VII. Investment Climate A1. Openness to Foreign Investment The Malaysian Government welcomes manufacturing investment, especially in high-tech areas. Proposals for a manufacturing license are screened by the Malaysian Industrial Development Authority (MIDA) to determine whether or not they are consistent with the Industrial Master Plan (IMP) and government social policy. Investment regulations are specified in the Promotion of Investment Act of 1986 and the Industrial Coordination Act of 1974. Approval depends on the size of the investment, whether or not it includes local equity participation, the type of financing (both local and offshore) required, the ability of existing and planned infrastructure to support the effort, and the existence of a local or foreign market for the output. The criteria are applied in a non-discriminatory manner, except in the rare instance when a local and a foreign firm propose identical projects. One-hundred per cent foreign ownership in manufacturing is permitted only in certain instances. The general policy for manufacturing investment is as follows (it should be noted, however, that the government is very flexible in administering these guidelines): -- No equity conditions are imposed on projects which export at least 80 percent of their output. Under these provisions, for example, U.S. electronics firms in Malaysia have 100% U.S. equity, and operate in special export-oriented Foreign Trade Zones. -- For projects that export between 50 and 80 percent of output, 100 per cent foreign ownership is allowed if (a) the investment is worth at least RM 50 million (US $20 million) in fixed assets (excluding land) or has at least 50 percent value added; and (b) the product does not compete domestically with a locally made product. -- For projects exporting from 51 to 70 percent of output, majority foreign ownership (51 percent) is permitted. This can be raised to 79 percent ownership under certain circumstances. -- For projects exporting less than 20 percent, the maximum foreign ownership is 30 percent. The Government of Malaysia also regulates the distribution of Malaysian equity, in pursuit of its social goals. When foreign equity is less than 100 per cent, local equity will be distributed as follows: -- For foreign projects without a local partner, if 70 percent or more of the equity is foreign held, the balance is reserved for Bumiputras (the Malay and other indigenous people). If less than 70 percent is foreign-held, 30 percent is reserved for Bumiputras, and the rest for other Malaysians. If the equity reserved for Bumiputras is not taken up, the Ministry of International Trade and Industry (MITI) will allocate the balance to other Malaysians. -- For foreign joint ventures with Bumiputras, all local equity will be held by the Bumiputra partner. If the partner is unable to do so, MITI will allocate any unclaimed local equity to other Malaysians. -- For foreign joint ventures with non-Bumiputras, the local partner will take at most 30 percent of the equity. Any other local equity will be held by a Bumiputra. The Government of Malaysia also offers a number of fiscal incentives to foreign manufacturing investors. The principal incentives for the manufacturing sector are contained in the Promotion of Investments Act of 1986 and the Income Tax Act of 1967. These incentives apply to companies subject to Malaysia's 34 percent corporate income tax and the two percent development tax. The latter will be abolished effective in 1994. These incentives include: -- Pioneer status: A partial tax exemption; designated firms pay tax on only 30 percent of income for five years (non-renewable). -- Investment tax allowance (ITA). A write-off of up to 60 percent of capital expenditures incurred during the first five years of project approval to offset up to 70 percent of income. Any unused balance can be carried forward. Not available to firms with Pioneer status. -- Reinvestment Allowance: An allowance of 40 percent of capital expenditures to expand, modernize or diversify an existing facility before 1996. -- Export Credit Refinancing (ECR). This provides qualified exporters with below-market, short-term commercial credit. -- Abatement Incentive for Exports. Pre-tax income can be reduced at a rate equal to 50 percent of the ratio of export sales to total sales. This is being phased out over the next three years. -- Export Allowance. Five percent of the FOB value of export sales can be deducted from the pre-tax income of trading companies exporting Malaysian manufactures. -- Double Deduction of Export Credit Insurance. This is provided if the insurance company is approved by the Ministry of Finance. -- Double Deduction for Export Promotion. This is granted for certain qualifying expenditures (e.g. overseas advertising and export market research). -- Industrial Building Allowance (IBA). The IBA is an initial allowance of ten percent, followed by an annual two percent allowance, of the cost of warehouses and bulk storage facilities for exports. -- Incentives for Research and Development. These include a five- year tax holiday and permission to carry tax-relief period losses forward to the taxable period. -- Incentives for Training. These consist of an IBA for buildings used for training and a double deduction for approvable training expenses. -- Customs Exemption for Raw Materials, Machinery. This is granted for export-oriented manufacturers which use raw materials or components that are not made locally of acceptable quality. It also applies to machinery directly used in production. Under certain circumstances it may be granted for firms producing for the domestic market. The Malaysian Government does not discriminate against foreign investors after