Malaysian Industrial Development Authority
Workshop on Improving the Investment
Climate in Indonesia
November 16-17, 2005
INVESTMENT
INCENTIVES
Malaysia’s Perspective
Kaziah Abdul Kadir
Deputy Director General I
Malaysian Industrial Development Authority (MIDA)
www.mida.gov.my
1
Malaysian Industrial Development Authority
FUNCTIONS
of MIDA
www.mida.gov.my
2
Malaysian Industrial Development Authority
PROMOTION
• Foreign Direct Investment
• Domestic Investment
• Cross Border Investment
• Services
RESEARCH &
PLANNING
• Planning for Industrial
Development
• Recommend policies
and strategies on
industrial promotion
and development
EVALUATION
• Manufacturing licences
• Tax incentives for
manufacturing and
services activities
• Expatriate posts
• Duty exemption
• RDC, IPC and R&D status
FOLLOW-UP/MONITORING
• Assist companies in the implementation and
operation of their projects
• Facilitate exchange & co-ordination among
institutions engaged in or connected with
industrial development
• Advisory Services
www.mida.gov.my
3
Malaysian Industrial Development Authority
Government Representatives
Based in MIDA
• Immigration Department
• Royal Malaysian Customs
• Department of Occupational, Safety and Health
• Department of Environment
• Ministry of Finance
• Ministry of Human Resources
• Telekom Malaysia Berhad
• Tenaga Nasional Berhad
www.mida.gov.my
4
Malaysian Industrial Development Authority
INDUSTRIAL
Development Framework
www.mida.gov.my
5
Malaysian Industrial Development Authority
Development Philosophy
•
System of free enterprise but with active
government support and direction.
•
Government provides the broad thrusts
and sets direction for the whole economy,
and ensures the achievements of socioeconomic goals.
•
Private sector is free to operate and given
appropriate policy, institutional and
infrastructural support.
www.mida.gov.my
6
Malaysian Industrial Development Authority
Development Plans
1986 1991 1995
2000
2005 2010 2015
2020
Vision 2020
Second Outline
Perspective Plan
Third Outline
Perspective Plan
Fifth Malaysia Plan
Sixth Malaysia Plan
Seventh Malaysia Plan
Eighth Malaysia Plan
IMP (1986 - 1995)
IMP2 (1996 - 2005)
Completion of first
half of Vision 2020
IMP3 (2006 – 2020) - Being Formulated
www.mida.gov.my
7
Malaysian Industrial Development Authority
Why Malaysia – 10 Check List
•
•
•
•
•
•
•
•
•
•
Political and Economic Stability
Pro-business Government
Liberal Investment Policies
Transparency of Policies and Efficient
Delivery System
Policy of Welcome
Well Developed Infrastructure
Harmonious Industrial Relations
Trainable and Educated Labour Force
Quality of Life
The Nation’s Track Record
www.mida.gov.my
8
Malaysian Industrial Development Authority
ROLE OF
INCENTIVES
in Malaysia’s Industrial
Development
www.mida.gov.my
9
Malaysian Industrial Development Authority
• Investment incentives are being used as an
important tool, not only to attract investments into
the manufacturing and services sectors, but more
importantly, to achieve the industrial development
policies of the nation over the last 40 years.
• Incentives are provided to promote growth and
development of selected products/activities which
contribute significantly in terms of:
¾ Investment
¾ Value added
¾ Local sourcing
¾ Technology and R&D
¾ Employment of knowledge workers
¾ Socio economic development such as regional
balance
www.mida.gov.my
10
Malaysian Industrial Development Authority
…cont’d
• Incentives are constantly being reviewed with
a view to remove, reduce or improve them
due to the following factors:
¾ Served its purpose, i.e. targeted industries
have reached maturity level
¾ Ineffective in attracting investments
¾ To promote further development of the
targeted industries
¾ To promote new growth areas
www.mida.gov.my
11
Malaysian Industrial Development Authority
PHASES
of Industrial Development
and the Role of Incentives
www.mida.gov.my
12
Malaysian Industrial Development Authority
Late 1950s and in 1960s
Developmental Issues
• Unemployment rose to more than 8%
• Dependency on export commodities i.e.
rubber and tin
• Narrow economic base
www.mida.gov.my
13
Malaysian Industrial Development Authority
Strategies
Promotion of Import Substitution and Labour Intensive
Industries, and Location of Projects in Less Developed Areas
• Introduction of Pioneer Industries (Relief from
Income Tax) Ordinance, 1958
¾ Pioneer Status/tax relief period from 2 to 5 years based on
the amount of capital investment.
