2007 Investment Climate Statement - Malaysia

Openness to Foreign Investment

The Government of Malaysia (GOM) encourages foreign direct investment (FDI) by providing a number of incentives, particularly in export-oriented high-tech industries and "back office" service operations. The GOM also hosts international trade shows and advertises broadly to attract FDI. Many U.S. companies have operations in Malaysia, including Intel, Microsoft, Dell, GE, UPS, Mattel, and Motorola, just to name a few.

However, Malaysia's profitability for FDI is narrowing, as lower-wage manufacturing is becoming less competitive and the GOM remains reluctant to make reforms needed to attract higher-tech industries and realize its stated goal of "moving up the value chain." In October, the UN Conference on Trade and Development (UNCTAD) reported that in 2005 global FDI increased by 29% and FDI to Southeast Asia increased by 45%. However, FDI to Malaysia decreased by 14% during the same period[1]. A longer term outlook shows a similar trend. Total FDI inward stock for Southeast Asia increased by 42.4% from 2000 to 2005, while total FDI inward stock for Malaysia decreased by 9% over the same time period.[2] UNCTAD ranked Malaysia as the sixth largest destination for FDI in 1995; based on final 2005 figures, Malaysia now ranks 62nd.

According to the Malaysian Industrial Development Authority, third quarter figures for projects approved in 2006 indicate a substantial increase in domestic manufacturing start-ups, but 2006 approvals for foreign manufacturing start-ups remain comparable to 2005 levels. (Note: approval statistics are not directly comparable to actual FDI statistics. Also, manufacturing investment statistics do not capture investments in services or upstream oil and gas production.)

An in-depth study of the investment climate, conducted by the GOM in collaboration with the World Bank and published in 2005,[3] identified Malaysia's top two economic constraints as 1) its regulatory burden, especially for services, and 2) its shortage of skilled labor. Two similar studies, one conducted by UBS and the other by the Institute of International Finance, reached similar conclusions.

Regulatory Burden

The World Bank compiles an annual "Doing Business" report comparing regulations affecting ten areas of everyday business across the globe. Malaysia ranks 25th among the 175 economies covered in this survey.[4] Malaysia's best rankings are in the standardized indicators "getting credit" and "protecting investors," where it ranks third and fourth, respectively. At 137th place, Malaysia's worst ranking is in "dealing with licenses" which, in the standardized example of obtaining the approvals necessary to build a warehouse, involves 25 procedures and takes 281 days, at a cost of 78.2% of per capita income, all before construction can begin. The World Bank ranks Malaysia 71st for starting a business (30 days) and 81st for enforcing contracts (450 days). Other rankings include 38th in ease of employing workers; 46th in ease of trading across borders; 49th in ease of paying taxes; 51st in ease of closing a business; and 66th in ease of registering property.

One source of impediments to Malaysia's economic growth is its complex network of racial preferences to promote the acquisition of economic assets by ethnic Malays (bumiputera). The public aim of these programs is to encourage a more even distribution of wealth among races. Despite the stated goal of poverty alleviation, these race-based policies are not subject to upper income limitations; in practice wealthy and well-connected bumiputera receive the lion's share of the benefits. The resulting economic distortions in the property, labor, and stock markets inhibit growth and deter both foreign and domestic investment.[5] Effectively eradicating poverty will become increasingly urgent over the next five years, at which time Malaysia is expected to become a net importer of oil, thus losing a major source of funding for ongoing anti-poverty and development programs.

Corporate Equity

One of the government's racial preference policies is a requirement that foreign and domestic non-manufacturing firms take on bumiputera partners (with a minimum of 30% of share capital). If a company seeks public listing on the Bursa Malaysia (formerly Kuala Lumpur Stock Exchange), it is required to reserve at least 30% of its initial public offering (IPO) for purchase by bumiputera. In 2003 the GOM ended a formal requirement that corporations issue additional stock to bring bumiputera equity back up to 30% if those shareholders had sold their stock. However, bumiputera equity remains a consideration when companies apply for an array of required permits and licenses -- many of which must be renewed either annually or biennially.

The government caps foreign investment shares in most sectors. To alleviate the effects of the regional economic crisis, in 1998, Malaysia temporarily relaxed foreign-ownership and export requirements in the manufacturing sector for companies that did not compete directly with local producers. In June 2003, the government extended this policy indefinitely, permitting expansion of existing investments in manufacturing concerns to be foreign-owned. Manufacturing investments approved under the liberalized measures are not subject to racial preference requirements for divestment or dilution. Those with prior investments must honor the initial conditions to which they agreed but may request that they be changed. Malaysia's 2003 liberalization of foreign equity ceilings in manufacturing led to a spike in both foreign and domestic investment in the sector.

In September 2004, the government announced that venture capital firms could be 100 percent foreign-owned, in addition to manufacturing and information technology firms, subject to government approval for each investment project. Approvals are handled by the Malaysian Industrial Development Authority (MIDA) for most manufacturing projects and the Multimedia Development Corporation (MDC) for Multimedia Super Corridor (MSC) status companies (see below). Especially in the case of investments focused toward the domestic market and those in sectors other than manufacturing, the GOM has used this authority to restrict foreign equity (normally to 30 percent) and to require foreign firms to enter into joint ventures with local partners. The GOM often approves investments in high-tech industries, but is becoming less inclined to approve lower-wage manufacturing and in some cases will not renew tax abatement agreements to existing manufacturers not perceived as sufficiently high-tech.

Manufacturing

MIDA screens all proposals for manufacturing and related projects in Malaysia, both foreign and domestic, to determine whether or not they are consistent with the Third Industrial Master Plan (2006-2020) and with other strategic economic and social development policies. Project approval depends on many factors. MIDA may consider the size of an investment, the export-orientation of production, the type of financing required (both local and offshore), capital/labor ratio, the potential for technological diffusion into the local economy, the ability of existing and planned infrastructure to support the effort, and the existence of a local or foreign market for the output. If both local and foreign firms propose similar projects, the local firm will be given preference. All requests are handled on a case-by-case basis.

