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The Malaysian Policy Of Foreign Investment Economics Essay


Malaysia is one of the best country in terms of rapid growth of the gross domestic product (GDP) of 5.6 per cent last year and are very proud of this achievement in the global economic climate is not favorable. The concept of any investment is win-win situation. I invest my money to get profit and you use my money to get your own profit. Foreign investment is normally involves huge amount of money and there is need of an agreement and government regulation that can avoid disadvantages for both parties. Making foreign investment is different in nature from engaging in a trade transaction. A trade deal typically consists in a one-time of materials and money exchange, while investment in a foreign country contributes to a long-term relationship between the investor and the host country. Normally, the business plan of the investor is to sink substantial resources into the project at the outset of the investment, and this amount is expected to get back with acceptable rate of return during the investment subsequent period which sometimes can running up to several decades of years.

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Large-scale investment may last for decades. They involve interest of the investors, as well as the public interest of the host state. General legislation of the host country may not sufficiently address the nature of the project and the kind of interest concerned. The legal setting of each investment needs to be adjusted to the specifics and the complexity of each investment. The investment contracts will also reflect the bargaining power of both sides under the circumstances of the individual project. Therefore, investors and host states often negotiates investment agreements. Not surprisingly, no general pattern applicable to all situations has emerged in practice. Even within individual sectors of the economy, the typical agreements have evolved significantly in the past decades.

In practice, especially the legal regime of oil and gas projects by multinational companies has been determined in large part by investment agreements. Normally, state-owned companies were set up for the purpose of concluding and supervising the agreements with the foreign investor. Areas with potential reserves were more restricted and closely defined and the tittle to oil and gas remained with the host country. The risks inherent in a failure to find suitable oil or gas were shifted to the foreign investor who was allowed to recover exploration costs in case commercially usable reserves were found. Once oil or gases were produced, the product was divided between the two parties to the investment agreement under a negotiated formula, often subject to a gradual decrease of the rights of the investor. These arrangements were set out in so-called production-sharing or profit-sharing agreements.

For both the state and investor, the determination of the law applicable to the contract and the agreement on dispute resolution are often considered the most sensitive legal issues. The host state will view both areas from the vantage point of protecting its national sovereignty. The investor’s priority will be the choice of a legal order that provides a stable and predictable legal environment of a forum for dispute resolution that will preclude bias or political influences against the investors. Depending on the bargaining power and the negotiating skill of the parties, a number of possible choices have emerged for the applicable law. These range from a mere reference to the law of host state to an exclusive choice of the rules of international law. In between these extremes, general principles of law, the usage of the industry and rules of justice or the equity have been chosen. Often, a combination of national law and international rules as applicable law has been negotiated as a compromise.

2.0 Private Foreign Investors

International investment law is designed to promote and protect the activities of private foreign investors. This does not necessarily exclude the protection of government-controlled entities as long as they can act in a commercial rather than in a governmental capacity. Whether non-profit organizations may be regarded as investors is less clear and will depend on the nature of their activities.

Investors are either individuals or companies. In the majority of case, the investor is a company but at times individuals also act as investors. The foreignness of the investment is determined by the investor’s nationality. The origin of the investment, in particular of the capital is not decisive for the question of the existence of a foreign investment. The legal rules applicable to extraordinary events and periods of economic and social disorder are of direct interest both to the host state and to the foreign investor. The host state’s concern is to retain sufficient legal flexibility in dealing with extraordinary situations without incurring any liability towards the foreign investor. The investor and its home state like Malaysia will be aware that during a longer investment project, extraordinary situations may arise and that one of the purposes of the legal framework created by an investment treaty will be precisely to protect the investment during such difficult periods.

Under Customary International law, the theme of possible or inevitable damage to the alien during periods of serious disorder and of the possible scope of the host state has long occupied arbitral tribunals. This principle is qualified by a duty of the host state to exercise due diligence, that is to use the police and the military forces to protect the interest of the alien to the extent feasible and practicable under the circumstances, both before events and while it unfolds.

3.0 Policy: Ministry of International Trade and Industry (MITI)

The establishment of Investment Committee chaired by the Minister of Ministry of International Trade and Industry (MITI) to ensure better coordination between all government agencies and private sector investment in areas related to achieving the targets set under the ETP. MITI is under the supervision of Ministry of Trade and Entrepreneurship.

