RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/156 
12 December 2005  
 
(05-5812) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
MALAYSIA 
 
Report by the Secretariat 
 
  
 
This report, prepared for the fourth Tr ade Policy Review of Malaysia, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from th e Government of Malaysia on its trade 
policies and practices. 
 
Any technical questions arising from this report may be addressed to 
Mr. Mario Kakabadse (tel:  022 739 5172). 
 
Document WT/TPR/G/156 contains the policy statement submitted by the 
Government of Malaysia. 
 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
session of the meeting of the Trade Policy Review Body on Malaysia. Malaysia WT/TPR/S/156 
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CONTENTS 
 
    P a g e  
SUMMARY OBSERVATIONS vii 
 (1) E CONOMIC ENVIRONMENT  vii 
 (2) T RADE POLICY REGIME :  FRAMEWORK AND OBJECTIVES  vii 
 (3) T RADE POLICIES AND PRACTICES BY MEASURE  viii 
 (4) T RADE POLICIES BY SECTOR  x 
 (5) O UTLOOK  xi 
I. ECONOMIC ENVIRONMENT 1 
 (1) O VERVIEW  1 
 (2) R ECENT ECONOMIC DEVELOPMENTS  3 
 (i) Macroeconomic policies 3  (ii) Structural policies 7 
 (3) D
EVELOPMENTS IN TRADE AND FOREIGN INVESTMENT  11 
 (i) Composition of trade 11  (ii) Direction of trade 11 
 (iii) Trade in services 14 
 (iv) Trends in foreign direct investment 14 
 (4) O
UTLOOK  15 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 16 
 (1) I NTRODUCTION  16 
 (2) G ENERAL CONSTITUTIONAL AND LEGAL FRAMEWORK  16 
 (3) D EVELOPMENT AND ADMINISTRATION OF TRADE AND INVESTMENT POLICY  17 
 (i) Advisory and review process 20  (ii) Transparency 20 
 (4) T
RADE POLICY OBJECTIVES  21 
 (5) T RADE AGREEMENTS AND ARRANGEMENTS  21 
 (i) World Trade Organization 22 
 (ii) Regional agreements 24 
 (iii) Bilateral agreements 27 
 (iv) Trade preferences 28 
 (6) D ISPUTE SETTLEMENT  29 
 (7) F OREIGN INVESTMENT REGIME  29 
 (i) Recent developments 29 
 (ii) Legislative framework and procedures 30  (iii) Incentives 31 
 (iv) Investment guarantee and double taxation agreements 31 
III. TRADE POLICIES AND PRACTICES BY MEASURE 33 
 (1) I
NTRODUCTION  33 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  34 
 (i) Customs issues, trade facilitation, customs valuation and rules of origin 34 WT/TPR/S/156 Trade Policy Review 
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    P a g e  
 (ii) Tariffs 36 
 (iii) Prohibitions, quantitative restrictions, and import licensing 44 
 (iv) Contingency measures 46  (v) Government procurement 47 
 (vi) State trading 48 
 (vii) Trade-related investment measures and local-content requirements 49  (viii) Other measures 49 
 (3) M
EASURES AFFECTING EXPORTS  49 
 (i) Export taxes, charges, and levies 49  (ii) Export prohibitions, restrictions, and licensing 50 
 (iii) Duty and tax concessions 51 
 (iv) Free-trade zones and other measures 51  (v) Export subsidies 51 
 (vi) Export finance, insurance, and guarantees 51 
 (vii) Export promotion 52 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  52 
 (i) Standards and other technical requirements 52 
 (ii) Sanitary and phytosanitary regulations 56 
 (iii) Taxation and tax incentives 57 
 (iv) Legal framework for business 63  (v) Government-linked companies (GLCs) 63 
 (vi) Corporate governance 64 
 (vii) Competition policy 65  (viii) Intellectual property 67 
IV. TRADE POLICIES BY SECTOR 74 
 (1) I
NTRODUCTION  74 
 (2) A GRICULTURE  76 
 (i) Main features 76 
 (ii) Trade regime 77  (iii) Key subsectors 79 
 (iv) Policy objectives for the sector 82 
 (3) M
INING AND QUARRYING  82 
 (i) Regulatory framework 83 
 (ii) Trade and Investment regime 83 
 (iii) Foreign participation in the oil and gas sector 84 
 (4) M ANUFACTURING  84 
 (i) Features 84 
 (ii) Objectives for the sector 85 
 (iii) Trade policy instruments 85 
 (iv) Key subsectors 86 
 (5) S ERVICES  92 
 (i) Features 92 
 (ii) Policy objectives 94  (iii) Key subsectors 94 
REFERENCES   107 
APPENDIX TABLES  111 Malaysia WT/TPR/S/156 
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CHARTS 
Page 
I. ECONOMIC ENVIRONMENT 
I.1 Product composition of merchandise trade, 2001 and 2004 12 
I.2 Direction of merchandise trade, 2001 and 2004 13 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE  
III.1 Simple average applied MFN tariff rates, by HS section, 2001 and 2005 39 
III.2 Distribution of MFN tariff rates, 2001 and 2005  40 III.3 Tariff escalation by 2-digit ISIC industry, 2001 and 2005  41 
III.4 Applied AFTA tariff rates, by HS section, 2001 and 2005  42 
III.5 Import licensing, by HS section, 2001 and 2005  45  
 
