Highly Commendable, Timely and Useful Decision

The longstanding 30% bumiputra equity requirement will be lifted immediately for 27 sub-sectors, including health and social services, tourism, transport, business and computer-related services for foreign companies and investors. While some may still be a bit cynical, this is a very significant move, and will cause many more international funds to consider Malaysia. It is a well known fact that many companies and investment funds have bypassed Malaysia, either as a long term investment destination or even Malaysian equities, just because of the rule.

While the country may not see an immediate benefit, the cumulative goodwill will ensure a more competitive landscape for Malaysia in attracting foreign investments. I can bet you that Singapore should be pretty pissed with this development, so too for Thailand and Indonesia. The ruling unnecessarily put two huge boulders on our feet whenever Malaysia is being considered as a mid-term or long term investment option by foreign companies. Now we can allow our natural advantages, such as cheap flat land, a reasonable and knowledgeable work force, a pretty impressive logistic and infrastructure for movement of goods and services and overall low operating cost (thanks to direct and indirect subsidy).

The government hopes that lifting the requirement will boost investment and make the services sector more competitive. The decision comes amid official warnings that the economy could shrink by as much as 1 per cent this year. Malaysia has been hard hit by the global economic crisis, with exports down 15.9 per cent in February from a year ago. The services sector is the largest, contributing 55 per cent to Malaysia's gross domestic product last year.The move is very crucial in moving our reliance on services to at least 60 percent, and which would then lessen our reliance on electronics exports and commodities.

Within the services sector, financial services is the biggest, followed by tourism, one of the top foreign exchange earners. The government plans to liberalise other sectors in stages, with details for the financial sector to be unveiled next week.

The areas that still will have the 30% rule include sectors that may be politically sensitive and/or have a heavy state presence, such as air travel, utilities and retail. Malaysia is already the third most dependent economy in Asia after HK and Singapore - to compete better, we need a stronger structure to lure a different set of FDI that will add layers and move the country further up the value chain. We also need to diversify faster away from a dependence on commodities and electronics.

That rule has always made it very difficult for some companies that does not agree with the "relevance" and "the need" for such a requirement. Strategically and economically, it might not make much business sense, thus causing a huge downgrade in Malaysia's viability as a long term investment destination when compared to other countries. Its a highly commendable, timely and useful decision.

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Malaysia will scrap ownership limits for overseas companies in dozens of services industries after forecasting a 50 per cent slump in foreign investment this year. The government will immediately drop a rule in 27 sectors, from healthcare to tourism, that requires foreign companies to set aside 30 per cent of their units in Malaysia for ethnic Malay investors, Prime Minister Datu Seri Najib Razak said in a statement today.

Najib said last month that foreign direct investment may halve to RM26 billion (US$7 billion) in 2009 as the global recession delays projects. Malaysia’s government expects the US$181 billion economy to expand 1 per cent this year or shrink the same amount at worst, and many economists expect a larger contraction. Sales at electronics manufacturers have been hammered in the slowdown, and crude and palm oil exports are fetching lower prices.

“The services sector is targeted to be a new growth sector,” Najib said. Other industries freed from equity conditions include computer-related businesses such as repair and maintenance, providers of veterinary services, and transport and ship-rental businesses, he said.

Many foreign investors have said for years that the rules restrict competition and hold back growth. This year, local businessmen including Najib’s brother, Datuk Nazir Razak, who leads Malaysia’s second-biggest bank, CIMB Group, said the program needed reviewing. Today’s announcement should make services more attractive to investors, Najib said. The liberalization is part of Najib’s plan to increase the proportion of gross domestic product derived from the services industry to 60 per cent from 55 per cent in 2008.

Of RM50.1 billion of approved investments in Malaysia’s services industry in 2008, 11 per cent was from foreigners, according to the government.

p/s photos: Angelababy Yang Wing