• Introduction of Investment Incentives Act, 1968
¾ Extension of Pioneer Status up to 3 years
¾ Investment Tax Credit (ITC) based on capital
expenditure incurred on fixed assets
¾ Labour Utilisation Relief (LUR) up to 5 years based on
employment created
¾ Locational incentive up to 8 years based on capital
investment or employment created
www.mida.gov.my
14
Malaysian Industrial Development Authority
Impact/Result
• Growth of import substitution industries
¾ Food, beverages and tobacco industries
¾ Printing and publishing industries
¾ Building materials industries
¾ Chemicals and plastic industries
¾ Consumer products
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15
Malaysian Industrial Development Authority
The 1970s
Developmental Issues
•
•
•
•
•
•
•
•
•
Unemployment still high
Development of industries constrained by
small domestic market
Lack of domestic capital
Export of manufactured products limited
Export market outlets/expertise limited
Lack of managerial expertise
Lack of technology
Uneven distribution of wealth
Identification of race with economic functions
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Malaysian Industrial Development Authority
Strategies
Promotion of Export-Oriented and Labour Intensive Industries
•
•
•
•
Emphasis on job-creation
Promotion of electronics, textiles and other labour intensive
industries
Push for Foreign Direct Investments (FDI)
¾ Continue to provide tax incentives under the Investment
Incentives Act, 1968
¾ Establishment of FTZs in 1972
¾ Establishment of LMWs in 1974
¾ 100% foreign equity ownership allowed for projects
exporting 80% or more
Introduction of:
¾ Reinvestment Allowance (RA) to encourage reinvestments
¾ Import duty exemption on raw materials and
components/machinery and equipment
www.mida.gov.my
17
Malaysian Industrial Development Authority
Impact/Result
• Major MNCs established electronic
assembly operations in Malaysia
• FDI inflow in textile industry
• Major exporter of semiconductors and
textile products
• Large number of jobs created
www.mida.gov.my
18
Malaysian Industrial Development Authority
The 1980s
Developmental Issues
•
•
•
Global recession (1985-1987)
•
Deepening of industrial sector
Increase in unemployment
Lack of processing of local resources for
export i.e. rubber, palm oil, timber and
cocoa
www.mida.gov.my
19
Malaysian Industrial Development Authority
Strategies
Promotion of Heavy and Capital Intensive
Industries and Resource-based Industries
Introduction of Promotion of Investments
Act, 1986 to replace Investment Incentives
Act, 1968
• Encouraging the development of selected
priority areas in the manufacturing sector
• Promotion of manufactured exports
www.mida.gov.my
20
Malaysian Industrial Development Authority
Incentives Provided
• Pioneer Status (PS) with full tax exemption
• Investment Tax Allowance (ITA) with full tax
exemption
• Abatement of Adjusted Income for Manufactured
Exports
• Abatement of Adjusted Income for Location in a
Promoted Industrial Area
• Abatement of Adjusted Income for Small-Scale
Companies
• Abatement of Adjusted Income for the use of
domestically produced materials which are
incorporated in the manufacture of exports
www.mida.gov.my
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Malaysian Industrial Development Authority
…cont’d
• Abatement of Adjusted Income for purchases
from small scale companies
• Export Allowance
• Double Deduction of Expenses for promotion of
Exports
• Industrial Adjustment Allowance
• Enhancement of the Reinvestment Allowance
(RA) rate from 25% to 40%
Other Measures
• Launching of First Industrial Master Plan, 19851995
• Further liberalisation of equity policy to promote
export-oriented and labour intensive projects.