MIDA maintains a Business Information Center which provides information on investment, productivity, trade, and financing, as well as staff who can discuss a variety of manufacturing sectors. The center also has space for business meetings. On December 15, 2006, MIDA announced its intention to establish an on-site immigration unit in an effort to speed the processing of expatriate work visas. Applications for investment in sectors other than manufacturing are handled by the relevant regulatory agencies and sometimes require multiple approvals.

Investment regulations are specified in the Promotion of Investments Act of 1986 (PIA) and the Industrial Coordination Act of 1975. The government pledged in 2004 to replace the PIA with a more concise law covering investments in both manufacturing and services, but has yet to do so. The PIA does not address services investment. The Securities Commission and the Foreign Investment Committee (FIC) implement the regulations specified in the Malaysian Code on Takeovers and Mergers. The FIC also formulates policy guidelines for foreign participation in non-manufacturing sectors. Private entities, both foreign and domestic, may acquire, merge with, and take over business enterprises, subject to FIC approval according to their 1974 guidelines. However, the acquisition or disposal of five percent or more of interests in any local financial institution requires the prior approval of the Minister of Finance.

Historically, non-export-oriented foreign firms that had negotiated temporary exemptions from general equity limits were required to restructure within a definite timeframe. A restructuring program could involve taking on new local partners, giving existing local partners a greater equity share, or floating shares on the Bursa Malaysia. The government's goal at that time was to reduce foreign ownership of most firms producing for the domestic market to 30%.

Malaysia's requirements for the licensing and operation of direct selling companies include a provision that a locally incorporated direct selling company must allow for 30 percent bumiputera equity. The Ministry also "recommends" local content targets. Local companies that seek multi-level direct selling licenses require paid-in capital of RM 1.5 million ($423,700), while companies with foreign shareholders must have paid-in capital of RM 5 million ($1.4 million).

The Malaysian government also included local content requirements in "Guidelines on Foreign Participation in the Distributive Trade Services" that came into effect in December 2004. Among other provisions, department stores, supermarkets and hypermarkets are required to reserve at least 30 percent of shelf space in their premises for goods and products manufactured by bumiputera-owned small and medium sized industries. The guidelines also require that at least 30 percent of a store's sales consist of bumiputera products, a rule that does not take into account discretionary behavior on the part of consumers.

In 2005, the Ministry of Domestic Trade & Consumer Affairs (MDTCA) proposed a further amendment to the 2004 guidelines for the distributive trade sector that would have required foreign manufacturing and trading firms in Malaysia to establish separate marketing or distribution arms of their companies for local sales purposes. These entities would have been subject to Malaysia's racial preference policies, including 30% bumiputera ownership requirements. This proposal would have been applicable to firms brought into Malaysia under a MIDA license as noted above, and thus could have been in conflict with earlier investment agreements with international firms in Malaysia. Following an outcry from the private sector, the GoM did not implement this proposed change to the guidelines. MDTCA continues to consider changes to the distributive trade guidelines, in large part due to ongoing pressure from both domestic and foreign business interests.

Legal Services

Foreign lawyers may not practice Malaysian law, nor may they affiliate with local firms or use their international firm's name. Foreign law firms may not operate in Malaysia except as minority partners with local law firms, and their stake in any partnership is limited to 30 percent. Under the Legal Profession Act of 1976, the practice of Malaysian law normally is restricted to Malaysian citizens or permanent residents who have apprenticed with a Malaysian lawyer, are competent in Bahasa Malaysia (the official language), and have a local law degree or are accredited British Barristers at Law. The Attorney General has authority to grant limited exceptions on a case-by-case basis, provided the applicant has seven years of legal experience. Malaysian law does not allow for foreign legal consultancy except on a limited basis in the Labuan International Offshore Financial Center. Malaysia limits such foreign attorneys' scope of services to advice concerning home country and international law. Persons not licensed as lawyers are subject to criminal penalties if they directly or indirectly undertake activities relating to the Malaysian legal system, including drafting documents.

 Architectural Services

A foreign architectural firm may operate in Malaysia only as a joint-venture participant in a specific project with the approval of the Board of Architects. Malaysian architectural firms may not have foreign architectural firms as registered partners. Foreign architects may not be licensed in Malaysia but are allowed to be managers, shareholders, or employees of Malaysian firms. Only licensed architects may submit architectural plans.

Engineering Services

Foreign engineers may be licensed by the Board of Engineers only for specific projects, and must be sponsored by the Malaysian company carrying out the project. The license is valid only for the duration of the project. In general, a foreign engineer must be registered as a professional engineer in his or her home country, have a minimum of 10 years experience, and have a physical presence in Malaysia of at least 180 days in one calendar year. To obtain temporary licensing for a foreign engineer, the Malaysian company often must demonstrate to the Board that they cannot find a Malaysian engineer for the job. Foreign engineers are not allowed to operate independently of Malaysian partners, or serve as directors or shareholders of an engineering consulting company. A foreign engineering firm may establish a commercial presence, subject to meeting government requirements on Malaysian citizen participation. Foreign engineering companies may collaborate with a Malaysian firm, but the Malaysian company is expected to design the project and is required to submit the plans for domestic approval.

 Accounting and Taxation Services

 Foreign accounting firms may provide accounting and taxation services in Malaysia only through affiliates. All accountants who wish to provide auditing and taxation services in Malaysia must register with the Malaysian Institute of Accountants (MIA) before they may apply for a license from the Ministry of Finance. Citizenship or permanent residency is required for registration with MIA. Malaysian citizens or permanent residents who received degrees from local universities or are members of at least one of the 11 overseas professional bodies recognized by Commonwealth countries may apply for registration. The American Institute of Certified Public Accountants (AICPA) is not recognized by Commonwealth countries.