The objective of MITI is to plan, design and implement the Basics of Foreign Trade and Industry Chambers to expand rapidly towards achieving National Economic Policy and Vision 2020 to make Malaysia a developed nation. MITI has many functions such as planning, formulating and implementing investment policies, industrial development and international trade. Then, it also responsible to formulate policies and strategies for industrial development as well as to formulate, promote bilateral and multilateral trade relations as well as regional trade cooperation. It is also plan and promotes the development of Malaysia’s export performance in the international market. MITI also is to coordinate and monitor the development of small enterprises and medium enterprises. Development and improvement of management skills, supervisory and general to the private entrepreneurship and at the same time, MITI has to ensure the maximum benefit of manufacturing institution.

There are several policies and common regulations to protect local investors from impact of foreign investments. Division of Investment Policy and Trade Facilitation under MITI is function to design, evaluate and reviews the policies, strategies and programs that will create a favorable climate and favorable environment for investment development. Besides that, it should implement policies, strategies and guidelines that related to investment and industrial development. This division also coordinates and monitors the implementation of policies and actions as well as to identify and implement trade facilitation efforts to enhance the competitiveness and reduce business costs.

5.0 Malaysian Investment Development Authority (MIDA)

This unit is function as the body whose is responsible to branch the foreign investment into the manufacturing and service sectors in Malaysia. It is a Malaysian government agency established to provide advice to the federal government and the states in industrial development policies, provide consultation services to foreign companies about the business sector in Malaysia, manage business licensing and tariff or import duty exemption, in while coordinating the development of the plan.

This authority considers itself as the primary government agency for the development and coordination of industrial development and the first agency of contact for investors who wish to establish production projects and support services involved in Malaysia. MIDA will also be incorporated and authorized to make decisions in particular time when negotiating with potential investors and government improves service delivery by the Special Task Force to Facilitate Business or PEMUDAH. In order to ensure foreign investor stay attracted to invest in this country is by introducing an additional incentive packages to corporate tax exemptions to strategic industries of new areas and high-tech sectors such as alternative energy sources, advanced sophisticated electronics products, biotechnology, photonic, medical devices, aerospace and petrochemical industries. In fact, additional incentives have been offered to foreign investor such as incentives to encourage the second time to the existing companies to promote the expansion and diversification in Malaysia as well as promotion of investment activities to attract more local and foreign investments through media mass and cyber net. Although the objective is to promote Malaysia to foreign investors, MIDA also has ability to handle other tasks. For an example, it properly plans for industrial development, recommends policies to promote the progress to the MITI, and provides counseling to foreign companies operating in Malaysia and coordinates the exchange of information between the organizations involved in the advancement enterprises.

In addition, it is also responsible for evaluating applications for production of licenses, applications for tax incentives as well as an exemption from import duties or tariffs. Furthermore, this authority also approved the application to hire foreign workers by the companies and evaluate collaborative agreements. Strategically, MIDA has overseas offices around the world to promote investments in Malaysia. It is mostly located in the United States, Europe and East Asia. MIDA officers meet every week to approve immediately the application and propose new investment incentives together with officers of the Ministry of Finance. In 2010, the MIDA approved investments in the manufacturing and manufacturing-related services amounted to RM47.2 billion, which included a total of 910 projects, compared to 766 projects with investments of RM32.6 billion in 2009. From this amount, a total of 428 projects involving foreign investment of RM29.1 billion or equal to 61.7%.

The number of projects approved in the manufacturing and related services for the period January to April 2011 amounted to 272 projects worth RM18.6 billion shows the confidence of foreign investors to Malaysia to stay. Various measures have been taken by the Government to ensure Malaysia remains competitive and attractive investment destination in Southeast Asia in an effort to attract foreign direct investment (FDI).

6.0 Ministry of Finance Malaysia

Malaysian government has always put some effort to attract the foreign investment come to Malaysia as this country provide huge incentive and the chance to make a huge profit here is relatively high if compare to another country in Southeast Asia due to several factors.