TABLES 
I. ECONOMIC ENVIRONMENT 
I.1 Selected macroeconomi c indicators, 2001-04 1 
I.2 Basic economic and soci al indicators, 2001-04 5 
I.3 Eighth Malaysia Plan, 2001-05 10 
I.4 Malaysia's trade in commercial services 14 
 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
II.1 Main trade-related laws and regulations 17 
II.2 Comparative governance indicators:  selected countries and the OECD, 2002 21 
II.3 Status of selected notifications to the WTO, 2001 to October 2005 22 
II.4 Malaysia's involvement in bilateral and regiona l trading initiatives  with non-ASEAN partners, 
 June 2005  24 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 III.1 Structure of MFN tariff in Malaysia 36 
III.2 Applied MFN tariff averages by stage of processing, 2001 and 2005 43 
III.3 Summary of anti-dumping actions, 2001-05 (June) 46 III.4 Government procurement, 2001-04 47 
III.5 Malaysian standards aligned to international standards, 2001 and 2005 54 
III.6 Import restrictions on agricultural products, 2001-04 57 III.7 Structure of direct and indirect tax revenue, 2001-04 58 
III.8 Summary of Malaysian tax measures, 2005 59 
III.9 Direct and indirect tax incentives in Malaysia by sector and activity 60 
III.10 Main direct tax incentives for investment and recent changes 61 
III.11 Estimated trade losses due to copyright piracy, 2000-04 71 III.12 Actions taken under the Copyright Act 1987, Ja nuary 2001 to December 2004 72 
III.13 Seizure of counterfeit goods under Trade Descriptions Act 1972, January 2001  
to December 2004 73 
IV. TRADE POLICIES BY SECTOR 
IV.1 Structure of production and employment, 2001-05 74 
IV.2 Growth of labour productivity, 2001-05 76 IV.3 Tariffs affecting imports of select ed agriculture products into Malaysia 77 WT/TPR/S/156 Trade Policy Review 
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    P a g e  
IV.4 Overview of domestic support measures, 1998 and 2004 79 
IV.5 Production of major agricultural products, 2001-03 81 
IV.6 Manufacturing production index, 1995 and 2000-04 85 IV.7 Export, employment, total output, and value added for selected manufacturing subsectors, 2003 87 
IV.8 Exports and imports of selected electrical and electronic products, 2004 87 
IV.9 Tariff reductions on selected ITA products by Malaysia 89 IV.10 Tariff and excise rates on imported passenger vehicles, 2004-05 92 
IV.11 Overview of market access requirements in  selected services sectors in Malaysia 93 
IV.12 Assets of the financial system, 2004 95 IV.13 Top ten domestic banking groups, by total assets, end-June 2004 96 
IV.14 Top ten foreign banks, by assets, June 2003 97 
IV.15 Top ten insurance companies, 2001 and 2002 98 IV.16 Telecoms:  trends and forecast, 2000-07 101 
IV.17 Major foreign exchange earnings, 2004 103 
IV.18 Tourist arrivals and receipts, 2000-05 103  
 
