Business in Malaysia: Business Environment Analysis

Executive Summary

This paper provides an evaluation of the business environment in Malaysia. It is a report made by the development manager to the CEO of an Australian company on the possibilities of establishing a business in Malaysia. The CEO of the Australia Company is planning to expand the business operations to other countries. As the development manager, I have been appointed to evaluate the environment in Malaysia. From my investigation, I found that Malaysia is one of the densely populated nations in the world with a stable economy. It has been registering an increased growth rate in its GDP since 2004.

This has been contributed by the expanding manufacturing sector which was established in 1970. It is politically and economically stable making it an ideal environment for international business expansion. It is a country that is rich in both natural and human resources. Malaysia uses the Ringgit currency which has been a strong currency since the abandonment of the pegged system. The foreign reserves have been growing rapidly since then. It is a country that has a good socio-cultural environment suitable for the growth of an international business. The CEO should consider investing in Malaysia because he is assured of better returns.

Introduction

Malaysia has an estimated population of 28 million and it is the forty-third most populated country in the world. It has a land area of about 320, 000 square kilometers. The Western and Eastern parts of Malaysia are separated by the South China Sea and they share a similar landscape. Both parts are characterized by coastal plains, mountains, and forested hills. The highest mountain in Malaysia is Mount Kinabalu which stands at 4 km on the island of Borneo.

Malaysia experiences an equatorial climate with annual monsoons occurring from April to October (Southwest) and October to February (northeast). The capital city of Malaysia is Kuala Lumpur which is also the largest city in the country (Saw 2007:82). This paper looks at the economic, political, and legal environment in Malaysia. It also gives a list of the resources available in the country and provides a recommendation to the CEO of the suitability of Malaysia’s business environment for the expansion of business.

Economic Environment

In the early 20th century, Malaysia was the largest producer of rubber, palm oil, and tin in the world. Instead of employing the local citizens on the plantations and the mines, the Indians and Chinese who were introduced by the British were employed there. In early 1970, Malaysia went through a transition stage where reliance on minerals and agriculture was reduced and the manufacturing sector was introduced (Voon & Xin 2007:307). As a result, the growth rate in GDP increased by more than 7 percent and the inflation rate reduced significantly. Today, Malaysia specializes in the manufacturing of computer hard disks which boosts the economy (Richmond 2007:47).

Malaysia operates an open market economy that is state-oriented. As of 2007, its economy was ranked 3rd in South East Asia and 29th in the world. It had an estimated GDP of $357.9 billion and a growth rate of 7 percent (Institute of Development Studies (Sabah), 2008:50). The following table shows the GDP, GDP growth rate, GDP per capita, inflation rate, and the unemployment rate for 2007 to 2009.

GDP total and growth rate was lower in 2009 as compared to 2007 and 2008. Inflation price index has been increasing since 2007 but the employment rate has been stable for the three years. Per capita income was highest in 2008 but fell by $ 500 in 2009.

Before the 1997 Asian Financial Crisis, Malaysia used the Malaysian Ringgit which was an internationalized currency. By then it was a strong currency compared to the dollar but fell drastically after the crises. In 1998, the exchange rate ceased to be determined by the forces of demand and supply and was pegged to the US dollar. The central bank (Bank Negara Malaysia) announced that, the Ringgit exchange rate would be pegged against the U.S Dollar at 3.8 RM to 1$. In 1998, the peg system was abandoned and since then the Ringgit currency has been appreciating. Foreign exchange reserves have been increasing steadily since the peg system was abandoned.

As at March 2007, the foreign exchange reserves were approximated to be USD88 billion which was an increase of 10 USD since the peg system was abandoned (Columbus 2007:110). The following chart shows the foreign exchange reserve as announced by Bank Negara from 2004 to 2008. The figures have been rounded to the nearest billion in USD.

Political and Legal Environment

The systems of parliamentary democracy in Malaysia form a constitutional monarchy. It has thirteen states, an administrative capital and 2 local territories. Each state has its own head and an assembly elected by the public. Most of the states are governed by hereditary sultans and one of them is elected to act as the constitutional monarch for a term of five years. Federal legislative power is vested in the heads of the 13 states and the federal government. Its judiciary is independent of both the legislature and executive although the executive has limited power in the appointment of court judges (USA International Business Publications 2007: 51).

Malaysia has a codified constitution and a government system founded on the Westminster system. The population in Malaysia is composed of Malays, Indians, Eurasians, Chinese and other ethical groups. The indigenous people of Sabah and Sarawak are referred to as “natives” or “son of the state”.