Energy

Foreign investment is restricted in the oil and gas industries. All foreign energy investment is conducted through production sharing contracts between foreign operators (including ExxonMobil, ConocoPhillips, Amerada Hess, Baker Hughes, Newfield, and Murphy Oil from the U.S., as well as Royal Dutch Shell) and Malaysia's national petroleum company, Petronas.

Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is controlled by the parastatal, Petroleum Nasional Berhad (Petronas), the sole entity with legal title to Malaysian crude oil and gas deposits. Foreign investment takes the form of production sharing agreements (PSAs). Non-Malaysian firms are permitted to participate in oil services either in partnership with local firms or as contractors. They are restricted to a 30% equity stake if they are incorporated locally.

Telecommunications

Under the WTO Basic Telecommunications Agreement, Malaysia made limited commitments on most basic telecommunications services and partially adopted the reference paper on regulatory commitments. Foreign companies are limited to a 30 percent equity stake in existing fixed line operations, an investment ceiling codified as part of Malaysia's WTO services offer which limits market access commitments to facilities-based providers. These restrictions constitute one of the most restrictive regimes for an economy of Malaysia's level of development. Value-added service suppliers are similarly limited to 30 percent foreign equity. Restrictions on these activities tend to benefit the dominant provider, government-controlled Telekom Malaysia, and hamper the development of a more efficient information infrastructure.

In December 2005, Malaysia issued its revised WTO services offer, which offers to increase foreign equity limits to 49% in "application service providers" (ASP); however, precisely what this category encompasses is unclear. Foreign ownership of "network facilities providers" (NFP) and "network service providers" (NSP) would be limited to 30% under the revised offer. This NSP ownership limitation is actually more restrictive than the limitation currently required by Malaysian domestic regulations, which allow a maximum foreign equity cap for network service provider individual licensees of 61%, with a requirement that the foreign equity holding be reduced to 49% over a 5-year period commencing on the date of incorporation.

Broadcasting

The Ministry of Energy, Water, and Communications enforces broadcast content quotas on both radio and television programming. 80% of television programming must originate from local companies owned by bumiputera. However, in practice, local stations have been granted substantial latitude in programming because of a lack of suitable local programming. Radio programming also must consist of 60% locally originated content. Foreign ownership of radio and television stations is not permitted. Foreign investment in terrestrial broadcast networks is prohibited. As a condition for obtaining a license to operate, video rental establishments are required to have 30 percent local content in their inventories. Malaysia regularly censors movies and television shows deemed offensive on religious or sexual grounds.

Advertising

Advertising falls under the purview of multiple ministries and agencies, complicating the adoption of a single set of advertising regulations and enforcement procedures for all stakeholders in this process. International firms have concerns about the lack of clear and consistent advertising content guidelines, and how some advertisers misrepresent their products and services through advertising. The Government of Malaysia has an informal and vague guideline that commercials cannot "promote a foreign lifestyle."

Commercials are restricted to a maximum of 20 percent foreign content; however, the government recently relaxed enforcement of regulations governing the appearance of foreign actors in commercials shown in Malaysia.

Product labeling also is weak; for example, products can be found on store shelves with no indication of the manufacturer or country of origin.

Other industries

The GOM also restricts foreign investment in the financial services and insurance sectors (see section on capital markets below). Foreigners are permitted to hold a 70% stake in shipping companies, 49% in forwarding agencies, and 51% in insurance companies (note: new companies entering the market may own up to 49% equity but those already in the market can request that their equity be increased to 51%). Malaysia restricts foreign participation in professional services (other than "back office" operations that support foreign business activities), agriculture (unless it is an agro-tourism linked project), and construction. Ownership of agricultural land is restricted to Malaysian citizens.

Government holdings

The government owns approximately 36% of the value of firms listed on the Bursa Malaysia through its seven Government-Linked Investment Corporations (GLICs), including a majority stake in a number of companies. Only a minority portion of stock is available for trading for some of the largest publicly listed local companies. After the economic crisis of the late 1990s, the government began to re-acquire a number of entities it had privatized earlier, including the national air carrier, MAS, and Kuala Lumpur's light rail transit system. The government has given no indication of interest in restarting its privatization efforts. Khazanah, the government's largest GLIC, handles many of the country's major infrastructure projects, typically through companies in which it owns a majority stake. The Prime Minister and the Central Bank Governor sit on Khazanah's Board of Directors.

The current draft of a proposed Competition Policy reportedly exempts government-linked companies. Further details are not available at this time. The text of all pending legislation in Malaysia is covered by the Official Secrets Act, thereby making it a crime to divulge its contents before adoption.

Corporate taxes

For tax purposes, local and foreign enterprises are treated essentially the same. Resident petroleum companies pay 38% income tax; all other resident companies currently pay an income tax of 28%. A company is resident in Malaysia for tax purposes if its management and control is exercised in Malaysia, that is, if directors' meetings are held in Malaysia. The proposed budget released on September 1 includes a reduction to 27% in 2007 and 26% in 2008 for non-petroleum resident companies. Payments made to non-residents for technical or management services and rental of movable properties are subject to withholding tax at the rate of 10%. The U.S. and Malaysia have not concluded a bilateral tax agreement and no negotiations are anticipated at this time. In 2005, the government passed legislation mandating a new Goods and Services Tax that was scheduled for implementation in 2007 but this was deferred pending further study.

Human Resources

Beyond the heavy regulatory burden and the investment restrictions resulting from the buimputera policies, Malaysia's shortage of skilled labor is its most oft-cited impediment to economic growth. (See sections on labor and performance requirements).

Conversion and Transfer Policies

In an effort to insulate the Malaysian economy from risks posed by volatile short-term capital flows and to eliminate offshore trading of the ringgit, the government imposed selective capital controls on September 1, 1998. Since that time, the government gradually has relaxed controls on foreign direct investment flows, wages, dividends, interest, and rental income earned in Malaysia. In May 2001, the government eliminated one of its most controversial measures when it abolished a 10% tax on foreign investors' portfolio investment profits taken out of the country.