www.mida.gov.my
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Malaysian Industrial Development Authority
Impact/Result
•
•
•
•
•
•
•
Establishment of Heavy Industries Corporation of
Malaysia (HICOM)
Production of PROTON cars
Establishment of steel mills, cement plants, motorcycle engine projects by HICOM
Growth of rubber based products (gloves, catheters,
latex thread, tyres); cocoa processing; and oleochemical projects based on palm oil
Malaysia becomes leading world exporter of rubber
latex products and oleo-chemicals
Large number of jobs created
Increased inflow of FDI
www.mida.gov.my
23
Malaysian Industrial Development Authority
The 1990s
Developmental Issues
•
•
•
•
•
•
Industrial transition in increasingly complex
global trade and investment environment
No longer low labour cost country. Labour
shortages, both skilled and unskilled
(unemployment rate in 1993 – 3% & 1994 – 2.8%)
Low level of R&D activity
Bottlenecks in support infrastructure
Lack of inter-intra industry linkages
Lack of indigenous technology and marketing
capability
www.mida.gov.my
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Malaysian Industrial Development Authority
Strategies
• Promotion of:
¾
¾
¾
¾
¾
High technology industries
Capital intensive industries
Skill intensive industries
Services based industries
R&D activities
• Accelerate the development of indigenous
technology
• Development of supporting industries
www.mida.gov.my
25
Malaysian Industrial Development Authority
Review of Incentive Scheme under
PIA, 1986
In 1991, overall review of the investment
incentives were undertaken to:
• encourage investments more selectively
• provide greater emphasis on achieving higher
levels of local content, value added,
technology and industrial linkages
www.mida.gov.my
26
Malaysian Industrial Development Authority
Major Changes
•
•
PS and ITA with partial tax exemption
Phased-out the following incentives:
¾ Abatement of Adjusted Income
¾ Locational Incentive
¾ Labour Utalisation Relief
¾ Industrial Adjustment Allowance
¾ Export Allowance
www.mida.gov.my
27
Malaysian Industrial Development Authority
Introduction of New Incentives
• Incentives for high technology projects
• Incentives for strategic projects
• Incentives for R&D activities (Contract
R&D company, R&D company and Inhouse R&D)
• Incentives for industrial training
(Technical & Vocational)
www.mida.gov.my
28
Malaysian Industrial Development Authority
Other Measures
• Launching of Second Industrial Master Plan (IMP2),
1996-2005
¾ Manufacturing Plus Plus Orientation
¾ Cluster Based Industrial Development
• Liberalisation of equity policy (100% foreign equity
ownership allowed irrespective of the level of exports)
• Human resource development
• Development of SMIs - Establishment of Small and
Medium Industries Development Corporation
(SMIDEC)
• Establishment of technology parks
www.mida.gov.my
29
Malaysian Industrial Development Authority
2000 onwards
• Continue to promote:
Manufacturing Activities
¾
¾
¾
¾
¾
¾
¾
¾
www.mida.gov.my
High Value Added Projects (General promoted
products)
High Technology Projects
Strategic Projects
Resource-based Industries
Small Scale Industries
Industrial Linkages
Encourage dispersal of industries
New growth areas (biotechnology, optoelectronics,
wireless technology, advanced materials etc.)
30
Malaysian Industrial Development Authority
•
…cont’d
Promotion of Services Sector
¾ Regional and International Establishments
(OHQs, IPCs, RDCs, REs & ROs)
¾ Integrated Logistics Services (ILS)
¾ Integrated Market Support Services (IMS)
¾ Integrated Central Utility Facilities(CUF)
¾ Knowledge-based companies
¾ Acquisition of high technology and marketing
companies abroad
www.mida.gov.my
31
Malaysian Industrial Development Authority
Major Incentives Provided
•
•
•
•
•
•
•
•
•
Incentives for services sector (Full tax exemption for 10 years for
OHQs,IPCs & RDCs and partial tax exemption for 5 years for ILS,
IMS & CUF)
Special incentives for investments in selected industries (Full
tax exemption for 10 years for specialised machinery and
equipment and oil palm biomass; and 5 years for automotive
industry)
Second round incentives for reinvestments in selected industries
(resource-based industries, food processing, machinery and
equipment, oil palm biomass)
Enhancing tax incentives for promoted areas
Incentives for production of halal food
Incentives for outsourcing of manufacturing activities
Incentives for acquisition of foreign-owned companies or
marketing companies abroad
Extension of the RA period from 5 years to 15 years
Customised incentives
www.mida.gov.my
32
Malaysian Industrial Development Authority
Other Measures
•
Enhancement of the Government Delivery Systems
¾ Removal of many of the conditions imposed in the
Manufacturing Licence (ML)
¾ Adoption of a fast track system for the approval of ML within
seven working days
¾ Adoption of a frast track approval for applications for exemption
of raw materials and components within 14 working days
¾ Establishment of Project Implementation and Monitoring Unit in
MIDA to coordinate and monitor the implementation of projects
¾ Appointment of special project officers at MIDA to hand-hold and
assist investors in obtaining all necessary approvals until they
are operational
¾ Establishment of One Stop Centres at both the local authority
and state levels to expedite the processing and approval of
Building Plans and Certificate of Fitness of Occupation
www.mida.gov.my
33
Malaysian Industrial Development Authority
…cont’d
•
Establishment of State Investment Centres to promote
and facilitate investments in the respective states.
