OECD Investment Policy Reviews: Malaysia 2013
Malaysia stands out as one of the economic success stories in Asia. Foreign direct investment (FDI) has played a major role in the growth and diversification of the economy, and has been a key part of an outward-oriented development strategy. As an early mover in terms of export-led development, Malaysia has traditionally received significant amounts of foreign investment relative to the small size of its economy. Today, Malaysia is a net outward investor, with its companies increasingly becoming regional and global players.
In spite of this enviable performance, the Malaysian economy is confronting numerous inter-related challenges as it strives to attain developed country status by 2020. Private investment as a share of GDP has declined, and FDI as a share of total FDI in ASEAN has decreased since the early 1990s.
The government has engaged in ambitious reforms across the board which have led to increased liberalisation and more efficient regulations and have contributed to a strong enabling environment for business. Malaysia will also continue to benefit from a dynamic and rapidly integrating region, thereby retaining the attention of investors.
OECD Investment Policy Reviews: Malaysia presents an assessment of the investment climate in Malaysia, including the institutional and legislative framework for investment. It focuses on policy options in the areas of investment, infrastructure, finance, responsible business conduct, corporate governance and green investment and discusses measures to help revive both foreign and domestic investment.
Investment policy: Towards greater openness
Malaysia was one of the first emerging economies to welcome foreign investment in export-oriented manufacturing sectors beginning in the late 1980s. Foreign investors in domestic-oriented projects or providing services through local affiliates, on the other hand, traditionally faced numerous restrictions on their activities, notably on the maximum share of foreign equity.This dualistic approach to regulating foreign investment began to change following the Asian financial crisis in 1997. First, the export obligation tied to full foreign ownership was dropped for manufacturing projects. Then, starting in 2003, the government began to liberalise restrictions in the banking and insurance sectors. This was followed in 2009 by the deregulation of the Guidelines of the Foreign Investment Committee which had previously constrained foreign takeovers of Malaysian companies. At the same time, the government announced the liberalisation of 27 service sub-sectors, followed by another 18 sub-sectors announced in 2011.The result has been a substantial liberalisation of policies covering foreign investment, particularly over the past decade. Malaysia is now relatively open by the standards of emerging economies in Asia according to the OECD FDI Regulatory Restrictiveness Index, but still maintains far more restrictions than found on average in OECD member countries. Many of these remaining obstacles are in service sectors which play a key role in the overall competitiveness of the economy, including in manufacturing sectors. Further reforms of restrictions in these sectors could provide the needed impetus to revive private investment and propel Malaysia on a path to developed country status by 2020.