All payments to other countries must be made through authorized foreign exchange dealers in foreign currency. Onshore banks must record the amount and purpose of each cross-border transfer over RM 50,000 (approximately $14,124).

Effective April 1, 2004, the government increased the allowable maximum of retained foreign currency export proceeds held in foreign currency accounts by resident exporters and approved operational headquarters to U.S. $100 million from the previous U.S. $70 million. Resident and non-resident travelers may carry no more than RM 1,000 into or out of Malaysia. Residents may not carry out foreign currency more than the equivalent of RM 10,000 (U.S. $2,824). Non-residents may carry in any amount of foreign currency, but are required to declare currency amounts in excess of USD $2500. Non-residents may carry out foreign currency up to the amount they carried in.

On July 21, 2005, Bank Negara ended its policy of pegging the ringgit at a fixed rate of RM 3.80 to the dollar and shifted to a managed float against a trade-weighted basket of currencies. As of December 2006, the ringgit is trading at approximately RM 3.54 to the dollar. The ringgit has appreciated 6.8% against the dollar since the end of the peg, but many analysts believe it is still undervalued.

Expropriation and Compensation

The Embassy is not aware of any cases of uncompensated expropriation of foreign-held assets by the Malaysian government. The government's stated policy is that all investors, both foreign and domestic, are entitled to fair compensation in the event that their private property is required for public purposes. Should the investor and the government disagree on the amount of compensation, the issue is then referred to the Malaysian judicial system.

Dispute Settlement

Malaysia has signed and ratified the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States. Malaysia became a Contracting State on October 14, 1966 when the Convention entered into force, granting jurisdiction over investment disputes between the Government of Malaysia and non-Malaysian citizens to the International Center for Settlement of Investment Disputes (ICSID, www.worldbank/org/icsid). ICSID is affiliated with but independent of the World Bank.

Malaysia also is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The domestic legal system is accessible but generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts, and can be slow and bureaucratic. The U.S. Embassy is aware of one case where a U.S. investor plaintiff reports that, after 31 months and 17 hearings, the Malaysian court has yet to address the merits of his case. Plaintiff claims to have provided the court with documentation both from Malaysia and from a U.S. court case involving the same company that the company's assets continue to be drained through ongoing fraud. However, the court stayed his petition that the company be put in receivership until the matter is resolved. The court also stayed plaintiff's petition for discovery.

One local law firm reports that cases involving intellectual property rights generally take five to eight years, with more complex patent infringement cases taking ten to fifteen years.

Many firms choose to include mandatory arbitration clauses in their contracts. The government has set up the Kuala Lumpur Regional Center for Arbitration (http://www.rcakl.org.my) under the auspices of the Asian-African Legal Consultative Committee to offer international arbitration, mediation, and conciliation for trade disputes. The KLRCA is the only recognized center for arbitration in Malaysia. The U.S. Embassy is aware of one contractual dispute with a U.S. company where the Malaysian firm chose not to honor mandatory arbitration clauses as stated in their contract. Resolution of that case is pending.

Performance Requirements and Incentives

Fiscal incentives granted to both foreign and domestic investors historically have been subject to performance requirements, usually in the form of export targets, local content requirements and technology transfer. Performance requirements are usually written into the individual manufacturing licenses of local and foreign investors.

In the May 2003 Economic Stimulus Package, the Malaysian government extended the full tax exemption incentive from ten to fifteen years for firms with "Pioneer Status" (companies promoting products or activities in industries or parts of Malaysia to which the government places a high priority), and from five to ten years for companies with "Investment Tax Allowance" status (those on which the government places a priority, but not as high as Pioneer Status). Government priorities generally include the levels of value-added, technology used, and industrial linkages. If a firm (foreign or domestic) fails to meet the terms of its license, it risks losing any tax benefits it may have been awarded. Potentially, a firm could lose its manufacturing license. The government has stated that in the long term, it intends gradually to eliminate most of the fiscal incentives now offered to foreign and domestic manufacturing investors. More information on specific incentives for various sectors can be found at www.mida.gov.my.

Malaysia also seeks to attract foreign investment in the information technology industry, particularly in the Multimedia Super Corridor (MSC), a government scheme to foster the growth of research, development, and other high technology activities in Malaysia. Foreign investors who obtain MSC status receive tax and regulatory exemptions as well as public service commitments in exchange for a commitment of substantial technology transfer. For further details on incentives, see www.mdc.com. Some corporations have used the MSC to outsource call center and back office operations, including HSBC and BMW. Initially, MSC firms were required to set up operations in the new town of Cyberjaya, south of Kuala Lumpur, and some areas of central Kuala Lumpur. In 2005, Malaysia announced that firms in the Bayan Lepas area of Penang also could apply for MSC status. The Multimedia Development Company (MDC) approves all applications for MSC status.

In the services sector, the government's stated goal is to attract foreign investment in regional distribution centers, international procurement centers, operational headquarters, research and development, integrated market and logistics support services, cold chain facilities, central utility facilities, industrial training, and environmental management. To date, the GOM has had some success in attracting regional distribution centers; however, there has been little progress in the other targeted areas. Industry contacts cite Malaysia's poor record in protecting intellectual property rights as their primary reason for not bringing their R&D to the country.

Malaysia also has stated that it would welcome foreign investment in biotechnology; however, to date no U.S. biotech companies are operating here except representative offices of some pharmaceutical companies. Prime Minister Abdullah repeatedly has expressed strong interest in using biotechnology to help invigorate the agricultural sector in Malaysia. Investment in biotechnology figures prominently in the national budget and is a lynch pin in the 9th Malaysia Plan (the government's five-year economic development plan), launched in March 2006.

