EDITORIAL PROFILE: MALAYSIA

   Site Selection: What is the significance of Malaysia’s recent elections to foreign investors?

   Datuk R. Karunakaran: The ruling Barisan Nasional (BN, or National Front Party) won the 12th general election held on March 8, 2008, with a simple majority and the mandate to govern the country for another five years. The general election, which saw the opposition coalition parties given the mandate to form the State Governments in Penang, Selangor, Perak, Kedah and Kelantan, is a testimony that parliamentary democracy is vibrant in Malaysia. There was a smooth transition of power to the coalition parties forming the new State Governments. The new State Governments have also pledged to pursue business-friendly policies to ensure the States under their administration remain competitive to investors.

   Malaysia will continue with its free market and attractive policies for foreign investors. The election results will in no way diminish the Government’s objective to continue developing the Malaysian economy and implementing programs for poverty eradication in order to provide a level playing field for all Malaysians. The Government has assured all existing and potential investors of its continued pro-business policies.

   SS: What separates Malaysia from other regional investment centers like Hong Kong and Singapore?

   DRK: Malaysia has been and continues to be successful in promoting foreign investments into the manufacturing and related services sector due to a variety of pull factors, such as:

   • Political and economic stability;

   • A well developed infrastructure to meet the needs of the industry;

   • Pro-business government, transparent and business friendly policies;

   • English language widely spoken and a good legal system;

   • Trainable and educated work force;

   • Harmonious industrial relations between management and employees;

   • Quality of life;

   • Policy of welcome to foreigners;

   • The nation’s track record as a profitable base for investors over the last three decades.

   However, Malaysia still competes for FDI from new and emerging economies globally. Within the region, Malaysia is competing for FDI with other countries in ASEAN, and in the Asian context, from China and India.

   Most of these new and emerging economies have liberalized their investment regimes and made their countries very attractive for foreign investments. Consequently, Malaysia has to keep abreast of the global requirements for companies intending to establish their operations in the country. The industry- and company-focused approach will be strengthened through Specific Project Missions to attract foreign investment in sectors based on strength of specific countries in the selected industries and technologies and also to dispatch marketing teams to specific companies overseas to discuss incentives and other issues to secure investments.

   SS: Investments in projects from the manufacturing and services sectors grew by nearly 25 percent in 2007. To what do you attribute this dramatic growth? How can this level of growth continue in 2008 and 2009?

   DRK: The increased investments in the manufacturing sector were mainly due to greater interest in capital-intensive and high-value-added projects among both domestic and foreign investors, particularly in the electronics and electrical industry, petroleum products including petrochemicals, basic metal products and paper, printing and publishing. Within the services sector, the real estate sub-sector accounted for the largest share of investments with 33 percent of total investments, followed by the transport sub-sector with investments of US$5.2 billion or 25.5 percent. The other key sub-sectors were support services, energy and telecommunications.

   The higher investments approved in 2007 reflected continued interest by investors in investing in the manufacturing sector, particularly in the petroleum products industry and basic metal industry in response to the strong global demand and higher prices of oil and steel. Investments in these capital-intensive industries will not only result in an increase in production capacities but also technology upgrading such as in fully integrated blast furnaces to meet the demand for better quality steel by the automotive and E&E industries.

   The electronics industry continued to attract substantial investments in 2007, increasing by 51 percent to $4.7 billion compared with $3.1 billion in 2006 in line with the focus on capital- and skills-intensive and high-technology operations. There is also growing interest, globally, in the renewable-energy sector, and this is one of the new areas identified for promotion in Malaysia, particularly the manufacture of solar cells and modules. MIDA is also pursuing several leading global manufacturers and suppliers of materials, components and services to set up their operations with the aim of establishing a solar industry cluster in the country.

   A special incentive is granted in the form of Pioneer Status with full tax exemption for 10 years or Investment Tax Allowance of 100 percent for five years for renewable energy and energy efficiency/conservation projects.

   Under the 2008 budget, it was announced that the renewable energy incentives have been further enhanced whereby other companies in the same group could be given either Pioneer Status or Investment Tax Allowance even though one company in the same group has been granted the incentive.