•
Establishment of Business Information Centre in MIDA
to provide comprehensive published information on
investments in the manufacturing and services sectors,
trade, financing, productivity and SMEs
•
•
•
Review of the Industrial Coordination Act, 1875
Review of the Promotion of Investments Act, 1986
Formulation of 3rd Industrial Master Plan
www.mida.gov.my
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Malaysian Industrial Development Authority
PERFORMANCE
of the Manufacturing and
Selected Key Services Sectors
www.mida.gov.my
35
Malaysian Industrial Development Authority
GDP by Industrial Origin
Sector
GDP Contribution (%)
1970
1980
1990
2004
Agriculture,
Forestry & Fishery
32
30
19.4
8.3
Mining & Quarrying
6
6
9.8
7.1
Construction
5
4
3.5
3.0
Manufacturing
17
15
26.6
31.8
Services
40
45
40.7
57.1
Source: Economic Reports
www.mida.gov.my
36
Malaysian Industrial Development Authority
Contribution of Manufacturing Sector
to GDP, Employment and Total Exports
Year
Share to GDP
(%)
Employment
(% growth)
% to Total
Export
2000
33.4
9.2
85.2
2001
31.5
-0.1
85.3
2002
30.1
4.8
87.7
2003
30.8
6.6
82.0
2004
31.8
7.2
82.6
Source: Economic Report 2004/2005
www.mida.gov.my
37
Malaysian Industrial Development Authority
Major Manufactured Exports, 2004
2004
Description
Value
(US$ Billion)
Share of Total
Exports (%)
MANUFACTURED GOODS
99.2
82.6
Electrical & Electronic Products
63.6
50.2
Chemicals & Chemical Products
6.6
5.2
Machinery, Appliances & Parts
4.1
3.2
Wood Products
3.7
2.9
Optical & Scientific Equipment
3.1
2.4
Textiles & Clothing
2.6
2.0
Manufactures of Metal
2.5
2.0
Iron & Steel Products
1.9
1.5
Rubber Products
1.6
1.3
Processed Food
1.6
1.3
Source: Department of Statistics, Malaysia
www.mida.gov.my
38
Malaysian Industrial Development Authority
Investments in Approved Manufacturing Projects
(2000 – September 2005)
Year
No. of
Projects
No. of Projects
Approved
No. of
Employment
With
Incentives
Without
Incentives
Proposed Investment
(US$ Billion)
Domestic
Foreign
Total
2000
805
206
599
88,112
3.6
5.2
8.8
2001
928
287
641
89,440
1.8
4.9
6.7
2002
792
282
510
64,744
1.7
3.1
4.8
2003
965
301
664
77,182
3.6
4.1
7.7
2004
1,101
406
695
88,634
4.1
3.4
7.5
2005
(Jan-Sep)
761
237
524
84,540
2.5
2.7
5.2
Total
5,352
1,719
3,633
492,652
17.3
23.4
40.7
Source: MIDA
www.mida.gov.my
39
Malaysian Industrial Development Authority
Domestic & Foreign Investments in
Approved Manufacturing Projects
(2000-September 2005)
Domestic
42.5%
(US$23.4 Billion)
Foreign
57.5%
(US$17.3 Billion)
Total Capital Investment: US$40.7 billion
Source: MIDA
www.mida.gov.my
40
Malaysian Industrial Development Authority
Domestic & Foreign Investments In Approved Projects by
Major Industries (2000-September 2005)
10.6
US$ Billion
10
Total Investments - US$ 40.7 Billion
Domestic
Foreign
5
2.3
2.5
1.8
1.5
1.3
2.1
1.6 1.5
1.4
0.6
0.9
1
0.7
0
E&E
Basic Metal
Paper
Transport
Petroleum
Chemicals
Food
Source: MIDA
www.mida.gov.my
41
Malaysian Industrial Development Authority
Foreign Investments in Approved Projects By Major
Countries (2000-September 2005)
Germany
15.9%
Japan
13.5%
Singapore
11.2%
UK 5.7%
Korea 4.7
USA
20.7%
UAE 4.3%
Others
15.3%
Netherlands
4%
Taiwan
China 4%
4%
Total Foreign Investment: US$40.7 billion
Source: MIDA
www.mida.gov.my
42
Malaysian Industrial Development Authority
Investments in Approved Services Activities
(As at September 2005)
No. of
Approvals
Average Proposed
Business Spending
(US$ Million)
Operational Headquarters
