An Analysis of Macro-Environmental Factors and Their Impacton ...... Company in Malaysia

2. Country information of Malaysia

Malaysia is located in South East Asia, just above the equator and it has a tropical climate through the entire year with an average temperature of 27C. The capital city is Kuala Lumpur, which is located on the West coast of the peninsula. Malaysia is a multi ethnic country composed of 50 % Malays, 35 % Chinese and 10 % Indians. The official language of Malaysia is Bahasa Malaysia. The main currency in Malaysia is called the Ringgit (RM). Although Bahasa Malaysia is the official language of Malaysia, English is widely used in business.

Political Analysis

• Political stability
• Legal framework for contract enforcement
• Intellectual property protection
• Trade regulations & tariffs
• Favored trading partners
• Anti-trust laws
• Pricing regulations
• Taxation - tax rates and incentives
• Wage legislation - minimum wage and overtime
• Mandatory employee benefits
• Industrial safety regulations
• Product labeling requirements

Economic Analysis

• Type of economic system in countries of operation
• Government intervention in the free market
• Comparative advantages of host country
• Exchange rates & stability of host country currency
• Efficiency of financial markets
• Infrastructure quality
• Skill level of workforce
• Labor costs
• Business cycle stage (e.g. prosperity, recession, recovery)
• Economic growth rate
• Discretionary income
• Unemployment rate
• Inflation rate
• Interest rates

3. Political Analysis of Malaysia

4. Malaysian economy

Malaysia has a strong, open economy and a government committed to international competitiveness in terms of trade and investment.

This is being achieved through skills upgrading, management and organisational excellence and more intensive R&D efforts. Recognising that information and communications technologies are changing the face of international trade, resource flows and competition, Malaysia is continuously upgrading its communications and multimedia infrastructure to support its trading and commercial activities.  1

The Malaysian economy has experienced rapid economic growth during the past three decades. This growth has been accompanied by low inflation, reduced unemployment, falling poverty, reduction in income inequalities, and rising per capita income. Malaysia is one of South East Asia’s most successful economies and is aiming to become a fully developed country by 2020. Whereas it used to be reliant on the production of mineral and agricultural exports, Malaysia's economy is now dominated by manufacturing, and in particular electronics. 

 Malaysia's economy officially came out of recession in 1999, having shrunk by over seven percent in 1998. In 1999 Malaysia's economy grew at an impressive 5.6 per cent, which was mainly driven by the external and public sectors. In 2000 Malaysia's economy was estimated to have grown by over eight per cent, higher than the government's forecast of around 7.5 per cent. Exports were the leading contributor to Malaysia's sustained economic recovery in 2000 and continue to be the main engine of growth. The challenge will be to maintain a policy environment, which is conducive to growth in the face of a slowing global economy.
Being an open and trade-dependent economy, Malaysia was affected by the global downturn in the electronics industry and the US economic slowdown. Despite the more difficult external environment, which worsened in the afterwards of the 11 September attacks, growth of the Malaysian economy remained positive at 0.4% in 2001. Pragmatic and flexible policies to strengthen the economy, put in place since the Asian financial crisis, have enabled the economy to weather the more challenging external environment. In particular, the increase in public spending by the government and the introduction of two stimulus packages targeted at boosting consumption and investment—one in March, and the other in September 2001—totalling 7.3 billion ringgit, helped cushion the adverse impact of the weaker external sector on the domestic economy. Hence, the deterioration of the manufacturing sub sector by 5.1%, largely due to weaker external demand, was offset by positive growth in the domestic sectors of the economy—in particular the services sector, which expanded by 4.9%. The nation’s macroeconomic fundamentals remained strong with inflation subdued at below 2%, unemployment contained at below 4%, the current account balance remaining in surplus at 8.9% of GNP, strong external reserves at $30.8 billion at end-2001 (up $4.9 billion from the lowest level in 2001), as well as a sound and resilient banking system.

The Business Environment

Malaysia’s historical development accounts for the British skew of its political, legal, accounting and education systems. In many ways, this sets the background for practices familiar to the international business community.