Employing Expatriates

Despite broad recognition of Malaysia's shortage of skilled labor, most foreign firms face restrictions in the number of expatriate workers they are allowed to employ. Manufacturing companies with foreign paid-up capital of at least U.S. $2 million receive automatic approval for up to ten expatriate posts. Manufacturing companies with paid-up capital of U.S. $200,000 to $2 million will receive automatic approval for up to five expatriate posts. Beyond these automatic allowances, a firm wishing to employ expatriate personnel generally must demonstrate that there is a shortage of qualified Malaysian candidates and that a Malaysian citizen is being trained. In practice this is difficult for firms to document. Work visas are issued for a period of two years, with possible - but not guaranteed - renewals for up to a maximum of ten years. The uncertainty of whether investors will be permitted to remain in the country after their businesses become profitable remains a significant barrier to foreign direct investment. No individual is permitted to remain in Malaysia on a work visa beyond ten years. Malaysia's freeze on permanent resident visas remains in place; however, it has launched the "Malaysia, My Second Home" program that provides long-term resident visas for well-off expatriates.

In addition, foreign firms have complained that the procedures for obtaining work permits are time-consuming and burdensome. Malaysia is making some progress in simplifying permit approvals for some categories of foreign personnel. For example, in its 2007 budget released on September 1, the government announced that it would establish four additional immigration units intended to expedite visa approvals for expatriates and would begin to permit professionally-qualified spouses of expatriates to work.

Up to now, dependent children of expatriate women employed in Malaysia on legitimate work visas usually have been given 2-year dependent pass visas, but their expatriate husbands often have not been given the same dependent pass visas. In several cases, expatriate husbands were given only the standard 90-day visitor visas, and were required to leave Malaysia and return at regular intervals. Department of Immigration officials responded to concerns about this policy by indicating that it was a "cultural issue" in Malaysia, and that "...men should be in the workplace and women should be at home." While improvements in the policies and procedures are helpful, their impact in alleviating Malaysia's acute shortage of highly qualified professionals, scientists, and academics is negligible.

Right to Private Ownership and Establishment

The World Bank ranks Malaysia 66th among 175 countries for the ease of registering property, which takes an average of 144 days, and 71st in starting a business, which involves 9 government-required procedures and takes an average of 30 days.

Patents registered in Malaysia generally have a 20-year duration from date of filing, which can be extended under certain circumstances. The length of time required for patent registration averages five years and trademark registration averages two years. Registrations are handled by the Patents and Trademarks Department of the Ministry of Domestic Trade and Consumer Affairs. Copyright protection extends to computer software and lasts for 50 years after the author's death. The Copyright Act includes enforcement provisions allowing government officials to enter and search premises suspected of infringement and to seize infringing copies and reproduction equipment.

Protection of Property Rights

Malaysia is a member of the World Intellectual Property Organization (WIPO) and is a party to the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property. In 2006 Malaysia acceded to the Patent Cooperation Treaty. Malaysia has not ratified the WIPO Copyright Treaty or the WIPO Performance and Phonograms Treaty, which extend traditional copyright principles to the digital environment.

In 2000, Malaysia's parliament amended the Copyright Act, the Patents Act, and the Trademarks Act, as well as legislation on layout designs of integrated circuits and geographical indications, in order to bring Malaysia into compliance with its obligations under the WTO TRIPS Agreement. In 2004, Malaysia passed the "Protection of New Plant Varieties Act 2004" in line with the requirements of Article 27.3 (b) of the TRIPS Agreement. Enabling regulations for this law are expected to be implemented in early 2007. Malaysia does not prohibit other companies from relying on test and other undisclosed information submitted by another company to the government to obtain marketing approval of pharmaceuticals and agricultural chemicals, as called for under TRIPS Article 39.3.

Optical Media Piracy

Malaysia has a significant problem with piracy of copyrighted materials, particularly those stored on optical media. Malaysia's production capacity for Compact Discs (CDs) and Digital Video Discs (DVDs) significantly exceeds local demand plus legitimate exports. U.S. industry estimates Malaysia's excess capacity is between ten to twenty times that needed for the legitimate market. The resulting surplus is exported globally. Pirated products believed to have originated in Malaysia have been identified throughout the Asia-Pacific region, North America, South America, Europe, and Africa.

The International Intellectual Property Association (IIPA) estimates 2005 industry losses in Malaysia due to piracy at $147.3 million. IIPA estimates 2005 piracy rates at 60 percent for business software, 49 percent for music, and 50 percent for movies. Malaysia has remained on the Special 301 Watch List since October 2001, specifically because of its failure to substantially reduce pirated optical disc production and export.

The Optical Disc Act of 2000 established a licensing and regulatory framework to control the manufacture of optical discs and to fight piracy. Under the Act, manufacturers are required to obtain licenses from both the Ministry of International Trade and Industry and the Ministry of Domestic Trade and Consumer Affairs (MDTCA), to place source identification (SID) codes on each disc, and to allow regular inspections of their operations. This law should be modernized to ensure inspection authority covers all locations where optical media production may occur and also include as offenses acts such as "gouging" or tampering with the SID codes and "burning" of recordable discs.

In 2006, Malaysia's government continued to make progress in IPR enforcement. The MDTCA reported that it had revoked the licenses of six CD factories found to have been involved in piracy activities. It also reported that in the first half of 2006 MDTCA enforcement officials had conducted 179,195 raids throughout Malaysia; initiated 39,346 cases; and had arrested 1948 vendors for selling pirated discs worth 475 million ringgit (approximately USD 130 million). Prosecution continues be an ongoing challenge, but the government made some headway in tackling the judicial backlog for infringement cases. Malaysia's courts have imposed deterrent sentences of imprisonment and/or fines for the offenders. The Minister of Domestic Trade and Consumer Affairs continues to pledge the creation of a specialized IP court, but it is not expected to be in place before mid-2007.

The government is making further efforts to reduce trade in pirated goods. A special task force, chaired by the Minister of Domestic Trade and Consumer Affairs and including representatives from all ministries and agencies with responsibility for IPR, has overseen the expansion of enforcement staff and a more vigorous program of raids on sellers of pirated products. The Ministry added over 700 more enforcement officers in 2006 to complement the existing 1400 officers.

Malaysia continues to impose a hologram-labeling requirement for optical discs containing copyrighted material.