APPENDIX TABLES 
 
I. ECONOMIC ENVIRONMENT 
AI.1 Merchandise exports by group of products, 2001-04 113 
AI.2 Merchandise imports by group of products, 2001-04 115 AI.3 Merchandise exports by destination, 2001-04 117 
AI.4 Merchandise imports by origin, 2001-04 118 
 III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
AIII.1 Summary analysis of the Malaysian's MFN tariff, 2001 and 2005 119 AIII.2 Import licensing approval, 2005 120 
AIII.3 Khazanah investment holdings by sector and company 123 
  
 Malaysia WT/TPR/S/156 
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SUMMARY OBSERVATIONS 
 (1) E
CONOMIC ENVIRONMENT  
1. Trade and trade-related policies 
remain integral parts of Malaysia's broad 
economic development strategy, whose key objectives are economic growth sufficient for the attainment of developed country status by 2020 and an equitable distribution of the 
resulting wealth.  Hence, during the period 
under review (2001-05), Malaysia has continued to liberalize its policies on international trade and foreign investment.  Indeed, imports and exports of goods, respectively, were on average equivalent to 
86% and 110% of GDP during that period.  
Inflows of foreign direct investment (FDI), although down from the high level of 7% of GDP between 1990-97, were still around 3% of GDP during the period 1999-04, a level 
more in line with the world average. 
2. As a consequence of its openness to 
trade together with prudent macroeconomic and structural reforms in key areas, it looks as if the Malaysians economy has now fully recovered from the Asian financial crises in 
1997-98.  Growth in real GDP, after slowing 
to 0.3% in 2001, owing to a contraction in exports, rebounded to 4.4% in 2002, 5.4% in 2003, and 7.1% in 2004.  At the same time, both unemployment and inflation have 
remained low during the period under review, 
with unemployment at around 3.5% and inflation within the 1-2% range.  Real GDP growth for 2005 is expected to consolidate at 5%, due to slower world growth and trade 
activities, the downward trend in the global 
semiconductor cycle, higher imported inflation arising from relatively higher world oil prices, and lower prices of commodities, particularly palm oil, Malaysia's main agricultural export.  
3. Malaysia's current account surplus 
widened from 8.3% of GDP in 2001 to 12.6% 
of GDP in 2004.  The current account position is due to merchandise trade;  Malaysia has a persistent deficit on invisibles trade.   4. With the exchange rate pegged to the 
U.S. dollar (until July 2005), thereby limiting the scope for independent monetary policy, compensatory fiscal policy sustained 
Malaysia's growth momentum between 2001 
and 2003 in the face of softening global demand and uncertainties created by the 11 September attacks, the war in Iraq, and SARS.  In the process, federal government debt 
rose appreciably, albeit from relatively low 
levels.  Post-crisis ref orms to restructure the 
financial sector and clean up balance sheets have been almost completed and the financial and corporate sectors have been strengthened.  Restrictions on foreign exchange transactions 
were lifted gradually and the liberalization of 
the trade and investment regime has continued.  In July 2005, Malaysia abandoned its currency peg against the U.S. dollar and replaced it with a "managed float" system 
based on a basket of currencies.  This marked 
the end of almost all of the capital controls that had been established in September 1998 in the wake of the Asian financial crisis. 
5. Malaysia's economic slowdown 
earlier in the period under review highlighted 
the problems associated with over-reliance on 
an export-led growth stra tegy, particularly in 
electrical and electronic products and the consequent vulnerability to industrial countries' business cycl e.  To address this 
issue, measures have been taken to develop 
new sources of growth, whereby agriculture, resource-based industries, high-technology manufacturing and services have been given higher prominence in order to improve the 
economy's competitiveness and resilience to 
shocks. 
(2) T
RADE POLICY REGIME :  
FRAMEWORK AND OBJECTIVES  
6. There has been little change in 
Malaysia's trade-related institutional 
framework since its last Review.  Malaysia has 
continued efforts to liberalize its relatively open trade and investment regime.  In the WTO, Malaysia has implemented its Uruguay Round commitments, has unilaterally lowered 
tariffs in its annual budget exercises, and is WT/TPR/S/156 Trade Policy Review 
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participating actively in the Doha 
Development Round.   
7. One notable feature of the review 
period is that Malaysia has joined the trend in 
the south-east Asian region of seeking closer 