   SS: How can this level of growth continue in 2008 and 2009?

   DRK: The strong investment performance of the manufacturing sector in 2007 was partly due to the approval of 11 large projects with investments of more than $312 million each. Total investments in these 11 projects amounted to more than $9.3 billion or about half of total investments approved in the manufacturing sector. However, investments in capital-intensive projects, such as in the petrochemical and basic metals industries tend to be cyclical in nature and usually are not expected to recur on a yearly basis.

   Global developments, such as the current slowdown in the U.S. economy, will continue to have an impact on investment flows into the manufacturing and services sectors in the region and Malaysia. MIDA, being the principal Government agency responsible for promotion of the manufacturing and services sector, will intensify efforts to promote investment flows into the country. Promotional measures are in place and will be further fine-tuned.

   The Government will also continue with measures to improve the government delivery system. Key measures which have been introduced recently to improve the government delivery system include the establishment of a new Immigration Unit at MIDA to issue employment passes for all expatriate posts approved by MIDA. PEMUDAH, a high-powered task force, was also established in 2007 to identify, propose and implement appropriate measures to improve procedures, regulations and existing laws.

The Cabinet Committee on Investment was also set up in September 2006 to consider projects from investors which are high impact in nature and require special Government consideration.

   SS: Foreign investment in new manufacturing projects in 2007 amounted to RM17.3 billion (US$5.4 billion), just over 55 percent of the total investment. What is your plan to increase foreign investments in the manufacturing sector going forward?

   DRK: Efforts will also be intensified to target and promote investments in industries in which Malaysia has a strong competitive advantage, as well as in new growth areas such as the renewable energy sector. Under the IMP3, Malaysia has identified industries to be promoted in the manufacturing sectors vis-à-vis the resource-based industries that include petrochemicals, pharmaceuticals, rubber and rubber products, wood-based products, palm oil-based industries, and food processing. We have also identified the non-resource-based industries, including the electrical and electronics industries, medical devices, textiles and apparel, machinery and equipment, metals and transport equipment.

   Over the years, the Malaysian government has implemented several measures to sustain the country’s competitiveness. In addition to what I’ve already mentioned, these measures include reduction of the corporate tax from 26 percent in 2008 to 25 percent in 2009 and intensification of research, development and commercialization of home-grown R&D. In 2008, the government has allocated RM1.1 billion for the science and techno fund and for research institutions.

   SS: Investment from the U.S. increased by 20 percent in 2007 to RM3 billion (US$940 million), though the U.S. still trails Japan and Germany in total investment in Malaysia. What is behind such strong Japanese and German investment, and what incentives will MIDA offer to U.S. companies in the future to increase U.S. investment?

   DRK: There were a few reasons for strong Japanese investment in Malaysia, which include:

   • More than 83 percent or $1.6 billion of the total Japanese investment of $2 billion in Malaysia in 2007 were investments by existing companies undertaking expansions and diversification into new products or increasing their production capacity and efficiency.

   • Attractive incentives offered based on the requests of investors and other attributes, like good infrastructure facilities, availability of suitable human resources and supporting industries, especially for Japanese companies investing in the E&E sector, were major reasons for the increased Japanese investments in Malaysia. Japanese SMEs supporting their larger MNCs followed the MNCs to Malaysia both to reduce cost and to provide better support.

   • The Malaysia-Japan FTA that came into effect in 2006 also contributed to the increased interest among Japanese E&E and automotive companies in these sectors in Malaysia.

   • Japanese companies under the China-plus-one strategy are investing in countries other than China to mitigate against possible adverse developments in China. Vietnam and Malaysia have benefited from this strategy.

   • The increasing production costs in China plus the announcement by Chinese authorities of the tightening of the labor/employment laws and the scaling down of incentives for foreign investors have also made Japanese companies look at Malaysia.

   In the case of German investments, of the 26 projects approved, two were capital intensive projects with investments of more than $156 million each, namely OSRAM to establish a wafer-fabrication plant ($609.4 million) and Qimonda to manufacture memory products ($266.2 million).