Pharmaceuticals

Sales of counterfeit pharmaceuticals are a problem in Malaysia. Counterfeit medicines that have been identified include "drugs" with the wrong ingredients, insufficient active ingredients, and those with fake packaging. The copied drugs are believed to originate in China. Unregistered generic copies of patented products, primarily imported from India, are also available in Malaysia. Both street vendors and health professionals sell the counterfeit products. The counterfeit medicines may create risks for consumers' health, reduce sales by legitimate manufacturers, and leave legitimate companies vulnerable to lawsuits from patients who may have adverse reactions to the counterfeit products. The Ministry of Health and the Ministry of Domestic Trade and Consumer Affairs are improving their enforcement efforts, and share information and collaborate with industry on those efforts. Legal prosecution of counterfeit pharmaceutical remains a weak spot, however, with an inefficient court system plagued by delay and by lenient penalties for convictions.

In 2005 Malaysia's Ministry of Health implemented a requirement that all medicines and health care products be affixed with a hologram label in an effort to combat rising counterfeiting. The labeling policy applies to pharmaceuticals and traditional medicines, though over-the-counter medicine and cosmetics are currently exempt. Pharmaceutical companies opposed the mandatory labeling requirement because of concerns about the cost and efficacy of this "one-size-fits-all" approach, and have called on the Ministry of Health to review the effectiveness of the directive on a regular basis. Industry reports of out-of-sequence numbering of hologram labels have raised concerns about the existence of counterfeit labels.

Malaysia continues to consider the implementation of data exclusivity provisions, and is working with industry as it formulates a position. The government continues to lack an effective patent linkage mechanism; industry has reported several cases of registration of generic versions of pharmaceuticals which are still under patent protection.

Trademarked Consumer Products

A number of U.S. consumer product companies also have suffered significant losses due to the manufacture and sale of counterfeit trademarked products. The volume is difficult to determine because of the broad scope of products involved. Counterfeiting in Malaysia goes beyond the counterfeiting of luxury branded products to include printer cartridges, plastic container systems, motor oil, household cleaning agents, shampoo and skin care items, herbicides, and penlight batteries. Counterfeiters have improved the quality of packaging and marketing so that consumers are misled into purchasing the products. The products have caused harm to individuals and damage to automobiles and household goods. Some of the pirated goods are produced in Malaysia, while many are brought into the country from China, Thailand, and India.

Enforcement by the local government is hampered by the lack of training and scarcity of information about ongoing counterfeit activities. Complicating enforcement of trademark-related violations is a Malaysian Court of Appeals interpretation of the trademark law that requires enforcement officials to have a "Trade Description Order" to conduct criminal raids when the counterfeit product seized is not identical to the trademarked original. High specificity requirements necessary to seize a shipment suspected of containing pirated or counterfeit products also represent an enforcement obstacle to U.S. industry.

Transparency of Regulatory System

Transparency

Malaysia's Official Secrets Act makes it a crime to divulge the contents of any proposed law or regulation before it comes into effect. This denies stakeholders an opportunity for input into the drafting of legislation that affects their interests. U.S. companies have indicated that they would welcome improvements in the transparency of government decision-making and procedures, including government tenders.

In addition to secrecy laws regarding proposed new legislation, Malaysia maintains a complex network of practices for which no documentation is available. In response to U.S. government requests for a list of laws and regulations pertaining to market access in various sectors, one government official responded that ministries and agencies were "not in a position to make available an exhaustive list of the laws and regulations pertaining to their respective sectors," in part because these were "still being streamlined and in some cases being developed," and in part because "a number of market access issues are addressed by way of administrative circulars/guidelines/polices which not may be stated explicitly in any document.[6]"

In some cases, local private sector associations discriminate against foreign-owned companies. For example, an association of local banks decided to charge foreign banks significantly higher fees for joining an automated clearinghouse (ACH) system. According to one foreign bank contact, the fee for a local bank to join was nominal; the fee for a foreign bank to join was based on the approximate cost of setting up a new branch.

Government Procurement

Malaysia is not a signatory of the WTO Government Procurement Agreement (GPA). Malaysia's official policy is explicitly discriminatory, calling for procurement to be used to support national public policy objectives. These objectives include encouraging greater participation of bumiputera (ethnic Malays) in the economy, transferring technology to local industries, reducing the outflow of foreign exchange, creating opportunities for local companies in the services sector, and enhancing Malaysia's export capabilities.

Generally, international tenders are invited only where domestic goods and services are not available. In domestic tenders, preferences are provided for bumiputera suppliers and other domestic suppliers. As a result, foreign companies do not have the same opportunities as local companies to compete for contracts. In most procurements, foreign companies are required to take on a local partner before their bids will be considered.

Another concern with Malaysian government procurement is the lack of transparency and competitive bidding. In October 2003, Prime Minister Abdullah Badawi announced that the Government would introduce open tenders for government procurements and major projects, with direct negotiations limited to special cases; however, little progress has been made. U.S. companies have voiced concerns about the non-transparent nature of the procurement process in Malaysia. The government's central tender website provides links to other ministries' websites, but not all of them provide user-friendly information on government tenders. In September 2005, the Ministry of Finance announced that the purchase of roadway, decorative, and outdoor lighting fittings, together with equipment and accessories for all government projects, must be sourced from one of three local bumiputera manufacturers.

Corruption

Malaysia's ranking in Transparency International's Corruption Perception Index worsened, dropping from 39th to 44th place this year.

The Malaysian government considers bribery a criminal act and does not permit bribes to be deducted from taxes. Nevertheless, corruption remains a serious concern. The Anti-Corruption Agency (ACA) began operations in 1967 under the Prime Minister's department. Since June 1997, senior state-level officials have been required to declare their assets to the ACA upon taking office. Foreign businessmen are asked to report any individuals who ask for payment in return for government services. The ACA is authorized to conduct investigations and prosecute cases with the approval of the Attorney General. ACA investigations are sometimes reported in the newspapers, but are rarely targeted at high-ranking officials or business representatives with well-connected companies. Prime Minister Abdullah declared after assuming office that the fight against corruption was one of his priorities, but by 2005 the battle had slowed. There were a few high profile prosecutions in 2004 but little more since. By the end of 2006 the government has done little to implement recommendations from an April 2005 royal commission on police reform.