economic relations at both the regional and bilateral levels.  Thus, in addition to moving with its ASEAN partners towards achieving a single market by 2020 and full participation in 
the APEC forum under its 2004 Individual 
Action Plan, Malaysia, since the WTO's Fifth Ministerial talks in 2003, has been actively seeking bilateral free-trade agreements, with an important investment component, with Australia, India, Japan, Korea, New Zealand, 
and Pakistan.  Through ASEAN, it is 
participating in regional free-trade and investment negotiations with Australia/New Zealand, China, India, Japan, and Korea.  It has also signed a trade and investment 
framework agreement with the United States.  
The Malaysian authorities maintain that existing as well as planned bilateral and regional free-trade agreements are consistent with, and complement, the multilateral framework for trade negotiations.  Although,  
negotiation of a number of ASEAN-wide as 
well as bilateral agreements could increase competition in Malaysia, such agreements also raise issues of uniformity and consistency as well as trade diversion.  These FTAs could 
erode the competitive position of suppliers 
with MFN access to the Malaysian market. 
8. In terms of investment liberalization, 
equity holdings in all new manufacturing projects have been fully  liberalized;  foreign 
investors can now hold 100% equity in all 
investments in new projects as well as expansion/diversification projects.  Malaysia has also relaxed its guidelines to provide greater flexibility for foreign equity participation in local firms;  for acquisitions 
by Malaysian and foreign interests, the only 
equity condition is to maintain at least 30% bumiputera equity.  Sectors deemed strategic, such as broadcasting, water and energy supply, banks, and health,  however, are still 
limited to 30% foreign equity participation. (3) T
RADE POLICIES AND PRACTICES BY 
MEASURE  
9. During the period under review 
(2001-05), Malaysia's economy has remained 
relatively open to trade and foreign 
investment.  The tariff continues to be the main border measure affecting imported goods and accounted for 5.4% of overall tax revenue in 2004.  Over one third of tariff lines remain 
unbound and the considerable gap between 
bound and applied tariffs creates a degree of unpredictability for traders in the sense that there is significant scope for the authorities to raise tariffs.  However, applied tariffs have come down in successive annual budget 
exercises to an MFN average applied rate of 
8.1% in 2005, compared to 9.2% in 2001.  Patterns of MFN tariff dispersion and escalation have changed little since 2001.   
10. Imports are generally treated in the 
same way as domestically-produced goods as 
regards excise duty;  an exception concerns the rebate of excise duty for national car manufacturers.  Approximately 27% of Malaysia's tariff lines are subject to import licensing, a substantial part of which appears 
to be non-automatic.  This would seem to 
provide the authorities with scope for administrative discretion to encourage or discourage certain types of activity.  In particular, the Ministry of International Trade 
and Industry (MITI) oversees a system of 
approved permits that allows the holder to import foreign-built or assembled cars and distribute them locally;  this can act as a quota, restricting the total number of cars that 
can be imported.  Malaysia has become quite 
an active user of contingency measures, initiating 17 anti-dumping  actions during the 
review period, and has been the target of 26 investigations.  Malaysia is also planning to develop safeguard legislation. 
11. Malaysia has phased out all 
remaining trade-related investment measures as well as local-content requirements in the automotive industry.  The Government continues to be an important purchaser of 
goods and services, with the government-Malaysia WT/TPR/S/156 
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procurement market equivalent to 20% of 
GDP in 2004.  Preferential government procurement procedures continue to favour locally owned businesses, especially for 
smaller amounts.  International tenders are 
invited only if goods and services are not available locally.  The Government also affects procurement and supply of goods and services through its extensive ownership of 
enterprises.  Malaysia is not a party to the 
WTO Plurilateral Agreement on Government Procurement. 
12. Export duties and export licensing 
measures play a role in Malaysia's industrial policy.  Export taxes and extensive licensing 
arrangements are applied to certain exports 
such as timber, which has the effect of discouraging the export of those goods and reducing their domestic prices.  The aim of such measures, according to the authorities, is 
to foster the development of downstream 
