Foreign Direct Investment: Changes in Malaysia

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Written by Kenny Cheok.

Have there been any recent changes to the Foreign Investment rules in Malaysia?

There have not been broadly applicable changes to foreign investment rules in Malaysia.  Malaysia remains generally FDI-friendly but certain sectors have been, and still are, subject to foreign ownership restrictions, including:

  • financial services;
  • capital markets activities carried out by investment banks;
  • insurance and Islamic insurance (takaful);
  • petroleum;
  • communications and multimedia;
  • wholesale and distributive trade (in relation to hypermarkets and food and restaurant businesses);
  • education;
  • transportation services[1], freight forwarding and shipping;
  • water;
  • energy supply;
  • professional services; and
  • security and employment agencies.

Equity ownership limits may be imposed as a condition to obtain licences in these sectors.  In the financial institutions sector, the Malaysian Central Bank's approval is required to enter into negotiations for mergers or acquisitions.  There may also be requirements to reserve minimal equity participation levels for indigenous Malays (Bumiputera).  For 'distributive trade' companies (including non-manufacturing and non-regional establishments), there are also ethnic requirements at all levels of the company, including the board of directors. The exact requirements differ from industry to industry, and there are also a number of other sector-specific rules issued by sectoral regulators that may impact on how a decision to invest is structured – e.g. the extent to which a local partner will need to be sought to satisfy foreign ownership restrictions. 

As a result of COVID-19, there are also a number of policies announced by the government that are expected to have a positive impact on foreign investment activities.

These include, as a response to the economic downturn, a number of stimulus packages.  Most recently, the Malaysian Prime Minister on 5 June announced a series of 40 short-term economic recovery measures (collectively called PENJANA, Pelan Jana Semula Ekonomi Negara) with a total of RM35 billion (~US$8.2 billion) in value.  Some of these initiatives are either aimed at FDI or will have an impact on FDI in Malaysia.

It should also be noted, that traditionally, the Central Bank of Malaysia, Bank Negara Malaysia (BNM)'s foreign exchange policies have provided some hurdles to foreign investors and these have also been recently revised as detailed further below.

If yes, please provide a brief summary of the changes

Key highlights of PENJANA can be divided into 3 areas for action:

  • empower the people: aimed at saving jobs and promoting employment, include hiring incentives, wage subsidies and reskilling / upskilling the workforce;
  • propel businesses: involving stimulating consumption and supporting businesses to shift towards business digitalisation; and
  • stimulate the economy: attracting foreign capital and providing sector-targeted and systematic support.

Some specific initiatives relevant to foreign investments are set out below.

Stimulate the economy: initiative No. 34 of PENJANA, 'Malaysia as an Attractive Horizon for Businesses'

Introduced to attract foreign companies to relocate their businesses into Malaysia, this initiative aims at addressing the risk of re-location by providing tax incentives.  This initiative dedicates RM50 million and includes (among other things) advantageous tax rates and allowances, running from July 2020 to December 2021. The processing time for manufacturing licence applications for non-sensitive sectors has also been expedited.

The various agencies under the Ministry of International Trade and Industry, such as the Malaysian Investment Development Authority and InvestKL, assist to facilitate such investments into Malaysia. This includes by formulating competitive fiscal packages and raising awareness about the various tax incentives available for relocating companies and the process for certain licence / approval applications. Malaysia has identified industries which it thinks have  the potential to become new areas of growth for the economy such as high-value, high-tech and high-impact areas including electrical and electronics, machinery, medical devices, aerospace, renewable energy and consumer technology.

Propel businesses: initiative No. 26 of PENJANA, 'Dana PENJANA Nasional'

An RM1.2 billion investment fund will be established from July 2020 to support the digitalisation of Malaysian businesses.  Half of the fund will be sourced domestically and half from international investors.  The fund will match institutional private capital investment with selected venture capital and early state tech fund managers for the following:

  • seed stage / co-creation funds;
  • series A/B funds;
  • growth stage tech funds;
  • venture debt funds; and
  • opportunistic funds (e.g. e-sports and healthcare).

Empower the people: initiative No. 25 of Penjana, 'Spur Set Up of New Businesses'

This initiative aims at encouraging the establishment of new businesses and M&A transactions through tax breaks and rebates for the next few years. 

BNM foreign exchange policy changes

BNM administers the foreign exchange administration rules in Malaysia. BNM has issued notices under the Financial Services Act 2013 and Islamic Financial Services Act 2013. Generally, the foreign exchange administration rules do not impose any restrictions for foreign investors to invest into Malaysia.  In 2020, BNM amended some of the foreign exchange administration notices, consolidating approval requirements and streamlining the process of foreign exchange, which will allow Malaysian corporates to more flexibility tap into foreign capital. 