Malaysia has signed but not yet ratified the UN Convention against Corruption.

Efficient Capital Markets and Portfolio Investment

Banking

Foreign participation in new commercial banking operations remains restricted, with foreign equity limited to an aggregate 30% in any single domestic bank. In 2001 Malaysia froze new investment in financial services, both domestic and foreign, while it pursued the implementation of its ten-year Financial Sector Master Plan (FSMP). During Phase One of the FSMP, more than 50 domestic financial institutions were merged into what are now nine domestic banking groups. Phase Two involved some liberalization of foreign financial institutions already operating in Malaysia; however, some key elements that were announced as being enacted are not being implemented in practice. For example, FSMP Recommendation 3.15.1: "Replace product pre-approval requirements with a simple new product notification process" has been adopted in theory; however, in practice the GOM still prohibits new financial products until they are pre-approved. Phase Three, which is scheduled to be enacted in 2007, would liberalize the financial sector and allow new foreign financial institutions to enter the market.

Currently, domestic financial institutions are required to maintain a broad network of branches in rural areas even where such operations incur losses. In 2006, existing foreign banks were granted permission to open four new branches for the first time in many years, subject to GOM approval of the location of each branch. Two such branches must be in rural areas. Some foreign banks have obtained approval for more than four new branches. Further liberalization of branching regulations is included in Phase Three of the FSMP. Other key provisions in the Plan include the deregulation of pricing and rules of association on rates, fees and charges; the establishment of an effective consumer protection framework; greater transparency; increased competition; and the lifting of restrictions preventing foreign banks to set up shared ATM networks.

In 2005, the GOM launched the Malaysian Deposit Insurance Company (MDIC) which was designed in accordance with international standards. MDIC insures deposit accounts of up to RM 60,000 (USD 16,950) with separate funds for conventional and Islamic banking institutions.

Islamic Financial Services

On October 14, 2004, Bank Negara issued three new Islamic banking licenses to three Middle Eastern Islamic banks, as part of the Government's initiative to make Malaysia a global hub for Islamic financial services. The GOM provides tax incentives and other measures to encourage commercial banks operating in Malaysia to set up full-fledged Islamic banking subsidiaries in which foreigners may take a 49 percent equity stake. In June 2005, Bank Negara established the Fund for Shariah Scholars in Islamic Finance to provide funding for research grants and scholarships. In August 2006, Bank Negara announced the launch of its three-pronged Malaysia International Islamic Financial Center (MIFC) Initiative, including special tax and regulatory treatment, scholarships, and efforts to work toward global harmonization of Islamic banking and insurance practices. This was acted upon in part in the Government's 2007 budget, released September 1, 2006, which proposes a ten-year tax exemption on Islamic financial products in foreign currencies and tax relief for Islamic Finance studies.

Insurance

The insurance industry remains dominated by foreign providers, including some U.S. firms. The 2001 Financial Sector Master Plan sets out a timeline for liberalization of the insurance industry in several phases. These include increasing caps on foreign equity, fully opening the reinsurance industry to foreign competition, and lifting existing restrictions on employment of expatriate specialists. In August 2006, the foreign equity caps were raised from 30% to 49% for local insurance companies and from 49% to 51% for branches of foreign insurance companies. Branches of foreign insurance companies were required to incorporate locally under Malaysian law by June 30, 1998, although a few companies still enjoy extensions granted by Malaysia's government. As part of the 1997 WTO Financial Services Agreement, Malaysia agreed in principle to allow existing foreign shareholders of locally incorporated insurance companies to increase their shareholding to 51 percent.

The Government continues to promote Islamic insurance ("takaful") as part of its strategy to make Malaysia a global hub for Islamic financial services, including through new tax breaks announced in the 2007 budget. In January 2006, Bank Negara awarded four new takaful licenses to four joint ventures, of which foreign investors were permitted to own up to 49%. On September 16, Bank Negara announced that international takaful operators, both domestic and foreign, would be licensed to conduct business in international currencies. They could be as incorporated entities or branches and would receive a full tax exemption for ten years beginning in 2007. International takaful operators will not be subject to foreign equity caps.

Investment Services

The Securities Commission's ten-year Capital Market Master Plan, released in February 2001, established a timetable for liberalizing foreign participation limits. According to this plan, foreigners would be permitted to purchase a limited number of existing stockbrokerage licenses and to take a majority stake in unit trust management companies, beginning in 2003. On March 22, 2005, the government allowed five foreign stock brokerage firms and a foreign fund management company to set up operations in Malaysia. Foreign ownership in Malaysian stock brokerage firms remains limited to 49% and in unit trusts, to 30%, despite the Plan's pledge. Fund management companies may be 100 percent foreign-owned if they provide services only to foreigners, but they are limited to 70 percent foreign ownership if they provide services to both foreign and local investors. Futures brokerage firms may be 100 percent foreign-owned. In September 2003, the Securities Commission began allowing foreign firms operating in Malaysia to seek listing on the Bursa Malaysia.

Lending

The overnight rate as of December 2006 was 3.5% and the base lending rate 6.72%. The average lending rate dropped from 11.51% in January 1998 to 6.63% at the end of September 2006. Bank Negara also progressively lowered the overnight rate from 10.74% in January 1998 to a low of 2.70% in November 2005, followed by several gradual increases in response to inflation pressures. As of December 2006, the overnight rate had remained at 3.5% since April.

In April 2004, Bank Negara replaced the three-month intervention rate with the overnight rate as the indicator of the Central Bank's stance on monetary policy, and as the target rate for the day-to-day liquidity operations of the Bank. Bank Negara also relaxed certain rules on how banks compute their lending rates, namely removing the cap on lending rates for most lending products. The new framework was enacted to give banks more flexibility to create structured and customized products. Bank Negara still prescribes certain limits on interest rates used by banks, specifying a minimum rate for fixed deposits, and maximum rates for credit cards and certain home loans.