There is renewed interest among investors in the electronics and electrical industry in Malaysia.

Investments by both the companies constituted 75 percent of the overall investments from Germany. OSRAM, and Qimonda (formerly a unit within Infineon) have existing operations in Malaysia, and their major investments in 2007 were strategic moves by the companies to further expand/diversify their operations in Malaysia and to have a global footprint in Asia.

   As a measure to increase U.S. investment into Malaysia, the government will intensify efforts to offer customized incentives to target companies in new growth areas such as biotechnology, pharmaceuticals, optoelectronics, nanotechnology, photonics, machinery and equipment and engineering supporting industries.

   Companies, particularly from U.S., that are investing in technology and knowledge-intensive operations are demanding attractive incentive packages and quick decision making from the host countries. To date, Malaysia has been able to respond quickly to requests for special incentives through the approvals given by the High Level Committee for Special Incentives in the Ministry of International Trade and Industry (MITI) and the Cabinet Committee on High Impact Projects.

   Investors from the U.S. are very concerned about protection of intellectual property. In this context, the Malaysian government has undertaken a few measures with regard to intellectual property (IP) law, such as the establishment of an IP court, appointment of a Malaysian representative at the World Intellectual Property Organization (WIPO) and strengthening the laws relating to data exclusivity.

   SS: How can Malaysia increase its appeal to multinational companies as they seek regional headquarters?

   DRK: Malaysia currently offers a range of attractive fiscal and non-fiscal incentives for MNCs to establish their regional operations in Malaysia. Regional establishments such as Operational Headquarters (OHQs), International Procurement Centers (IPCs) and Regional Distribution Centers (RDCs) can be considered for income tax exemption for a period of 10 years under Section 127 of the Income Tax Act 1967. An approved OHQ will be exempted from income tax for a period of 10 years for the income arising from services rendered, income derived from interest on foreign currency loans extended by the OHQ and royalties received from R&D work carried out in Malaysia by an OHQ company on behalf of its offices or related companies outside Malaysia. An approved OHQ is also allowed to open foreign currency accounts (FCA) with licensed onshore banks to retain any amount of export proceeds in foreign currency; obtain any amount of domestic credit facilities in ringgit; and acquire fixed assets asllong as the fixed assets are used for the purpose of carrying out the operations of the OHQ.

   MNCs could also have a regional presence in Malaysia serving as procurement and distribution centers and undertake supply chain management for their manufacturing operations both in Malaysia and abroad. This can be done by establishing an International Procurement Center in Malaysia.

   MNCs that produce products of their own brand can establish a regional distribution center (RDC) in Malaysia. Companies applying for IPC/RDC status can also apply for expatriate posts, namely Key Posts and Time Posts. An approved IPC/RDC status company will enjoy the following benefits:

   • Open one or more FCAs with licensed commercial banks to retain its export proceed without any limit.

   • Enter into foreign exchange forward contracts with licensed commercial banks to sell forward export proceeds based on projected sales.

   • Bring in raw materials, components or finished products with customs duty exemption into free industrial zones (FIZs), free commercial zones (FCZs), LMWs and bonded warehouses for re-packaging, cargo consolidation and integration before distribution to its final consumers.

   Also, a company granted OHQ/IPC/RDC status and incentives under Section 127 of the Income Tax Act 1967, is allowed 100 percent foreign equity ownership. Expatriates working in OHQ/IPC/RDC companies are taxed only on the portion of their chargeable income attributable to the numbers of days that they are in Malaysia. Requests for expatriate posts will be granted based on the requirements of the OHQ/IPC/RDC.

   With its strategic location in Southeast Asia, Malaysia has vast potential to become a regional hub for services for many MNCs with multiple operations in the Asia Pacific region. To date, a total of 2,433 regional establishments have been approved in Malaysia, which include 150 OHQs, 202 IPCs, 18 RDCs, 638 Regional Office (ROs)and 1,425 Representative Office (REs).

   At press time, the exchange rate was: US$1.00 = RM3.2.