Malaysian Institutional Environment Essay

 

Malaysian Institutional Environment

Introduction

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The government of Malaysia is open to foreign investors.  Microsoft, GE, Intel, Motorola are some U. S. companies now having operations in Malaysia.  The total U.S. investment represents 28.8% of the total foreign investments in Malaysia, which ranked no.1, followed by Japan and Singapore. The priority is in the manufacture of electronics.  Malaysia provides incentives which include tax abatement, credit extension and investors protection to encourage foreign direct investments (FDI) particularly in export oriented high technology industries.  However, the necessary economic reforms to draw investors in are not being guaranteed by the government.  In 2005, the UN Conference on Trade and Development (UNCTAD) placed Malaysia as the 62nd investment centre for foreign direct investment, where in 1995, it was ranged 6th.  The significant decline in direct foreign investment as reported by the World Bank was due to “regulatory burden” on services and inadequacy of “skilled labor” supply (“Malaysia”, 2007).

Global Business Climate

Several components impede economic growth in Malaysia. Embarking on a business is very onerous, time-consuming and burdensome.  It will take some time to secure business permits and licenses as there are a whole lot of procedures that are very costly. It takes 25 procedures, 285 days to process licenses with a cost of 10% of per capita income (“Explore”, 2007).  A policy privileging an ethnic group is also a hindrance to economic growth.  Government requires 30% bumiputera (the affluent and well-favored group) ownership on foreign and domestic non-manufacturing companies.  In spite of the shortages in skilled workers and professionals, government restrictions on expatriate workers remain a major problem to some prospective foreign investors. The number of expatriate workers is dependent on the foreign paid-up capital.  $2 million paid-up capital in foreign manufacturing companies limits automatic approval to only ten positions.  If a foreign investor would avail of the local workers, aside from high salary rates, the cost of employment termination even for just cause is extortionate, adding up to a little less than 88 weeks salary of the dismissed employee.   Only visitors’ visas are accorded to husbands of expatriate women working in Malaysia because Malaysian culture dictates that it is the men that should be working and women’s place is at home. The policy on 10-year maximum period for expatriates workers and investors to remain in Malaysia continuously discourages foreign direct investments. Direct investors have uncertainties that after their businesses have become productive and profitable; their work visas will not be renewed (“Malaysia”, 2007).  There is difficulty in enforcing contracts as there are 30 steps to hurdle and processing takes 600 days at a cost of 27.5% of claim (“Explore”, 2007).

Financial incentives are subject to performance requirements which are contained in the licenses.  It takes the form of technology transfer, export goals and local content essentials. Companies with “pioneer status” operating in high priority products and activities are accorded ten to fifteen years 100% tax exemption incentive by the Malaysian government; and those firms with” investment tax allowance status” not as high as “priority status” are offered five to ten years (“Incentives”, 2007).  Companies engaged in the Information and Communications Technology (ICT) aside from the benefits under the abovementioned status enjoys additional benefits.  50% of the value of increased exports is deductible from their “statutory” income. ICT companies also enjoy deductions on payments to consultants, cost of developing websites with initial allowance of 20% for five years and 40% for acquisition of computers, software and other technology assets to be written off within two years. Tax incentive for small and medium-scale business is a reduction in corporate tax to 27%.  A firm may not only loss any tax benefits but, revocation of business license to operate may ensue if it fails to meet the terms of that license.  (“Incentives”, 2007).

Intellectual Property Protection

Intellectual property laws in Malaysia conform with international standards, Malaysia being a signatory to the international treaties on international property rights, such as the Paris and Berne Convention.  The government believes such laws offer ample protection to domestic and foreign investors.  However, the government failed to attract investments in international procurement, regional distribution centers, research and development and in biotechnology for its failure to protect intellectual property rights (“Malaysia, 2007).

Counterfeit pharmaceutical products are a major problem in Malaysia.  Sale of drugs and medicines with inappropriate ingredients and in bogus packaging are available anywhere.  Replications of unregistered generic patented products are also in the market. Fake medicines not only are health- hazards but also threaten financial future of legitimate companies. Aside from reduction in sales, companies are also predisposed to grimace future suits from parties who may have sustained injuries for using counterfeit products.  Trademark infringement remains unabated in Malaysia.  U.S. companies sustained financial losses due to production and sale of imitative goods. Lack of necessary skill and data about counterfeiting operations handicapped the enforcement by the local government. Court’s discriminating interpretation of the trademark law added to the complexity of its implementation.  The court requires eminent particularity description of a product prior to issuance of a search and seizure order (2007).