The excellent organisational skills of experienced staff, numerous facilities and the country’s easy accessibility make Malaysia an ideal venue for hosting meetings, international conventions and exhibitions.

A well-developed financial and banking sector is seen in the sophisticated financial facilities made available through domestic and foreign commercial banks and their nationwide network of branches. Besides these banks, venture capitalists, merchant banks, finance companies and industrial finance institutions offer financial resources for investors. Malaysia’s deregularisation of the financial sector makes for greater flexibility for business. A stringent Code of Corporate Governance assures investors and traders of clear ethics in the way business is done in Malaysia.

Bilateral business councils, foreign chambers of commerce and trade associations in the country are an invaluable source of information and trade links. Working closely with government agencies, these organisations provide advice and assistance to companies in trade and industry.

Natural resources abound in Malaysia, ranging from palm oil to bountiful petroleum and gas reserves. The 18th largest trading nation in the world, Malaysia exports to more than 200 countries.

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Recognising that its long-term prosperity is dependent on the maintenance of an open trading environment, Malaysia has put in place policies and incentives that make trade and related business transactions easy, secure and reliable. Its liberal trade and investment promotion policies and measures have attracted and anchored global players.

The country’s competitive position has been maintained by its responsiveness to changing market conditions, an adaptable labour force, low inflation and a well-developed financial sector. A stable and pro-business government ensures a conductive environment that encourages entrepreneurship and innovation. Embedded in its policy framework is Malaysia’s commitment to the basic principles of transparency, fairness, healthy competition and industry involvement in policy formulation.

Malaysia’s commitment to continuous quality improvement and meeting global standards has resulted in the development of world class products and services.

Government
Malaysia has a constitutional monarchy and consists of 13 states and two federal territories. The paramount ruler and a bicameral parliament consisting of a non-elected upper house and an elected lower house nominally head it. The powers of the state governments are limited by the federal constitution. However, under the terms of the federation, the two states of Sabah and Sarawak retain certain constitutional distinctions.

The cabinet is appointed by the prime minister from among the members of parliament with the consent of the paramount ruler. 
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Pro-business government policies that encourage investment in Malaysia provide a variety of tax incentives. These incentives include pioneer status and investment tax allowance as well as additional incentives for high technology industries, strategic projects, R & D and training. 

Investment guarantee agreements, double taxation agreements, bilateral trade agreements and bilateral payment agreements signed between Malaysia and a number of countries provide a conducive framework to support trade and investment. Also, with the full realisation of the ASEAN Free Trade Area (AFTA) at the end of 2003, a whole new market of over 500 million will have been created.

International trade
Malaysia's development, its strategic location and its importance as a member of the ASEAN Free Trade Area (AFTA) make it an attractive place to invest. Doing business is also attractive to many English-speaking countries due to the English language environment; British based legal system and its excellent infrastructure.

While Malaysia is gradually liberalising its tariff regime, some products are still protected by high tariffs and import licensing provisions. Market access for Foreign Service providers remains limited in some key services areas, reflecting the government's desire to encourage development of its domestic services sector. 

Foreign Investments

The Malaysian government promotes foreign investments. Malaysia does not discriminate against investors from any country. In order to encourage foreign investments, Malaysia offers many incentives and advantages to the people from the 40 countries with a double taxation agreement with Malaysia. 

The Malaysian government has designated the manufacturing sector as the key sector of the economy. Foreign investors are encouraged to form joint ventures with Malaysian companies. Malaysia especially welcomes projects that would benefit the country’s economy through transfer of high-level technology.Malaysia is also well known for its well-developed infrastructure facilities and physical distribution of goods.
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Malaysia received strong inflows of foreign direct investment flows in the decade before the regional economic crisis, mainly thanks to considerable investment from multinationals. The Malaysian Government is trying to attract foreign and domestic investors using an attractive range of investment incentives for selected activities.

With strong competition for foreign direct investment coming from Vietnam and China, Malaysia has sought to refine the range of promoted activities in order to channel investment into more high technology, capital-intensive manufacturing operations. Malaysia wants to transform its manufacturing base from one which is primarily an assembly operation to one which is capital intensive and generates a higher level of value added per employee, in order to sustain increasing wage costs.