Foreign investors and foreign companies have access to credit on the local capital market. On April 1, 2005, the government abolished the 3:1 gearing ratio requirement imposed on foreign-controlled companies for domestic borrowing. It also allowed foreign-controlled companies to seek any amount of ringgit credit without Bank Negara's approval.

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

Foreigners may trade in securities and derivatives. The Malaysian government has an adequate regulatory system to facilitate portfolio investment. In the wake of the 1997-1998 regional financial crisis, Malaysia took steps to improve accounting transparency and corporate governance. Publicly listed companies must submit quarterly reports that include a balance sheet and income statement within two months of each financial quarter's end and audited annual accounts for public scrutiny within four months of each year's end. An individual may hold up to 25 corporate directorships. All public and private company directors are required to attend classes on corporate rules and regulations.

Legislation also regulates equity buybacks, mandates book entry of all securities transfers, and requires that all owners of securities accounts be identified. A Central Depository System (CDS) for stocks and bonds established in 1991 makes physical possession of certificates unnecessary. All shares traded on the Bursa Malaysia must be deposited in the CDS. Short selling of stocks is not permitted.

Political Violence

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

Bilateral Investment Agreements

Malaysia has bilateral investment guarantee agreements with over 70 economies and has double taxation treaties with 60 countries. Malaysia's double taxation agreement with the U.S. currently is limited to air and sea transportation. Efforts to negotiate a more comprehensive bilateral investment treaty would require resolution of several issues, the most important of which is differing interpretations of national treatment.

In April 2002, the GOM passed the Mutual Assistance in Criminal Matters Bill, and in July 2006 concluded a Mutual Legal Assistance Treaty with the United States. Malaysia concluded a similar treaty among like-minded ASEAN member countries in November 2004.

OPIC and Other Investment Insurance Programs

Malaysia has a limited investment guarantee agreement with the U.S. under the U.S. Overseas Private Investment Corporation (OPIC) program, for which it has qualified since 1959. However, few investors have sought OPIC insurance in Malaysia.

Labor

Other than Malaysia's extensive regulatory burden, its shortage of skilled labor is the most oft-cited impediment to economic growth cited in numerous studies. Malaysia has an acute shortage of highly qualified professionals, scientists, and academics.

Education

Malaysia's success in achieving near-universal primary enrollment is noteworthy, and its secondary school enrollment has increased rapidly over the past two decades. However, the emphasis in most government-run schools is on rote memorization, not critical thinking skills. Despite increased enrollment in tertiary education made possible by increased government expenditure, the quality of university education is declining, as evidenced by growing numbers of unemployed graduates and decreasing output in terms of research and publications.[7] An earlier shift from English medium curricula to separate vernacular schools for Malays, Chinese, and Tamils (Malaysia's three main ethnic groups) elicited considerable controversy regarding the quality of education, social cohesion, the global competitiveness of Malaysians, and differentiated funding for Malay vs. non-Malay-medium schools. Further complicating the declining quality of tertiary education, Malaysia offers across-the-board racial preferences for university admissions and scholarships, and decisions regarding recruitment and promotion of faculty often are based on racial quotas more than on merit. The Government of Malaysia also awards scholarships to study abroad, primarily through the Jabatan Perkhidmatan Awam (JPA) which consistently has awarded 80% of its international scholarships to bumiputera each year from 2000 to 2005, as well as 70% to local universities each year from 2002-2005.

Labor

The government of Malaysia reported that labor market conditions in 2005 remained favorable with 3.5% unemployment (the official full employment rate is 4.0%). Unemployment for 2006 is expected to stay at 3.5%. Still, the government announced in November 2005 that Malaysia has approximately 60,000 unemployed university graduates due to a mismatch between university courses and job market requirements. The government has been recruiting the unemployed graduates for filling some 30,000 vacancies in the civil service, in large part through paid internships designed to improve their English language, communication and computer skills. In December 2006 Second Finance Minister Nor Yackop announced that Malaysia now had approximately 25,000 unemployed graduates.

The government no longer seeks to entice labor-intensive companies to establish operations in Malaysia, and reserves its fiscal incentives for higher value-added projects. At the end of June 2006, total registered foreign workers numbered 1.84 million -- a 13.6% increase over 2005. They were employed in the following sectors: 33.3% in manufacturing sector, 20.2% in plantations, 25.9% in services, and 15.1% in construction. The majority of the foreign workers are from Indonesia (64.7%), followed by Nepal (10.7%), India (7.4%), and Myanmar (5.2%). In July 2005, the government increased the levy on foreign workers in the services and plantation markets by 50%. The real rate of wage increases in the manufacturing sector was 0.8% in 2005 as compared to 1.9% in 2004.

The government rigorously monitors the ethnic balance among employees of both foreign and domestic firms, especially in the areas of technology, management and the like. Meeting GOM recommendations is essential for obtaining and renewing any of a multitude of licenses and approvals, which are essential to doing business in Malaysia's closely-managed economy. However, companies not meeting the racial quotas recommended by the GOM sometimes have been successful in obtaining renewals of their licensing requirements upon clearly demonstrating their inability to attract and hire qualified bumiputera employees.

Race-based preferences in hiring and promotion are widespread in government and in government-owned universities and corporations. While bumiputera represent about 60% of the population, they make up 77% of the civil service, including 84% of the top management group and 85% of the diplomatic service.[8]

With regard to employing workers, Malaysia ranks 38th among 175 countries in the World Bank's report Doing Business 2007. A notable impediment to employing workers in Malaysia is the high cost of terminating their employment, even in cases of wrongdoing. The World Bank estimates that the financial cost of firing an employee averages 88 weeks of salary for that worker.[9]

Malaysia is a member of the International Labor Organization International Labor