASEAN and South Korea, China and India, and bilateral FTAs with India and Pakistan left tariffs in place on many categories of goods.
Exports of many raw materials and staple crops, such as rice and crude palm oil, are discouraged in order to support domestic processing and hold down prices of staple foods. Such goods are typically subject to export taxes, which are in the range of 5% to 15% and usually apply only above some regularly adjusted quota.
Trade in services is subject to a wide variety of restrictions but those too are gradually falling away, thanks to the government’s liberalisation efforts under the ETP and an array of commitments made under FTAs. The most important of those is a commitment by the ASEAN bloc to “remove substantially all restrictions on trade in services” by 2015, when the bloc plans to formally designate itself as the ASEAN Economic Community (AEC). For example, members have agreed to recognise each other’s national professional licences.
Trade volumes relative to GDP are very high: exports were equal to 83% of GDP in 2013 and imports to 74% of GDP, according to BNM data. Such high ratios mean the Malaysian market for imports is large relative to the country’s size and income level, at $232bn in 2013 or $7827 per capita, not far behind the US, which had $8687 of imports per capita in 2013, or southern European countries such as Portugal with $8539 or Spain with $9911, according to US Commerce Department and Eurostat data. However, an unusually large portion of Malaysia’s imports are intermediate goods.
Imports & Exports
The main goods importedare electrical and electronic products, which made up 30% of goods imports in 2013 worth RM197bn ($61.5bn), and oil and oil products, which made up 14% of goods imports worth RM93bn ($29bn), according to the Department of Statistics. Base metals, their ores and products made up 11% of imports, worth RM70bn ($21.8bn), while food, drink and food crops made up 7.4%, worth RM48bn ($15bn) or 7.4%. Transport machinery, mostly automobiles from Thailand, made up 6.6% of imports, worth RM43bn ($13.4bn). Services accounted for 19% of total imports, worth RM141bn ($44bn).
Exports are likewise dominated by electrical and electronic products, which made up 36% of goods exports in 2013, worth RM263bn ($82.1bn), followed by oil, oil products and gas, which made of 22% of goods exports, worth RM159bn ($49.6bn). Chemicals, plastics, rubber and their products made up 12% of goods exports, worth RM85bn ($26.5bn) and edible oils, mostly palm oil, made up 7% of goods exports, worth RM50bn ($15.6bn). Services accounted for 15% of total exports, worth RM126bn ($39.3bn).
Getting The TPP Done
When negotiations on the TPP began to take shape in 2008-10, ambitions for it were high. Often described as a 21st-century trade agreement, the TPP was seen as an opportunity to dramatically expand the coverage of FTAs by promoting common regulatory practices and environmental standards. However, the TPP soon became bogged down by the complexities involved in advancing a 12-country FTA. The TPP grew out of an older four-party agreement concluded in 2005 among Singapore, Brunei, New Zealand and Chile, considered one of the most comprehensive FTAs of its era. After the US announced its interest in joining the agreement in 2008, other countries began to pile in, including Australia, Peru and Vietnam in 2008, Malaysia in 2010, Mexico and Canada in 2012, and Japan in 2013. Malaysia is interested in gaining tariff-free access for its exports to the US market. However, the US wants many things in return from Malaysia that the government appears unprepared to give: rules on public procurement that would disallow bumiputera favouritism, international arbitration for foreign investors suing the government, a system of trade sanctions for violation of labour and environmental standards, elimination of foreign equity limits for sensitive sectors including banks, cessation of fuel subsidies, and longer pharmaceuticals patent lives. In a 2013 public statement, the Malaysian government said it was seeking to “water down”, delay implementation or opt out of parts of the draft treaty.
During a visit by US President Barack Obama in April 2014, he and Prime Minister Najib both expressed confidence a text would be agreed by the end of the year. But neither shed any light on whether they had moved on disputed issues. Meanwhile, disagreements had emerged between the bigger economies involved in the pact, especially between the US and Japan.
Several observers of the TPP process told OBG they were confident Malaysia and the US would compromise on a text before the final push to get the agreement adopted. Anne Marie Brooks, executive-director of the American Malaysian Chamber of Commerce, told OBG, “I’m sure there will be a middle ground, it’s just not clear where that’s going to be. Our hope is the government will use the TPP to move forward with reforms, as a way of saying something forced its hand.”
Foreign investment and international trade will remain key to raising standards of living. While the most visible features of an advanced economy are its large consumer-oriented service sectors, the country needs to focus on increasing the productivity of its export-oriented industries first.
Malaysia looks set on continuing its course of gradual liberalisation while retaining its bumiputera policies and its large share of state-owned companies.
However, the liberalisation process has gained momentum, and the synergies that could be added from taking further steps are obvious. The government is likely to be prodded by the TPP to commit to some kind of schedule for further reforms, which could turn out to be an important policy pivot point.
Likewise, the ASEAN bloc’s integration process has significant momentum, even if the formal birth of the AEC in 2015 mostly recognises past achievements. With its well-funded banks and deep corporate equity and bond markets, Malaysia is well positioned to play a greater role in the entire region’s development.