the initial investment has been made. The Securities Commission and the Foreign Investment Committee implement the regulations specified in the Malaysian Code on Take- overs and Mergers. Foreign portfolio investors are permitted to trade freely in both equity and debt on the local exchanges, and to purchase stock in newly privatized firms during an initial public offering. A.2. Conversion and Transfer Policies Malaysia has an open foreign exchange regime. Payments, including repatriation of capital and remittance of profits, are freely permitted and are transacted on a timely basis. Payments to other countries outside Malaysia may be made in any foreign currency other than the currency of Israel. Payments within Malaysia must be made in Malaysian Ringgit. The Government places no other restrictions on payments in a foreign currency of less than RM 10,000 (US$ 4,000). Larger transactions require an exchange control license. For transactions up to RM 10 million (US$ 4 million), the license consists of a simple reporting form obtained from any commercial bank. The single exception is on payments made abroad on loans from non- residents. Here, the loan must have been made with the approval of the Controller of Foreign Exchange (an office of Bank Negara, the central bank), and the payments must be consistent with terms of the approved loan. Transactions exceeding RM 10 million require the approval of the Controller, who generally grants it. Over the past decade, the Malaysian Ringgit (RM) has fluctuated within a rather narrow band -- from 2.50 to 2.75 ringgit per dollar. Since the Central Bank manages the exchange rate in a controlled float using a basket of currencies weighted heavily in the U.S. dollar, this historical experience is likely to prevail for the foreseeable future. A.3 Expropriation and Compensation The Embassy is unaware 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 would be referred to the Malaysian judicial system, which has proved capable of enforcing property and contractual rights. A.4 Dispute Settlement The Embassy is unaware of any important investment disputes involving foreign investors or contractors in the past several years. Malaysia is signatory to the UN-sponsored Convention on the Settlement of Investment Disputes. The domestic legal system is open, accessible on a non-discriminatory basis and transparent. Should local administrative and judicial facilities fail to satisfy claimants, a dispute would be submitted to the International Center for Settlement of Disputes (ICSID) under the aegis of the United Nations. A.5 Performance Requirements and Incentives Apart from the equity guidelines described in section A.1 above, the Malaysian Government does not generally impose performance requirements on foreign investors. Quite often, however, performance requirements are written into the manufacturing license of both local and foreign investors who are granted fiscal incentives. Most often these take the form of export targets -- for example the license may specify that at least 40 percent of the output must be exported. There have also been cases where the transfer of specific technology has been made a condition for obtaining investment tax incentives. 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. In extreme cases the firm could lose its manufacturing license. The Government has stated that over the long term it intends to eliminate gradually most of the fiscal incentives now offered to foreign and domestic manufacturing investors, as described on section A.1 above. A. 6 Right to Ownership and Establishment Conditions under which a foreign investor or a domestic entrepreneur may establish a manufacturing enterprise and engage in remunerative activities in Malaysia are liberal. Certain sectors of the economy remain, however, essentially closed to foreigners. Foreign service firms, for instance, are generally restricted to a minority interest (30 percent). The government severely restricts establishment in the financial service industry. No new banking or insurance licenses are being awarded. Ownership of agricultural land is restricted to Malaysian citizens. Under the terms of the Petroleum Development Act of 1974, the upstream oil and gas industry is the province of the parastatal Petroleum Nasional Berhad (Petronas), which is the sole entity with legal title to Malaysian crude oil and gas deposits. A. 7 Protection of Property Rights Malaysia has an effective legal system and adequate legislation of protect private property. It has one of the region's strongest regimes for protecting Intellectual Property Rights (IPR)_. They are covered by the Trade Description Act of 1976, the Patent Act of 1983 and the Copyright Act of 1987, as amended in 1990. In addition, Malaysia has acceded to the Berne Convention and the Paris Convention, and is a member of the World Intellectual Property Organization (WIPO). Patents registered in Malaysia generally have a 15-year duration, but this can be extended under certain circumstances. Although the processing time for trademark registration may be as long as 18 months, infringement has not been a problem for American firms. Copyright protection extends to computer software, and lasts for life plus 50 years. 