Social Analysis

• Demographics
• Class structure
• Education
• Culture (gender roles, etc.)
• Entrepreneurial spirit
• Attitudes (health, environmental consciousness, etc.)
• Leisure interests

Social and Demographic Structure

The Malaysian population, totalling 23 million people, has many origins: Chinese, Indian, Malay and Thai, just to mention some. The earliest of today’s inhabitants, however, has none of the above-mentioned origins. The indigenous people of Malaysia mainly consists of different tribes, such as the Orang asli of the Malaya Peninsula, the Penan of Sarawak and the Rungus of Sabah, many of whom still largely pursue a nomadic way of life. Their presence in the country probably dates back over 5000 years; yet, they are merely a small minority of the country’s population today. The largest community of the population today is the Malays, which constitutes approximately 50% of the total number of residents, and the first Malay settlers established themselves around 1000 B.C. 2

Together with the indigenous peoples mentioned above they are referred to as Bumiputera ("the sons of the soil") or more commonly; merely Malays (even though the expression is wrong). 3

Not too long ago, most of the Malays were farmers and fishermen, but during the last decades, initiated by the Bumiputera policy111, they have been educated away from the agriculture sector and into the industry and political power. Also characteristic for the Malays is their religion, Islam, which is the official religion of Malaysia. In the North Eastern parts of the country, particularly in the states of Terengganu and Kelantan, the fundamental Muslims have a strong foothold. However, there is religious freedom in Malaysia, allowing each individual to have her or his own religious beliefs.

The other two major ethnic groups in Malaysia arrived much later, following the evolution of the country itself. During the British era there was a shortage of labour, whereby a massive number of people immigrated to the British colony of Malaya, mainly Chinese, in order to support the mining industry of tin.

Today, the Chinese comprise about a third of the Malaysian population and are present in all of Malaysia. Their presence is particularly strong in the state of Penang in the northwest of Malaysia. The Chinese are Buddhists and Taoists, speak Hokkien, Hakka and Cantonese, and have been, and to a certain degree still are, dominant in the business community.4

Apart from the Chinese, a lot of Indians, mainly Hindu Tamils from southern India and some Indonesians, later immigrated to work with the rubber plantations and the construction of the infrastructure.

From an origin in the working class, the Indians could today be said to constitute the middle class and often work within the administrative apparatus. The Indian groups have however often ended up between two chairs and have no real political power. Within all three of the major ethnic groups a range of smaller sub-groups can be found, each with its own culture, characteristics, language and traditions.

There are also many traces from the colonial era left in Malaysia. English was for example recently reinstated as the language of instruction in tertiary education and despite the fact that Bahasa Malayu is the official language, people generally speak English when members of different communities talk to each other. Malaysia is still subject to large waves of people entering the country.5

With hundreds of construction projects taking place at the time, there is a constant need of foreign labour. Simultaneously, Malaysia is in better economic conditions than many of its neighbouring countries and a lot of people have consequently immigrated from Thailand, Bangladesh, Indonesia, Sri Lanka and the Philippines during the last decade.6

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A young, educated populace comprise the majority of Malaysia’s workforce. A clear advantage to business would be the widespread use of English and the continuous replenishment of local and internationally educated students. A great number of Malaysian professionals are trained in the UK and abroad, making them adaptable to your way of doing business. It is possible to find the best of all worlds in Malaysia.

Having been established in Malaysia for many years, sectors like the electrical and electronics, palm oil, rubber and petrochemicals have a large pool of skilled and experienced workers at all levels. Private colleges, professional associations and government training initiatives throughout the country ensure that knowledge and skills are continuously upgraded.

Malaysia’s labour laws safeguard the interests of employers and employees, ensuring harmonious industrial relations. As an employer you will have peace of mind where industrial relations are concerned.

5.2.3.4 Legal structure

Malaysia's legal system is based on English common law. Legislative acts are reviewed in the Supreme Court at the request of the supreme head of the federation. Malaysia has not accepted compulsory ICJ jurisdiction. Malaysia's judicial branch consists of its Federal Court whose judges are appointed by the paramount ruler on the advice of the prime minister.