The changes brought forward by these notices include:

  • Malaysian corporations are now able to provide financial guarantees for their foreign subsidiaries, or vice versa, without having to register with BNM; and
  • resident exporters are now allowed more freedom and flexibility in retaining export proceeds in foreign currencies.

These changes expedite the timing required for financing transactions in Malaysia and can help corporations with foreign capital to remain economically viable in these difficult times. However, the rules on external borrowings in foreign currency by residents (including issuance of redeemable preference shares to foreign investors) remain unchanged.

What was the rationale for the changes?

The changes are  part of a broader set of economic stimulus measures to counteract COVID-19 and stimulate business investment (both foreign and domestic) in Malaysia.  There is a strong recognition by the Malaysian government that an economic recovery will, in part, require FDI.

Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?

The PENJANA initiatives listed above are one-off stimulus measures.  However, as the economy starts to re-open, more changes are expected, and some may be permanent.

The BNM notices are permanent changes as they replace the previous notices on foreign exchange policies.

Are there any particular sectors that are affected the most?

New businesses and businesses in the technology sector are most affected.  In particular,  high-value, high-technology and high-impact sectors such as electrical and electronics, machinery and equipment, medical devices, aerospace, renewable energy and consumer technology will be positively impacted by the initiatives by the Ministry of International Trade and Industry (MITI) together with the agencies under MITI.

What is the outlook for foreign investment in Malaysia?

Malaysia is generally receptive to FDI.  As a developing nation, the country heavily depends on FDI for its economic development. FDI in 2019 amounted to RM31.7 billion with an FDI growth rate of 3.1% on the prior year. In 2019, the highest FDI by country was Japan, followed by Hong Kong and Netherlands . The Malaysian Government has recognised that in order to recover from COVID-19, Malaysia requires a significant influx of resources and government directives that help attract capital.  The recent PENJANA initiatives and BNM relaxation on foreign exchange administration rules reflect a conducive environment for foreign investment.  Malaysia's number of COVID-19 cases are being controlled relatively well, so it is likely that investor confidence in Malaysia  will increase.

Given the ongoing US-China trade tensions, Malaysia is seeking to position itself as a preferred destination for high-value FDI from China. The Malaysian Investment Development Authority (MIDA), together with other government investment promotion agencies such as InvestKL, has set up various teams and initiatives focusing on China, including the China Special Channel (currently led by MIDA) to accelerate FDI from China and to attract and fast-track high-value, high-tech and high-impact investments from Chinese companies and global MNCs in China which are looking to tap into the Asia Pacific region through Malaysia.

In addition, Malaysia is currently a party to 7 bilateral free trade agreements (Japan, Pakistan, New Zealand, India, Chile, Australia, Turkey) and 6 regional free trade agreements (through its membership in ASEAN) with China, Korea, Japan, Australia-New Zealand, India, and the ASEAN Trade in Goods Agreement. 

What it is your advice to foreign investors in Malaysia?

Malaysia is an FDI-dependent country.  Its policies are generally conducive to foreign investment, notwithstanding some restrictions in certain sectors and foreign currency controls by the central bank.   Foreign investors should keep track of the evolving policy changes and take advantage of any government incentives available to them. Conversations with foreign investors are very much welcomed by the Malaysian governmental agencies and such investors can reach out directly to various Malaysian governmental agencies to understand the FDI landscape and incentives available to them.

Does Malaysia's FDI organisation coordinate with other government agencies, including the antitrust regulator?

There is no central organisation or regulatory body for reviewing and verifying FDI in Malaysia as there are no general restrictions on FDI and equity restrictions (if any) are sector specific.  In 2009, Malaysia removed its former Foreign Investment Committee investment guidelines, which enabled foreign acquisition of interests and takeovers to occur without requiring additional regulatory scrutiny.  Any sector-specific foreign equity restrictions are overseen by the relevant  regulatory authority within that sector. 

Although there is no central regulatory body, MIDA oversees the promotion of the manufacturing and services sectors in Malaysia. MIDA does coordinate with other government agencies, including InvestKL.

In 2016, MIDA established the Incentive Coordination and Collaboration Office with the main aim of improving the central coordination of all incentive offerings.  MIDA has developed an interactive web portal to provide information to investors on available incentives, which you can access here


[1] Companies providing tat least 51% Malaysian equity (including 30% Bumiputera equity).

[2]  Department of Statistics Malaysia

This publication is intended to provide a high level overview of FDI trends and regulation in Malaysia. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons does not practice Malaysian law, and works closely with local lawyers to support our clients' needs in Malaysia. We are grateful to Zaid Ibrahim & Co. (a member of ZICO Law), one of Malaysia's leading law firms for their co-operation on this publication.

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