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. Malaysia has expanded Government IPR enforcement personnel and has brought action against both software and video pirates. A. 8 Regulatory System, Law and Procedures Malaysia has a transparent system of Government economic and business regulation. For tax purposes, local and foreign enterprises are treated on essentially the same footing. The corporate tax rate is 32 percent, except in petroleum production where it is 40 percent. There is an additional one percent development tax imposed, but it will be phased out by 1995. The Malaysian Government places restrictions on the number of expatriate personnel employed by foreign and domestic firms. Applications for expatriate posts are submitted to MIDA at the same time as the manufacturing license application. The following are the Government guidelines on the employment and retention of expatriate personnel in Malaysia: -- A company with a paid-up capital of at least US $2 million is automatically allowed five expatriate positions. More can be requested. -- For a company with paid-up capital of less than US $2 million, expatriate positions may be permitted if the paid-up capital is in the neighborhood of RM 500,000 (US $200,000). If allowed, expatriate executive posts may be retained for at most 10 years if a Malaysian citizen is being trained for the post. Non-executive expatriate posts can be retained for at most five years, again providing a Malaysian is being trained. The Malaysian Government may relax these conditions for certain high priority industries. -- In general, intra-company transfers among expatriates already given a work permit are permitted without the need for a new work permit. -- Work permits are valid for at most 10 years, although one year permits are more common. -- Work permit holders are granted multiple-entry visas valid for the same duration of the work permit. -- Companies desiring additional expatriate posts as a result of expansion or product diversification or to renew existing posts must apply to the Standing Committee on Malaysianization of the Department of Immigration. In addition, the Government of Malaysia monitors hiring practices to ensure that all employers strive to meet guidelines designed to ensure a racial balance in employment. A.9. Efficient Capital Markets and Portfolio Investment Malaysia imposes no restrictions on foreign portfolio investment. The Malaysian Government has in place an adequate regulatory system to facilitate portfolio investment. In 1992 it established a Securities Commission to centralize regulation and encourage further expansion of the domestic capital market. In the same year, the Government licensed a private company (Rating Agency of Malaysia) which rates all bonds before issuance. Deepening the domestic capital market is a major Malaysian Government priority. To foster development, monetary authorities grant local and foreign private sector liberal access to a variety of credit instruments. Credit is, in general, allocated on market terms. One exception is a requirement that local and foreign banks loan a small portion of their funds at a specified rate of interest (currently nine percent) to Malaysian citizens purchasing low-cost housing. Foreign investors have access to credit on the local capital market, but are required to source at least 60 percent of local borrowings with a domestically-incorporated bank. As of 1994, all banks operating in the country are domestically incorporated. No prior permission is required for borrowing less than RM 10 million (US $4 million). Foreign investors may borrow locally in foreign currency to finance their business activities (e.g. pay for imports) or to purchase Malaysian Ringgit (RM) on the local market, but may not hold local borrowings of foreign currency for investment abroad without permission of the Controller of the Currency. The domestic banking system is sound. As of June, 1993, the top five commercial banks held assets worth US $45 billion. To retain tight control over the domestic money supply, Bank Negara Malaysia (the Central Bank) instituted a series of measures in 1993 which penalized speculators holding Ringgit offshore and placed limits on the volume of currency swaps. To date the incidence of foreign firms interested in a hostile takeover of a Malaysian company has been extremely small. As noted above, take-overs and mergers are regulated by the Malaysian Code. A.10 Political Violence Although Malaysia suffered violent conflicts in the past, there is currently no political violence. The country has been peaceful for over a generation, since the racial clashes of 1969 and the earlier communist insurgency. B. Bilateral Investment Agreements Malaysia has bilateral investment guarantee agreements with 29 countries and country groupings: USA (1959), Germany (1960), Canada (1971), Netherlands (1972), France (1975), Switzerland (1978), Sweden (1979), Belgium and Luxembourg (1979), United Kingdom (1981), Sri Lanka (1982), Romania (1982), Norway (1984), Austria (1985), Finland (1985), Organization of Islamic Conference (1987), Kuwait (1987), ASEAN (1987), Italy (1988), South Korea (1988), People's Republic of China (1988), United Arab Emirates (1991), Denmark 91992), Vietnam (1992), Papua New Guinea (1992), Chile (1992), Laos (1992), Taiwan 91993), Hungary (1993) and Poland (1993). Malaysia has a limited Investment Guarantee Agreement with the United States under the U.S. Overseas Private Investment Corporation (OPIC) program. Efforts to negotiate a more comprehensive Bilateral Investment Treaty still require resolution of several issues, the most important of which is differing interpretations of national treatment. Malaysia has double taxation treaties with 36 countries: Singapore (1968, 1973), Japan (1970), Sweden (1970), Denmark (1970), Norway (1970), Sri Lanka (1972), United Kingdom (1973), Belgium (1973), Switzerland (1974), France (1975 and 1991), New Zealand (1776), Canada (1976), India (1976), Germany (1977), Poland (1977), Australia (11980), Thailand (1982), South Korea (1982), Philippines (1982), Pakistan (1982), Romania 91982), Bangladesh (1983), Italy (1984), Finland (1984), People's Republic of China (1985), Commonwealth of Independent States (1988), Netherlands (1988), USA (1989), Hungary (1899), Austria (1989), Yugoslavia (1989), Indonesia (1991), Mauritius (1992), Iran (1992), Papua New Guinea (1993) and Saudi Arabia (1993). With the United States, Malaysia has a tax agreement limited to air and sea transportation. Negotiation of a comprehensive agreement was re-opened in 1992. C. OPIC and Malaysia Since 1959 Malaysia has qualified for the U.S. Overseas Private Investment Corporation (OPIC) insurance programs. However, given Malaysia's political stability, positive attitude towards foreign investors and available dispute settlement mechanism, few investors have sought OPIC insurance in Malaysia. D. Labor The Malaysian economy is at or near full employment. The official unemployment rate for 1993 was 3.0 percent (down from 3.9 percent in 1992. Unlike the US employment statistic, the Malaysian figure includes workers no longer actively seeking employment. Excluding these workers, unemployment is below 3.0 percent. Local and foreign firms report difficulty in obtaining workers at all skill levels. Labor relations in Malaysia are generally good, and Malaysian labor unions, who account for less then 10 percent of the workforce, act responsibly. The Government discourages strikes through a system which promotes settlement through negotiation or arbitration by the Industrial Court. Once a case is referred to the Industrial Court, the union is barred from further industrial action until resolution has been reached. The Malaysian Government prohibits the formation of a national union in the electronics industry, but allows in- house unions. E. Foreign Trade Zones/Free Ports Foreign and domestic investors have equal access to Malaysia's ten Free Trade Zones (FTZ's), located in the states of Penang, Melaka, Selangor, Johor and Perak. To be eligible, a firm must export all production (although the Malaysian Government will also consider applications from companies that export at least 80 percent of output). Raw materials and components imported for use in export production in the FTZ and exported abroad are not subject to duty. No restrictions are placed on a company's choice of suppliers. Investors may apply to sell a portion of their FTZ production on the domestic Malaysian market, subject to domestic duties but eligible for duty drawbacks and available exemptions. For manufacturers located outside FTZ's, sales to companies with facilities within a Malaysian FTZ were formerly considered exports, a potentially key fact for a foreign firm with an export requirement written into its license. In addition to the FTZ's, Malaysia offers firms wishing to locate in other parts of the country the opportunity to establish themselves as Licensed Manufacturing Warehouses (LMW's), which operate on the same principles as an FTZ. This means an investor can essentially set up a "mini-FTZ". Malaysia has two Free Ports: Labuan Island (offshore of Sabah) and Langkawi Island (offshore of the northwestern peninsular state of Kedah). Labuan is also the site of Malaysia's infant offshore banking facility. Langkawi is primarily devoted to the tourist trade. F. Capital Outflow Policy Malaysia is relatively free of foreign exchange restrictions. Malaysians are currently not permitted, however, to borrow funds on the domestic capital market for investment abroad. As the country industrializes, it is becoming a foreign investor itself. In 1992, the Malaysian Government announced plans to implement incentives for outward investment for certain industries in which Malaysia has a comparative advantage, such as rubber estate management and palm oil processing. The Prime Minister and other cabinet officials have led trade missions to other developing countries to encourage Malaysian outward investment. A special cabinet committee has been formed to propose measures. The latest available Bank Negara (central bank) estimate put Malaysian direct investment abroad at RM 554 million (US $200 million) in 1990, over a third (35 per cent) in Hong Kong. G. Foreign Direct Investment Statistics See tables in Appendix A, Section 4. The data on approved applications for manufacturing investment were supplied by the Malaysian Industrial Development Authority (MIDA). They do not include foreign investment in the upstream oil and gas industry (exploration, production and development), which the national petroleum company, Petronas, puts at RM 8.5 billion (US $3.4 billion) annually. In addition, the data record only project approvals, not actual disbursements or reinvestment by existing foreign manufacturers. A 1992 Bank Negara (central bank) survey of manufacturers revealed that 17 percent of total project cost is disbursed in the first year following approval, 53 percent in the second year and the balance by the end of the third year. H. Major Foreign Investors On a manufacturing project approval basis, the US was the top foreign investor in Malaysia for each of the last two years. In 1993 the approved proposed investment from the US was US $644 million. This is followed closely by Japan's US $581 million. The two countries made up 55 percent of the total foreign investment in Malaysia. Other major foreign investors are from Taiwan (US $331 million) and Singapore (US $191 million). US firms with a significant investment in Malaysia include: Exxon, all major semi-conductor manufacturers (e.g. Motorola, Texas Instruments, Intel, National Semiconductor, Harris), a number of computer component makers (e.g. Seagate, Komag), the toy maker Mattel and the medical products manufacturer Baxter International. Virtually all the major Japanese consumer electronics firms (e.g. Sony, Panasonic) have facilities in Malaysia.