Under this Ministry, there is one act that related to foreign investments policy in Malaysia. It is called as Malaysian Industrial Development Authority (Incorporation) Act 1965. Under this Act, there are several issues that mentioned clearly to sustain the economic development of this country in long term of period. One of them is the introduction of Promotion of Investment Act 1986 which gives several important advantages for the investors such Pioneer Status (PS), Investment Tax Allowance (ITA),Infrastructure Allowance (IA), Double Deduction on Expenses for Promotion of Exports, Industrial Adjustment Allowance (IAA), Incentive for Forest Plantation Project and Incentives for Manufacturing Related Services. For avoid unfair between local and foreign investor, foreign investor needs to pay tax. One example is Labuan Offshore Business Activity Act (LOBATA) 1990 which stated offshore companies in Labuan undertaking offshore business can elect to pay tax at a rate of 3% of net profit or pay RM20000. It also state that income of offshore companies from non-trading activities is not subjected to any taxes.

6.0 Impact of Liberalization to Foreign Investment in Malaysia

Since the introduction of export-oriented industrialization strategy, foreign direct investment (FDI) has been identified as an important mechanism in the development of the industry in this country. In order to attract foreign investor continuously, a range of financial and non-financial incentives and regulatory aspects of a more liberal has been introduced as the impetus for foreign investors locate their production activities in the country. Participation of foreign capital in manufacturing industrial sector is increasingly important since the introduction of the Pioneer Industries Ordinance in 1958, the Investment Incentives Act 1968 and the Free Trade Zone in 1971. For export-oriented investment projects majority foreign ownership is permitted and in some cases 100% foreign equity is allowed if the company exports at least 80%. However, the Liberal Equity Policy is effective from 17 June 2003, allowing 100% foreign equity ownership to all investments in new projects and additional projects or diversification regardless of the level of exports of such companies. Liberalization of the ownership of this has major implications for the status of the possession in the industrial sector of the country and its impact on the benefits and advantages to be gained from foreign companies for the development of local industry.

Globalization of manufacturing activities has opened up opportunities for foreign investment inflows into the country and until now government policy to invite foreign investors to invest in the country to finance the productive base through the establishment of offshore production plant remains an important strategy. Various incentives and investment incentives have been offered in an effort to compete for foreign investment apart from increasing liberalization in terms of regulations and laws of doing business in the country. Liberal Equity Policy is among the main attractions offered by Malaysia to foreign investors who allow up to 100% equity ownership to foreign companies. This policy even if from one hand to give a competitive advantage to industrial locations in the country, but it also has an effect on the achievement of national development objectives in order to develop a production base and local industry that can compete internationally. Liberal Equity Policy which took effect on 17 June 2003, allowing 100% foreign equity ownership to all investments in new projects and additional projects or diversification without taking into account the level of exports of these companies. Flexibility in terms of ownership of this has major implications for the status of the possession in the industrial sector of the country and its impact on the benefits and advantages to be gained from foreign companies for the development of local industry.

A phenomenon that is clearly seen from the perspective of economic geography in particular industrial geography is the rapid growth of internationalization of capital (investment).

Factors that make Malaysia as investment center in this region:

There are many factors that can attract foreign investors to invest their capital amount in various types of project in Malaysia. Below are list of its factors with brief description.

7.1 Government Support Policies

A major factor that has attracted investors to Malaysia is the government’s commitment to sustain a business environment that provides opportunities for companies to grow and make profit. This commitment is reflected in the government’s efforts to obtain regular feedback from the business community through consultation channels such as dialogues which held between the government and the private sector. This allows for a variety of business community expressed their views and contribute to the formation of government policies that affect them. In fact, the private sector in Malaysia joined hands with the public sector to achieve national development goals.

7.2 Liberal Equity Policy

Since June 2003, foreign investors can hold 100% equity in all new investment projects, as well as investments in projects in expansion / diversification by existing companies regardless of the level of export and without exempting any product or activity. For example, a manufacturing license is automatically approved began in December 2008 and in April 2009, about 27 sub-sectors of services were liberalized to promote growth and investment in the services sector.

7.3 Hiring Foreign Officials

Foreign companies in the manufacturing sector are allowed to employ foreign officers in specific skills which are not available in Malaysia. A company with USD2 million and above of capital will be allowed up to 10 expatriate posts, including five key posts which the posts permanently filled by foreigners.