industries, which provide value-added content.  In 2001, 36% of Malaysian tariff lines were subject to export licensing requirements and in 2005 the situation appears to be similar.  At the same time, export assistance is provided 
through various measures, including:  import 
duty exemptions/drawbacks, tax relief, concessionary credits, insurance, and guarantees, as well as government-sponsored promotion and marketing assistance.   
13. Standards activities have been 
recognized as one of Malaysia's priorities to achieve developed natio n status by 2020.  
Malaysia aims to align Malaysian standards with international standards and, as of May 
2005, some 51% of Malaysian standards were 
so aligned, up from 35% in 2001.  Malaysian standard setting committees choose international standards as the primary option in revising standards and creating new ones;  about 80% of around 350 standards adopted 
annually are aligned.  Malaysia's role in the 
development of halal certification, earned the citation of the UN Codex Alimentarius Commission of Malaysia as the best global example for halal food production.  This 
reflects the objective of the Government to develop the country as a hub for halal food 
products.  
14. Tax incentives have long been an 
important instrument of Malaysia's economic 
development strategy.  They apply to 
investments in manufacturing, agriculture, tourism and approved services as well as R&D, training, and environmental protection activities.  No estimates are available 
concerning total tax revenue forgone as a 
result of the tax incentive schemes.  The Malaysian system of tax incentives may not necessarily be leading to improved investment performance.  The publication of estimates of tax revenues forgone would improve fiscal 
transparency in Malaysia and contribute to a 
more effective tax policy. 
15. The Malaysian Government has 
strengthened its intellectual property regime.  It has sought to improve the enforcement of 
intellectual property rights, in particular to 
curb infringement of copyrights and trade marks.  The Malaysian authorities maintain that they have had considerable success in eradicating optical disc product piracy, although piracy would seem to remain a 
problem along with counterfeiting.   
16. Malaysia does not have a 
comprehensive competition law, but set itself the target of a drafting a broad competition law by the end of 2005. 
17. The authorities have focused on the 
improvement of corporate governance, essential for an efficient capital market capable of mobilizing and channelling savings into the most productive investments.  
Requirements for companies to be listed on the 
stock exchange have been revised, the Capital Markets Master Plan was established in 2001 to set out the strategy for reform, and government-linked companies (GLCs) are being restructured. 
18. The State continues to have a strong 
presence in most sectors of the economy, mainly through over 40 listed and non-listed GLCs, with combined assets equivalent to WT/TPR/S/156 Trade Policy Review 
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more than half of Malaysia's GDP. Some of 
the biggest GLCs are Petronas (oil and gas), Tenega (power), Malaysian Airlines, Proton (the car company), and Telekom Malaysia.  
Recent steps to reform these companies are 
part of a broader effort to improve the transparency and performance of GLCs through the introduction, inter alia, of key performance indicators and performance-
linked compensation for their managers.  The 
objectives are to create a more arms-length relationship between the State and GLCs, make them more independent and commercially oriented and encourage greater private investment in the GLCs.  
(4) T
RADE POLICIES BY SECTOR  
19. During the review period, competition 
has intensified for Malaysian industries as domestic barriers are dismantled through bilateral and regional FTAs and through WTO 
negotiations, and as low-wage countries, 
especially China, erode Malaysia's competitive advantage in unskilled, labour-intensive manufacturing.  Competitive pressures are moving the Malaysian economy to the upper end of the value-chain, producing 
knowledge- and technology-intensive goods as 
well as supplying services.  In 2001, the Third Outline Perspective Plan and the Eighth Malaysia Plan emphasized the Government's commitment to moving from an input-driven to 
a knowledge- and productivity-driven 
economy in order to generate sustainable economic growth and maintain competitiveness.  A significant challenge in this regard is the speed at which new domestic 
sources of growth can be found, which 
depends considerably on the gains in total factor productivity (TFP) . In 2001, this was 
projected to grow at an annual rate of 2.8%, but was substantially lower, at 0.8% for the period 2001-03.  It was expected to return 
during 2004-05 to around 1.7%, more in line 