Part of Malaysia’s inheritance from its former colonial rulers, is its legal structure, with the old British structure, rules and regulation. Judicial power is vested in the Federal Court, the Court of Appeal, the High Court and the Magistrate's Court, the Session's Courts and the Juvenile Courts. The Chief Justice of Malaysia heads the Judiciary. For cases regarding certain matters, involving Muslims only, there are also the Syariah courts. Nevertheless, the country is missing important enforcement mechanisms with the consequence that many laws are not followed in practice.141

Tax Rates

Malaysia operates an imputation system of corporate taxation. The present rate of income taxes whether resident or non-resident company is at a flat rate of 28%.

Non-residents are taxed on income only derived in Malaysia. With the exception of banking, insurance, air/sea transport income received in Malaysia from outside the country is not taxable.

· A company is resident in Malaysia for tax purposes regardless of where it is incorporated if at any time during the year it is controlled and managed in

Malaysia. Generally a company is considered resident of the place where its director’s meetings are held. The tax rate is 38% for companies carrying out petroleum operations.

A branch of a foreign company would also be taxed at a rate of 28% with the exception of interest income, which is taxed at the rate of 15%. However, countries with the Double Taxation Agreement will not be taxed on interest income.

Social Security

Corporations with one or more employees earning up to RM 2,000 per month are required to insure the employees under an employment injuries scheme managed by the government Social Security Organization (SOCSO). The social security provides for medical and other benefits to be paid to workers and their dependents for job related injuries. The contributions to the employment injury insurance scheme are payable by employers only, at approximately 1.25% of wages. The contributions to the Invalidity Pension Scheme amount to approximately 1% of wages and are shared equally by the employer and the employee.

Employment Passes for Expatriates

It is the government’s policy to see that Malaysians are eventually trained and employed at all levels of employment. Foreign companies are only allowed to bring in qualified personnel for areas where there is a shortage of trained Malaysians to do the job.

Foreign companies are urged to make effort to train more Malaysians so that the employment pattern at all levels of the organization will reflect the multi-racial composition of the country.

Types of Business Organizations

1.Company- there are three types of companies:

·  Company limited by shares

·  Company limited by guarantee

·  Unlimited Company

2. Partnerships and Sole Proprietorships:

·  All sole proprietorships and partnerships are unincorporated and must be registered with the Registrar of Business. They have unlimited liability.

3. Joint Ventures:

· Joint ventures are structured either as partnerships or as incorporated companies

4. Branches of Foreign Companies

Foreign investors can structure their operations in Malaysia as any of the following

·  Locally incorporated company

· Sole proprietorship

· Joint venture or partnership with a local corporate or non corporate partner

The most common type of business organization is the private limited company. A Sendirian Berhad can be wholly owned or set up with local participation.

 

Technological Analysis

• Recent technological developments
• Technology's impact on product offering
• Impact on cost structure
• Impact on value chain structure
• Rate of technological diffusion

5.2.5 Technology

Malaysia has undergone a tremendous development in the area of technology. In only a short period of time, it has gone from a large base in agrarian industry (rubber and palm oil industry) to cutting-edge technological industries.

Foreign companies have had a large impact in this process. By setting up their plants, they have transferred their know-how to Malaysia, and most companies are also required to transfer technology in order to get the necessary licenses and tax releases. The general Malaysian strategy has been to successively build up core knowledge and a technology base. Before the crisis, it was totally unthinkable that a foreign company would be allowed to establish itself if it produced something that Malaysia already knew how to do. Examples of long term technology transfer are the Japanese car company Mitsubishi’s license agreement with the domestic car manufacturer Proton, which made Proton very successful and the Swedish telecom company Ericsson, which know-how and technology has contributed to the country's development.7

However, the technological development is not evenly spread throughout the country, but is mainly focused around Kuala Lumpur. Particularly, the states of Sabah and Sarawak on Borneo and the North Eastern states on the peninsula are lagging behind in the technological development. Also the smaller towns and the countryside all over the country have not experienced the technological development.8

Recommendations

The number of macro-environmental factors is virtually unlimited. In practice, the firm must prioritize and monitor those factors that influence its industry. Even so, it may be difficult to forecast future trends with an acceptable level of accuracy. In this regard, the firm may turn to scenario planning techniques to deal with high levels of uncertainty in important macro-environmental variables.