Enacted laws may conform to the standard set by the international community but as to how these laws are implemented is most important. It takes five to eight years, to settle cases involving intellectual property, with patent infringement cases taking ten to fifteen years.  As provided for in their contracts, compulsory arbitrement clauses are not respected by most Malaysian firms.  With inadequate capabilities in the effective effectuation of intellectual property laws coupled with inefficient judicial processes, violations to property rights will remain a deterrent to direct foreign investments (2007).

Policies and Regulations

Malaysia, a signatory to the United Nations Convention against Corruption (UNCC) treats bribery as a criminal offence. The Anti- Corruption Agency created to combat corruption, has been functional since l967 but as of 2006 reports, has not been acceptably effective.  Corruption persists as a major issue in Malaysia and political observer squirm that corruption continues unrestrained. However, international organizations argue that Malaysia is less corrupt compared to other countries.

The procurement system lacks transparency and very discriminatory. Bidding is not competitive, thus foreign companies do not partake equal opportunities as the local companies in getting government contracts.  Before their bids are considered, foreign firms are required to take local partners. For domestic requirements, the bumiputera and other local companies are given preferences than international proposals which are only considered if goods and services are not available domestically.

Proposed laws and legislations remain secret until their effectivity.  This policy on secrecy denies interested parties, particularly the business sectors to contribute inputs in the drafting of laws concerning their interests. Documentation on laws and legislations are not available, issues are addressed only through guidelines and memorandum circulars.  It is a crime to disclose information on proposed legislation under Malaysia’s Official Secret Acts (“Malaysia”, 2007).

Participation of foreign banks in new commercial banks is restricted.  Foreign banks are limited to 30% equity in domestic bank  In 2005, existing foreign banks were allowed  to open four branches;  provided,  said banks were to put up two branches in rural areas preferred by the government even if such operations would mean incurring losses.  Further, foreign banks are charged higher fees for joining automated clearing house system than local banks. Furthermore, foreign banks are restricted to provide shared ATM networks. In other industries, foreign investment is restricted in the insurance sectors, financial and professional services.  However, foreigners are allowed 70% equity in shipping and 49% in forwarding enterprises. Agriculture, construction, and agricultural land ownership are reserved to its citizens.  Corporate taxes are basically the same for local and foreign businesses.  Resident enterprises pay 28% income tax and for a total tax rate of 36% of profit, including labor tax and contributions plus other taxes (“Explore, 2007”).  New legislations on goods and services tax have been passed but pending application in 2007 for further review.

Transportation and Communications

Malaysia’s transportation and communications infrastructures, whilst very modern, vary geographically as to quality and accessibility.  In most of Malaysia’s craggy terrain transportation infrastructure is still under development.  Except for the commuter rail system in Kuala Lumpur, roads and railways are concentrated in the thickly settled areas of the peninsula. Town roads are not fully developed and rail service is least available. The government has undertaken improvements in all its 93 ports. Inland and coastal waterways are always navigable.  In Sabah and Sarawak, the rivers are the major means of transportation.  Malaysia has 117 airports, but only 37 have paved runways.  There are six main airports that service international flights.

The government has liberalised its telecommunications policies. Telecommunications system is one of the most advanced networks in Asia but mostly centred in urban areas.   Foreign equity is limited to only 30% of local communication companies. Restrictions favor Telekom Malaysia, the dominant provider which is a government controlled corporation, thus impeding the growth of more efficacious facilities. In broadcasting, 60% of radio programming has to be of local substance while the well-connected bumiputera controls 80% of television programming.  Investors are concerned about lack of clear and uniform content guidelines in commercial advertisements (“Country”, 2006).

National Security

The military is primarily organised to address internal threats after the ethnic rioting in l969 which resulted to the establishment of economic policy giving the bumiputera larger share in the economy.  To address internal security, the government stressed on economic development and unity among ethnic divergences.  Although there are existing territorial disputes with other Asian countries, there are no immediate external threats.  Malaysia is a member of the ASEAN, a common defense agreement with South East Asian nations.  The United States enjoys the use of Malaysia’s naval and air facilities under a bilateral military agreement between the countries (“Malaysia”, 2007).

Malaysian Government and Politics

As a federalised constitutive monarchy, it is the king that legalised all government actions on the proposition by both the cabinet and the parliament; however, emphatically, it is the prime minister who holds power and authority. Malaysia is composed of thirteen federal states and three federal territories.  Federal states have their own constitutional government which enforce and administer state laws. Federal territories are administered by the Ministry of Federal Territories. The federal constitution is the Supreme law of the land with its legal system based on English common law.  Historically, Malaysia was once a protectorate of England until August 31, l957 when Malaysia became fully independent. There is no trial by jury and imposes death penalty.  Incessant modifications in the judicial structure, clogging of court cases, wretched legal relegation and corruption are among the perennial problems confronting the judicial system in Malaysia (“Country”, 2006).