with Malaysia's historical experience.  
20. The Government is promoting 
domestic and foreign investments in selected subsectors, notably high-technology 
manufacturing, ICT, biotechnology, education, and tourism, with the aim of developing 
products in new areas of growth. 
21. The most important agricultural 
activities are production of food commodities 
and of plantation crops for international 
markets, led by palm oil, rubber, and timber.  To promote the development of agriculture, which accounted for 7.5% of gross exports in 2004, the Government is focusing on 
increasing productivity and competitiveness 
through higher value-added activities and utilization of modern technology.  In particular, current development expenditure is focused on agriculture and R&D in halal products is being actively promoted.   
22. The manufacturing sector has long 
been the catalyst of growth.  Malaysia, one of largest exporters of semiconductors in the world, is now climbing the value chain to move its electronics industry from commodity 
chip-making to testing and design in order to 
stay ahead of competitors.  Generally, however, Malaysia's export orientation may be more difficult to sustain as an increasing number of countries pursue export-led economic growth.  Desp ite heavy protection 
over the years, Malaysia's domestic car 
makers, and notably Proton, have seen their market share decline as the Malaysian car market becomes increasingly open.  With the 2008 deadline for liberalization of the 
automotive sector drawing nearer, some 
segments of the industry may have to restructure to achieve international competitiveness. 
23. Services accounted for some 60% of 
GDP in 2004.  In genera l, the services sector 
is not yet as open to trade as agriculture and manufacturing, due perhaps to restrictions on foreign direct investment.  The Government has identified services as one of the key drivers of economic growth, with the focus on 
selected industries, including tourism, health, 
education, Islamic finance and information and communications technology (ICT)-related and manufacturing-related services.  Tourism has become Malaysia's most successful service 
sector and has increased in importance as a Malaysia WT/TPR/S/156 
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source of economic growth.  Negotiations at 
regional and global level to liberalize trade in services offer both challenges and opportunities for Malaysia's relatively 
protected sector in terms of the need to 
increase competitiveness.  In financial services, for example, Malaysia has sought to boost the competitiveness of locally owned financial institutions, through measures to 
enhance consolidation and mergers, in 
anticipation of increased competition from foreign-owned financial services providers. 
(5) O
UTLOOK  
24. Healthy foreign exchange reserves, a 
relatively small external debt, as well as 
financial and corporate sector restructuring 
have strengthened the economy and its resistance to external shocks.  Nonetheless, the economy remains vulnerable to downturns in key markets.  The near-term outlook is 
favourable with real GDP growth projected to 
moderate to 5% in 2005 and 5.5% in 2006 in line with global trends.  The main concern is lower than anticipated growth in the external demand for Malaysia's exports stemming from sustained, substantially higher than 
anticipated world oil prices.  
25. In the medium term, Malaysia is likely 
to remain vulnerable to industrial countries'  business cycle, although continued 
implementation of sound macroeconomic policies and sustained structural reform efforts could diversify the industrial and export 
structure more rapidly than expected and 
strengthen Malaysia's resilience to shocks.   
Policies will continue to focus on improving the business and investment climate primarily by reforming government-linked companies, 
which play a major role in the Malaysian 
economy.   
26. On the trade and investment front, 
import competition may be expected to intensify as domestic barriers are dismantled.  Malaysia expects exports to ASEAN to grow 
due to further liberalization of intra-ASEAN 
trade.  In the face of increased competition from China in goods markets, Malaysia is focusing on higher value-added exports and encouraging services exports.  Malaysia 
recognizes that it has a role as a gateway to 
the ASEAN market and is offering incentives to foreign companies as it competes for FDI against regional neighbours and the much bigger economies of China and India.  A flexible exchange rate regime, backed by 
sound economic fundamentals, may enhance 
investors' perception of the country and encourage inflows of capital.  Domestic and foreign investment is likely to remain a key factor in bringing about Malaysia's 
transformation to a knowledge-based 
economy.