 

Important Factors

• Malaysia’s communications links are among the best in Asia. The country is taking a co-ordinated and integrated approach to expand and upgrade its roads and highways, railways, ports, airports and telecommunications systems.
• A dynamic ICT development programme is being implemented across all sectors to establish a sound knowledge-based economy in order to add value to all economic sectors.
• Malaysia has a well-developed financial and banking sector. Malaysia also enjoys a natural niche market in Islamic banking and finance
• Strong synergy and co-operation within the country’s public and private sectors helps in continuous improvements in efficiency and reliability.

Malaysia - Economic Update

• Economic conditions improved further in the first half of 2002

• Driven by strong consumption spending, supported by the Government stimulus packages

• Higher capacity utilization in the manufacturing sector

• Industrial output has risen and domestic demand strengthened further

• Inflation remains low, although pressures are rising due to higher oil price

• External sector remains favourable

• Interest rate remains low - Loan approvals on the rise

• Better position to withstand adverse external developments

WHY MALAYSIA

• Political Stability

• Economic strength & strategic natural resources

• Warm & Friendly attitude of welcome

• Liberal & Pro-business government policies

• Excellent infrastructure

• Productive labour force

• Well-developed financial & banking sector

• Vibrant business environment

• Quality of life

• Strategic Location

4. Conclusion

In conclusion, it seems clear that every company, which is planning to begin business in a foreign country, needs to analyse macro-environmental factors and their impacts on company’s business sector because every sector or industry has its own distinct environment, which changes on a regular basis. The macro environment context is thus made up of all the conditions and factors external to the company that can positively or negatively affect the life, orientations, structures, development and the future of the company. 

This report analysed …….company’s macro environmental factors, and tried to identify the most important factors for the company. These factors include: socio-cultural, economic, international, legal-political and technological elements. For the company, the most important factors that will impact on company are especially country’s business environment, political-legal factors, socio-cultural and technologic factors. Thus, by considering these factors, the company could entire and start doing business in Malaysia.

REFERENCES

1. Trading with Malaysia
2. 108
3. 109

      4- 110 http://www.mymalaysia.net.my

5- 112

     6- 113

      7-147 Mahathir M., (2000)

        148 - 149http://www.fmm.org.my

8- 150

http://www.stroudgate.net/biap/ad/108.html

“The Government will continue to provide the leadership, policy direction and guidance to ensure that Malaysia has an attractive investment climate.”

Malaysia’s Prime Minister, Dr. Mahathir Mohamad, at the launch of the Second Industrial Master Plan

Benefit from a government bold enough to implement innovative policies to ensure political

The Malaysian Industrial Development Authority (MIDA) is the government’s principal agency for the promotion and coordination of industrial development. It is the first point of contact for investors who intend to set up projects in the manufacturing and its related support services sectors in Malaysia. MIDA assists potential investors with information regarding government policies and procedures, tax incentives, infrastructure facilities and potential joint-venture partners. Manufacturers can contact MIDA for assistance in planning your fact-finding trip to Malaysia.

Success

With a business friendly government, well-established foundations and, most importantly, a people that continuously strive for excellence in all things, Malaysia is where you go to get that optimum return on your investment. With the government and the private sector working together to support your business venture, success is within reach. Our foundations are your success factors.

The Malaysia External Trade Development Corporation (MATRADE)
is Malaysia’s national trade promotion agency dedicated to helping Malaysian companies enter the international marketplace. MATRADE puts international buyers in contact with reliable Malaysian suppliers of products and services and vice versa. MATRADE maintains a database of Malaysian suppliers and overseas buyers and provides up-to-date market information, reliable trade and business leads, and advisory services to the domestic and international business community.