Article 161(A) of the Federal Constitution of Malaysia 1957 provides for the special position of the natives of the states of Sabah and Sarawak. It spells out what “native” means and which groups are considered native. It also outlines the conditions for the alienation of lands and the preferential treatment of natives by the state (Anon. “The Political System and Government Policy” 2010).

Since the 2008 general election, Malaysian politics has been stable and transparent for the citizens. It has a legal system that is founded on English common law. Decisions made by the Court of Appeal are reviewed by the Federal Court which has the jurisdiction of making decisions concerned with constitutional matters and quarrels arising from the federal government or state. Sabah state, Sarawak state and the Peninsular Malaysia has a high court each. Authority over external affairs, internal security, finance, citizenship, transportation, among others is vested upon the federal government (Gomez 2007:24).

Socio-Cultural Environment

Before undertaking any business venture especially internationally, it is good to understand the cultural environment. This is because; an international business involves interactions with different people from different cultural backgrounds. Socio-cultural environment can manipulate the labor environment, the economic environment and politics (Anon. “Social – Cultural Considerations” 2010). On the other hand, the cultural environment can be manipulated by technological environment such as the means of transport to work places, technological advancement such as access to internet, economic environment such as standard of living, and the geographical environment such as climate changes (Chee &Than 1990:1).

Malaysia is a multi-cultural society. 2007 statistics shows that, the population is composed of Malayans (62%), Chinese (24%), Indians (8%) and other minority groups who are mostly semi-skilled laborers. The national language is Malaya although English is commonly spoken in cities and towns. Most of the tribes in Malaysia speak in their native languages. Business is usually carried out successfully without encountering challenges based on culture, religion or origin (Saw 2007:84). Malayans constitute the largest number of labor force followed by Chinese and the Indians.

Resources

Malaysia is rich in natural resources such as minerals, forestry and agriculture. It is well known for the exportation of palm oil, rubber, tobacco, pepper and cocoa. Exportation of natural resources forms the backbone of Malaysia’s economy. It has a large labor force concentrated in the manufacturing sector. In the recent past, the country realized that utilization of knowledge would lead to economic growth and wealth creation.

Policies have been laid down to promote education in primary and secondary schools and also the tertiary levels. The human resources have been empowered to be innovative in creation of new ideas and entrepreneurial skills. The human capital is skilled for carrying out processes in industries leading to economic growth (Trade Chakra 2008).

Raw materials are readily available in Malaysia ranging from agricultural raw materials, minerals, among others. The country has a stable economy and a strong finance base. Bank Negara uses monetary policies to regulate money in the economy and to ensure that the inflation index remains as low as possible.

Malaysia is a country that upholds morals and ethical issues. It is composed of different religions that have been given the freedom of worships for example the Muslims have been allowed to hold their annual ceremonies (Nair 1997:91). Most of the industrials and organizations have a duty of upholding social accountability towards the society or community.

Conclusion

Malaysia is one of the densely populated nations in the world with an estimated population of 28 million as at 2007. It covers a geographical area of approximately 320, 000 sq kilometers. It is one of the countries in the world with a wide range of natural resources in agriculture, minerals and forestry. Most of its exports are derived from natural resources such as rubber, tin, palm oil and cocoa. For along time it had been relying on the exportation of these natural resources but realized the importance of introducing the manufacturing sector. This was introduced in 1970. It specialized in the manufacturing of the computer hardware disk which led to a growth of 7% in GDP in 2007. Since then, the manufacturing sector has been doing well necessitating the need for qualified personnel.

In 2007, Malaysia was ranked 3^rd in East Asia in terms of economic performance. It can be said to be one of the stable economies in the world. It has a good foundation for establishing an international business. For a long time, the national language in Malaysia had been Malaya which was hindering foreign investors but today, English has become a common language which is widely spoken in many cities and towns. This makes it easier for the establishment of a business enterprise for our Australian country.

Recommendations

As the development manager, I would urge the CEO to consider expanding business operations in Malaysia. In Malaysia we are not only assured of a ready market (because of the large population) but also the availability of labor force and raw materials. Most of the raw materials in Malaysia come from agriculture, minerals and forestry and they are readily available. This will help in reducing the time and cost that could be used in sourcing materials elsewhere. Malaysia has a wide labor force which has been equipped with a lot of knowledge and skills to handle the complex processes in the manufacturing sector. Before setting up an international business, it is good to evaluate the socio-cultural environment because it can influence the technological and the legal environment. Malaysia’s population is composed of the Malayans, Chinese, Indians, and other minority groups. Most of these communities have their cultural values, beliefs and language which are still solid. The good thing with them is that, they respect one another and carry out their operations in an ethical manner. The manufacturing sectors have a sense of social responsibility to the community and society at large.

Reference List

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