Malaysia: an overview of the legal framework for foreign direct investment

Malaysia: an overview of the legal framework for foreign direct investment

How can the legal framework in Malaysia limit or facilitate the inflows of foreign direct investment?

Among the Southeast Asian countries, Malaysia has keenly attracted Foreign Direct Investment (FDI). In this respect, it has constantly striven to maintain the competitiveness of FDI determinants, including the legal infrastructure. Today, Malaysia is encountering fresh challenges, for FDI flows seem to have declined in the region. To counter this phenomenon the Government of Malaysia (GOM) has enhanced the utility of the existing determinants and is constantly considering new strategies to attract FDI. Accordingly, the FDI legal framework has also been enhanced.

The aim of this paper is to shed light on the legal framework for FDI in Malaysia, with a focus on the various areas of law that especially pertain to FDI. These include, but are not limited to, Malaysia’s legislative policy, land, labour and environmental laws, non fiscal incentives, tax regime, intellectual property rights framework and justice administration/dispute resolution procedures.

The paper starts by describing the legal system of Malaysia and then moves on to examining the various legal aspects of FDI. The paper also points out to several restrictions and limitations posed by the government on FDI in several sectors such as:

  • the manufacturing sector, i.e. the automobile sector
  • the service sector, limited to a large extent
  • finance sector, open to a limited extent
  • professional services which is closed to foreign participation.

The author argues that such direct government intrusion is tantamount to contravention of the principle of freedom of contract, wherein business parties should be free to enter business transactions without any undue influence or duress.

Finally, the author concludes the study by underlining several key challenges that remain in terms of the legal framework for FDI in Malaysia that should be addressed by the system, being:

  • the relationship with the Association of South East Asian Nations (ASEAN) neighbors through the ASEAN Investment Agreement (AIA) with a view of reaffirming the importance of sustaining economic growth and development in all member states
  • the Agreement on Trade Related Investment Measures (TRIMs) which recognises that certain measures imposed by governments in connection with investments has restrictive effects on trade
  • the need for measurable reform on the implementation and enforcement of Intellectual Property Rights (IPRs) through full compliance with the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs)
  • the compliance with the ASEAN Free Trade Agreement (AFTA) time frame which facilitates trade and investment.
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