7.4 Incentives Attraction

Based on the impact on assessment of 2009, the corporate tax rate was reduced to 25% and the maximum individual tax rate reduced to 26% (for the year 2010). Malaysia has offers various incentives for manufacturing projects under the Promotion of Investments Act 1986 and the Income Tax Act 1967. For instances, there are incentives like Investment Tax Allowance, Re-investment Allowance, High Technology Industries and Strategic Projects Incentives.

7.5 Economic robustness

Malaysia is now at the most radical transformation in its quest to achieve Wawasan 2020. This transformation is very obvious in the political, public sector and among Malaysian business entities. Malaysia has developed from an agriculture-economy and primary commodities to a manufacturing-based economy, export-driven industries driven by a high-tech, knowledge-based and capital-intensive.

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New Economic Model to be achieved through the Economic Transformation Programme is a key pillar that will move Malaysia into a developed nation that is both inclusive and sustainable in line with goals set in Wawasan 2020. Economic Transformation Programme will be driven by the Strategic Reform Initiatives that will be the basis of policy measures relevant. Government initiatives have produced positive achievements are reflected in the statistics of economic growth. In 2010, Malaysia’s economy grew by 7.2%, compared with a contraction of 1.7% in 2009. Based on Bank Negara Malaysia, this country has projected a growth of 5-6% in 2011 regarding latest estimation.

As evidence of commitment of this country to promote free trade and commerce, the government has set five economic growth corridors, to further develop Malaysia. Five economic growth corridors are:

a) Iskandar Malaysia in southern Johor (IRDA)

b) Northern Corridor Economic Region (NCER)

c) Sabah Development Corridor (SDC)

d) East Coast Economic Region (ECER)

e) Sarawak Corridor of Renewable Energy (SCORE)

Priority will be given to develop urban agglomeration which focusing corridor around clusters and develop high economic impact sectors under the 10th Malaysia Plan (2011-2015).

7.6 Educated Human Resources

Malaysia has offers young, educated and productive workers to the foreign investor in competitive cost if compared to other countries in Asia. In Malaysian education system, a person is compulsory to get basic education for at least 11 years before can be accepted as job hunter. With the full support by the government policy to develop human resource in many sectors, manpower with high quality in this country recognized as the best in the region.

Moreover, there are 20 public universities and 21 private universities in Malaysia as well as polytechnic and other institution that offered variety of courses from diploma and higher level or post-graduation. About 35000 students were registered every year and half of them are in science or technical stream. This proves that Malaysia able to provide competitive and skillful workers.

7.7 Advanced Infrastructure

Continuous effort of Malaysian government to improve infrastructure successfully make this country has one of the most advanced infrastructure among industrial countries in Asia and relatively less traffic jam due to systematic road network development. Regarding this advantage, it indirectly attracted the foreign investors to invest in any various field in this country. For an instance, Kuala Lumpur provides housing estate, job opportunities and good infrastructure including world-class transportation system for people mobilization.

7.8 Efficient Harbor

International trade like maritime trade is one of important element for Malaysian economy. There are 7 main harbors in this country like Port Klang, Port Tanjung Pelepas, Johor and Port of Kuantan. All trading process in any port is controlled systematically and efficiently by Malaysian government agencies.

7.9 Developed Industrialization Region

There are almost 200 areas of industrial zones in Malaysia and 18 of Free Industry Zone (FIZ) which was built in this country. This situation shows good the economy of Malaysia in terms of industrial development.

7.10 Sophisticating Communication Technology

Communication network in Malaysia shows the good developments and improvements since a decade ago due to successful of Telecommunication Authority privately. Digital technology and latest fiber optic directly offers high quality of telecommunication services with competitive price.

7.11 Life Quality

Malaysia is one of the most friendly country and glad to come any guest from everywhere to work and stay in this country. Besides that, Malaysian people also so friendly and can easily close to them as a friend. In context of climate, the tropical climate of this country with relatively with same temperature throughout the year allows them to wear comfortable outfit daily.

7.12 Energetic Business Realm

Export-oriented of Malaysian economy, policies, government support and huge local business community indirectly make this Malaysia as one of very competitive exporting anchorage country in this region. Good opportunities for the company from local and international to make profits and provides job opportunities for the society. Malaysia is known as country whose implements the k-economy that makes their company tends to close with information technology.

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