Introduction
In recent years, Malaysia has become one of Southeast Asia’s most compelling destinations for foreign direct investment (FDI). Its well-developed infrastructure, pro-business policies, and strategic location at the heart of the Association of Southeast Asian Nations (ASEAN) have positioned the country as a magnet for global investors. Within the broader Malaysian economy, the manufacturing sector has consistently taken centre stage, supported by government incentives and robust demand for Malaysian-made goods.
This article explores the opportunities and considerations for foreign investors looking to establish a manufacturing footprint in Malaysia. From understanding the latest FDI landscape to navigating local regulations, shareholding restrictions, and compliance matters, this guide aims to empower investors with the knowledge they need to make informed decisions.
- 1. Overview of Foreign Direct Investment (FDI) in Malaysia
FDI represents a crucial pillar of Malaysia’s economic development. Over the decades, the government has adopted a series of measures designed to attract and retain foreign capital, particularly in high-value industries.
Key Trends and Statistics
According to the Malaysian Investment Development Authority (MIDA), FDI inflows into Malaysia have shown steady growth in recent years. While the global economic landscape has been subject to fluctuations due to factors like pandemic recovery and shifting trade policies, Malaysia’s diversification strategy has enabled it to maintain a relatively positive trajectory.
Traditionally, the manufacturing sector receives a significant portion of FDI. Since 2021, this sector continued to account for a large share of approved investments. The electrical and electronics (E&E) industry stands out for attracting notable foreign interest, but other sectors such as petrochemicals, aerospace components, and pharmaceutical equipment manufacturing are also gaining momentum.
Government Initiatives
Malaysia offers various tax holidays, grants, and allowances aimed at attracting high-impact industries. For example, the Pioneer Status and Investment Tax Allowance are accessible to companies setting up operations in key manufacturing segments.
The government, through MIDA and other agencies, regularly simplifies procedures to expedite approvals for permits and licenses, ensuring that investors face minimal red tape.
- 2. Key Drivers for Investing in Malaysia
While FDI can be attributed to multiple factors, there are several standout reasons why global companies consistently choose Malaysia.
Malaysia’s regulatory framework for foreign investors is generally welcoming. Successive administrations and supportive government policies have maintained a stable and predictable policy environment, focusing on nurturing high-value industries and facilitating technology transfer. A well-developed infrastructure often became vital consideration for manufacturers. The country boasts modern road networks, international airports, seaports, and reliable utilities. Dedicated industrial parks throughout Peninsular Malaysia, Sabah, and Sarawak offer purpose-built facilities that reduce set-up time and cost for manufacturers.
Located in the heart of Southeast Asia, Malaysia provides convenient access to the broader ASEAN market, home to over 600 million consumers. Its proximity to major global shipping lanes makes it an ideal export hub. Ongoing trade tensions and supplychain recalibrations have prompted many multinationals to diversify their manufacturing bases away from traditional hubs. Malaysia has benefitted from this shift, attracting companies seeking an alternative or supplemental production location.
Malaysia’s multicultural and diverse population is fluent in multiple languages, including English, Mandarin, Tamil, and Malay. This cultural diversity facilitates better communication with global stakeholders and eases the on-ground establishment of foreign ventures.
- 3. Shareholding Rules and Regulatory Framework
Malaysia broadly encourages foreign participation in its manufacturing sector, with an emphasis on attracting high-value and innovative industries. As such, foreign investors can typically hold up to 100% equity in manufacturing companies, particularly those classified as “promoted” or priority sectors.
While the manufacturing sector broadly permits full foreign ownership, certain service-oriented segments may impose a maximum foreign shareholding threshold.
For instance, healthcare services (e.g., private hospitals) restricting foreigner to hold not more than 70% equity and logistic services to public was being restricted to not more than 50% equity. Investors keen on these industries are advised to consult local legal experts to navigate specific limitations, which may vary depending on federal or state regulations.
- 4. Manufacturing License Requirements
Upon setting up of a company and entering into Sale and Purchase Agreement or Tenancy/Lease Agreement for land or factory premises, obtaining a manufacturing license from MIDA is a critical step. Specific conditions under the Industrial Coordination Act 1975 (ICA) apply.
The ICA requires manufacturing companies with shareholders’ funds of RM2.5 million and above or engaging 75 or more full-time paid employees to apply for a manufacturing licence approved by the Ministry of Investment, Trade and Industry (MITI). It is very important to know that even companies that do not meet these criteria must apply for an exemption.
On the other hand, the manufacturing company shall comply to the guidelines for approval of industrial projects in Malaysia based on the following criteria:
- • Projects must have Capital Investment Per Employee (CIPE) of at least RM140,000.00; and
- • Total full-time workforce of the company must comprise at least 80% Malaysians. Employment of foreign workers including outsourced workers is subjected to current policies; and
- • Total number of managerial, technical and supervisory levels (MTS) is at least 25% of total employment or having a value added (VA) of at least 40%.
- 5. Other Essential Licenses and Approvals
Beyond the manufacturing license, various other approvals may be mandatory, depending on a company’s activities and scale of operations. The company shall apply for a business license from the local city council before commencing business operations.
Besides that, under the Environmental Quality Act 1974, projects likely to have significant environmental impacts require an Environmental Impact Assessment (EIA) from the Department of Environment (DOE). Investors must demonstrate an awareness of environmental regulations. This includes adopting pollution control measures, waste management systems, and energy-efficient practices, especially for high-impact industries like chemicals or heavy manufacturing. Examples include large-scale petrochemical plants or heavy industries with substantial waste output. Companies are encouraged to conduct a preliminary site assessment prior to the site selection. A preliminary site assessment evaluates the suitability of the proposed site for the intended manufacturing activity. It identifies potential environmental issues and determines whether a detailed EIA is required.
Robust safety protocols and compliance with the Department of Occupational Safety and Health (DOSH) standards are prerequisites. Companies are also required to obtain relevant approvals including but not limited to the registration of factories and certificated machinery with DOSH. Any use of industrial machines or boilers necessitates registration with DOSH. Safety inspections at factory site or manufacturing plants will be carriedout by DOSH officers to ensure compliance with national occupational safety standards and minimize workplace hazards.
On the other hand, Fire and Rescue Department (BOMBA) Clearance or a no-objection letter is vital before occupying of the factory or premises, this approval certifies that buildings and facilities meet fire safety standards. This step is crucial not just for legal compliance but also for protecting the well-being of workers and safeguarding assets.
Compliance is the cornerstone of sustainable business operations in Malaysia. While Malaysia’s regulatory system is relatively transparent and business-friendly, it requires consistent adherence to rules, including tax filings, corporate governance, labour laws and intellectual property protection. By diligently meeting these obligations, investors can fortify their reputation and minimize operational disruptions.
Conclusion
Malaysia’s manufacturing sector offers foreign investors a compelling blend of economic opportunity, strategic location, and governmental support. Its track record for attracting FDI attests to the country’s commitment to nurturing a globally competitive manufacturing ecosystem. From obtaining the necessary licenses to ensuring consistent legal and regulatory compliance, a well-planned entry strategy will pave the way for long-term success in this dynamic market.
About the author
Kelvin Chee Wei Jia
Senior Associate
BRIDGE
Halim Hong & Quek
kelvin.chee@hhq.com.my
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