The United Malays National Organisation (UMNO) mostly bumiputeras, has been the dominant party which now occupy 109 out of 219 seats in the House of Representatives. The political atmosphere is characterised by ethnic partisanship and internal conflicts among political parties. The Conference of Rulers (Majilis Raja-Raja) is the supreme institution which elects from among themselves the king as head of state for a single term of five years. The king appoints the nine hereditary rulers and four state governors composing the Conference of Rulers. In case the king becomes incapacitated to perform his duties, the deputy head of state assumes power.  He is elected in the same way the king is elected (2007).

In its relations with other countries, the United States views Malaysia as a peril to terrorism despite its attempts to fight terrorist acts and focuses on counterterrorism activities.  Allegements that a Filipino insurgent group, the Moro Islamic Liberation Front, has sanctuaries in some parts of Borneo have caused encumbered relations with the Philippines. There is also latent hostility existing between Malaysia and other Asian countries such as Singapore and Brunei over interests in natural resources of disputed territorial claims. Sovereignty over Spratly Islands, said to be rich in oil is still being disputed among Malaysia, Philippines, Brunei, China, and Vietnam. The claims of Malaysia and Brunei over offshore seabeds had caused the cessation of exploratory activities in those domains. Petroleum resources located in the seabed of Sipadan and Ligitan Islands’ maritime boundaries are still under claims by the Philippines and Indonesia.  Nevertheless, none of these territorial conflicts resulted in military engagement.  Today, there is an improvement in Malaysia’s relationships with other Asian countries as a consequence of commercial growth and development.  Malaysia is a member of different international organizations and signatory to different international treaties and agreements (“Country”, 2006).

Conclusion

Setting out on a business venture in Malaysia is indeed an adventure. Considering the vast land area of 329,758 square kilometers and total coastline of 4,675 kilometers in length, and also looking at tourism being the second largest industry in Malaysia (“Country”, 2006), would initially attract real estate development investors.  However, advertent across-the-board analysis of Malaysian institutional environment would create apprehensions on future prospects, particularly in real estate development which is not a priority industry in Malaysia.

First and foremost, developing a real estate business ordinarily requires conversion of agricultural lands. Malaysian government restricts ownership of agricultural lands to its citizens. In case of joint ventures with local investors, the favoured bumiputera would own an equity interest of 30% in the business.  Further, the approval process has to be considered, too.  Registration of property as mentioned earlier is very burdensome and very costly, taking an average of 144 days that entails numerous procedures. No doubt it was ranked 66th among 175 countries by the World Bank for ease of recording property ownership  (“Malaysia, 2007).

The next consideration is the construction phase of the development.  Construction is also restricted to Malaysian citizens.  A foreign investor must avail of a Malaysian firm to handle the project and sponsorship of foreign engineers is subject to the requirement that no local engineer is capable for the job. Hiring of skilled workers is very costly and there is a shortage of supply. Employment of expatriates depends on the invested capital and maximum allowable work visas are limited to ten years.

In view of the investment climate in Malaysia, there is a possibility that the flow of information in the property market is fundamentally inaccurate and circumscribed as it is only obtainable in the local market at significant cost.  Inasmuch as turnover rate in properties is very deadening, it would be very difficult to auspicate future trends of property prices.  (“BIS”, 2005).  Starting a business, hiring workers, enforcing contracts, registering of property or even paying taxes or winding up and liquidating  the business is not that uncomplicated in Malaysia

References

BIS Papers No. 21 (2005, April). Real estate indicators and financial stability.  Retrieved on

September 28, 2007 from <http://www.bis.org/bppdf/21.pdf

Country Profile:  Malaysia government and politics (2006, September).  Retrieved on

September 28, 2007 from <http://www.mongaby.com/reference/country

profiles/2004-2005/Malaysia.html>

Explore Economies, Malaysia (2007).  Retrieved on September28, 2007 from

http://www.doingbusiness.org/ExploreEconomies/?economyid=119

Incentives for Investment Malaysian Industrial Development Authority. (2007, March).

Retrieved on September 28, 2007 from<http://www.mida.gov.my/

Malaysia. (2007). Investment climate statement-Malaysia.  Retrieved on September 27, 2007

From <http://www.state.gov/e/eeb/ifd/2007/82336.htm

 

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