Malaysia Country Report

Infortal Worldwide Geopolitical Risk Summary  

Malaysian business culture is affected by the country’s ethnic diversity and racial tensions. The political proximity and connectedness of certain companies within the country exacerbate this.

Prime Minister Anwar Ibrahim’s unity government seeks to soothe tensions despite lingering difficulties. Firms must take special care to navigate the racial politics within Malaysia’s business culture and to reduce liability.  

Malaysia’s position in Southeast Asia affords it special proximity to regional growth centers in China, India, and Australia. Due to rising tensions with China, Malaysia’s economy remains exposed to negative externalities in the event of open conflict involving China. Malaysia can prove an attractive alternative to China, but there are industry-specific regulations and hiring requirements that interested business owners and investors should expect to follow.

Political Update 

The structure of the Malaysian government is a federal parliamentary constitutional elective monarchy. There is a monarch, the Yang di-Pertuan Agong, who is both the head of state and head of Islam in Malaysia. The Agong position rotates via election by the sovereigns of each state in Malaysia. The head of government is the Prime Minister, elected by multiparty parliamentary elections.

It is difficult to separate politics from ethnic tensions in Malaysia. The cultural makeup of Malaysia spans ethnic and religious groups, where about 60% of the population is Malay/indigenous (called Bumiputera), about 25% are Chinese, and about 7% are Indian. The divide was intentional while Malaysia was still a British colony; Chinese and Indians were brought to the country under the British belief that Malaysia would be easier to control. 

Immediately following his election in November 2022, Prime Minister Anwar Ibrahim’s focus has been on dismantling the corruption that has plagued Malaysian politics for some time. Malaysia is still recovering politically from a major scandal a decade ago, where Malaysia’s sovereign wealth fund was found to have been embezzled of billions of dollars from numerous local and international actors. Prime Minister Ibrahim has campaigned against corruption since the 1990s and has even been incarcerated multiple times as a retaliatory tactic.

In 2022, Prime Minister Ibrahim created a “unity” government to claim power, an unusual ruling coalition called Pakatan Harapan, teaming up with the United Malays National Organization (UMNO) to form a legislative majority. Partnering with UMNO, who have perpetrated the corruption Prime Minister Ibrahim seeks to cleanse, has lost some support and allies but remains in power.

Economic Update 

Like politics, economics in Malaysia is closely tied to ethnic divisions. After independence in 1957 and increasing racial tensions, the New Economic Policy (NEP) was passed in 1971 to “correct” the economic disparity that favored the Chinese over the Malays. Among other factors, the Malay community was given a minimum 30% share across economic and social spheres, including housing and business quotas. 

There is close economic collaboration between Malaysia and its Southeast Asian neighbors, mainly through the Association of Southeast Asian Nations (ASEAN). They ratified the Regional Comprehensive Economic Partnership (RCEP), the world’s most significant free trade agreement involving ASEAN countries along with Australia, New Zealand, Japan, South Korea, and China, in 2022. These trade agreements significantly reduce or eliminate tariffs among participating nations and facilitate investment between nations. Separately, Malaysia is also in talks with Singapore to establish a Special Economic Zone on their shared border, connecting and bolstering the two countries’ economies.

China remains a close trade partner with Malaysia. As part of ASEAN, Malaysia is part of the China-ASEAN Free Trade Area (FTA), where members can trade with no tariffs on a vast majority (about 90%) of product categories. This has led ASEAN as a whole to be China’s largest trading partner in 2020.  

Currently, economic growth in Malaysia has contracted slightly from its strong 2023 start. The Malaysian ringgit has fallen 6.9% against the U.S. dollar in 2023, though Bank Negara Malaysia (BNM) officials state that this does not reflect their otherwise succeeding economy.

Key Investment Sectors 

Manufacturing – Electric vehicles (EV): U.S.-based Tesla and China-based Geely have recently announced headquarters in Malaysia and are now looking to establish themselves as a hub for EV development.

Manufacturing – Electronics: Malaysia has identified electronics as a primary, and Intel has opened a chip packaging and testing facility in Penang.

Financial Services – There is an evergrowing fintech industry in Malaysia with a regionally strategically vital location.

Recommendations for Companies and Investors  

As an emerging Southeast Asian economy, Malaysia is eager to welcome investment facilitated by the Malaysia Investment Development Authority (MIDA). Recently, MIDA significantly moved into Malaysia from China. MIDA is also looking to increase its economic development through 

Malaysia may be beautiful to investors looking into regional alternatives to China, called “Altasia.” English is widely spoken in Malaysia, the population is educated, and it is often one of the least expensive options in the region. However, China has also begun offering heavy investment agreements to Malaysia, which could signal significant competition in critical areas. 

Some laws and practices treat foreign investors differently than domestic investment, though this depends on the sector. For example, companies must meet the Bumiputera hiring and ownership requirements, usually by having Bumiputera entities own majority stakes or sitting on a board of directors. Joint ventures are encouraged to quickly establish the customary 70 international/30 Bumiputera equity split to meet these requirements. Working with MIDA and understanding these requirements is imperative to success when looking to begin a venture in Malaysia. 

Importantly, entering new markets requires careful consideration and deep level due diligence to understand local market conditions and uncover any hidden risk factors. 

Want To Know More?

For a deeper review of political, economic, due diligence and security risks for Malaysia, please contact us.