Once considered one of the Asian dragons, foreign investors have largely forgot Malaysia in the decade following the 1998 Asian financial crisis. However, there have been some important recent reforms in business law in Malaysia as the government of Najib Razak finds ways to push its liberalization agenda further in order to attract more foreign capital in the form of market exchange and direct investment.
The most important recent reform has been the relaxation of rules requiring ethnic Malay investors to have at least a 30% stake in any listed company. With the new law “newly listed companies will now be required to make available only a 12.5% stake to ethnic Malay investors without any obligation to achieve the quota if the issue is not taken up by them,” reported the Financial Times. The new regulation arguably aims to ease ethnic tensions and protectionism in favor of Malays of ethnic minorities. The three major ethnic group s include Malays (51%), Chinese (24%) and Indians (7%).
In addition, the government also took a significant step by changing the restriction on the former foreign ownership ceiling for asset management funds and brokerages. According to the Financial Times, “under the new rules, ‘qualified and leading’ foreign fund management companies in the wholesale segment will be allowed to set up operations in Malaysia without need of a local equity partner, while the foreign shareholding limit for unit trusts in the retail sector will be raised to 70 per cent from 49 per cent. Similar change also applied to foreign ownership ceiling for brokerages.
Back in the early 1970s, while implementing various policies in order to attract foreign investors, particularly those that could bring in technological development, the Abdul Rayak government imposed legislation to the effect that Malays (the major ruling ethnic group) must own 30% of most local companies. This discriminatory condition, defended four decades ago as “a genuine assault on poverty”, eventually helped embed a system of privileges for well-connected insiders and widened the political gap between the government and various business groups to the extent that various policies can no longer be effectively implemented.
Like Thailand, Malaysia has absorbed manufacturing FDI for many decades. However, during the last decade, the rise of China, the impact of the Asian financial crisis and progress in regional and global integration have forced the country into a new developmental phase. Aside from attracting more foreign investment, improving domestic capacity has become the cornerstone for continuing the development of Malaysia; however, such “leveling up” efforts have for the most part been “excruciatingly slow”, if not entirely unsuccessful.
The steps taken by the Malaysian government in recent months have arguably come “more than a decade too late”. Nonetheless, foreign investors remain cautiously optimistic. The reforms in question are, by their nature, long-term; as such, eventual evidence of success will hopefully tempt investors to return to the country: “The Malaysian market was in danger of slipping off the edge of investors’ radar screens. Now it has the potential of becoming more important again,” said the Financial Times.
My impression is that external threats such as the rise of China, the Asian financial crisis or the global integration of the Asia Pacific region can only take partial responsibility for Malaysia’s economic standing. It is probable that the bigger and less apparent problem lies in the fragmentation of the political and social ties between the central government and various interest groups causing failures to enforce or implement policy in recent years. For example, in the Malaysian government’s Second Industrial Master Plan (“IMP2”) of 1996-2005, the concept of “manufacturing plus plus” correctly sets out, what a middle-income country such as Malaysia should do in order to advance to the next stage of development. Yet Malaysia largely did not succeed in meeting its own goals during the implementation period of IMP2. Whatever the cause of the social and political fragmentation, it was not substantial enough to slow down the growth process in the decades prior to the Asian financial crisis; and yet for some reason, it appears that the crisis was a turning point after which the internal problems of Malaysia began to hinder further development. Consequently, any reform effort under the title of “liberalization” must offer adequate attention to the internal conflicts of the country, or else the dragon may continue to slumber.