106
1,163.4
International Procurement Centres
174
4,571.7
9
111.2
543
25.9
Representatives Offices
1,236
31.6
TOTAL
2,068
5,903.8
Type of Establishment
Regional Distribution Centres
Regional Offices
Source: MIDA
www.mida.gov.my
43
Malaysian Industrial Development Authority
Achievements
Period
IMP2* Investment Target
(US$ Billion)
Approval
(US$ Billion)
Per Year
6.6
(RM 25 Billion)
7
(RM26.5 Billion)
(Average)
Cumulative
(1996-2004)
59
(RM225 Billion)
62.8
(RM238.6 Billion)
Note: IMP2 - Second Industrial Master Plan (1996-2005)
www.mida.gov.my
44
Malaysian Industrial Development Authority
CONCLUSION
Lessons Learnt
www.mida.gov.my
45
Malaysian Industrial Development Authority
1. Overall, investment incentives have been an effective
tool to promote investments into targeted industries.
Their effectiveness are measured in the context of
spin offs and multiplier effects to the company,
industry and the country at large. Revenue lost must
result in net gains in terms of:
¾ Investment inflow
¾ Employment creation
¾ Expansion of tax revenue from individual taxes of
employees
¾ Local purchases of goods and services
¾ Market penetration
¾ Technology development and R&D
¾ Creation of other support businesses
www.mida.gov.my
46
Malaysian Industrial Development Authority
…cont’d
2. Tax incentives are not the most influential factor for
investors in selecting investment locations. More
important are the fundamental elements such as
political and economic stability, pro-business
government, liberal investment policies, well
developed infrastructure and trainable and educated
labour force.
3. Nevertheless, given all factors equal among
competing countries, tax incentives can assume a
decisive role in the final location decisions of foreign
companies once the choices are narrowed down to
handful of sites with similar characteristics. In this
regard, tax incentives will enhance the
competitiveness of the country to attract investments.
www.mida.gov.my
47
Malaysian Industrial Development Authority
…cont’d
4.
The granting of investment incentives is not a
phenomena associated only with developing countries.
Developed countries such as USA and UK also provide
substantial incentives in the form of grants to compete
for investments.
5.
For the developing countries, the granting of
investment incentives has to be selective as these are
very costly, can create distortion to the tax system,
reduce tax revenue and pose budgetary constraints to
the host countries. Any measures undertaken to retain
existing incentives or to grant any new incentives, will
depend on the ability and the capacity of the host
countries.
6.
Incentives will need to be constantly reviewed to asses
their effectiveness.
www.mida.gov.my
48
Malaysian Industrial Development Authority
…cont’d
7.
An effective monitoring and enforcement mechanism
will need to be introduced. The role of promotion and
regulatory bodies will need to be clearly
differentiated.
8.
Decision to formulate and review incentives will
require consultation with the various stake holders,
both government and the private sectors in order to
ensure the targeted direction is in line with market
demand/trends, maximise benefits and minimise
bottlenecks.
9.
The grant of incentives must be collectively done
through a committee comprising the relevant bodies,
to avoid abuse of power and to ensure all possible
angles are being considered.
www.mida.gov.my
49
Malaysian Industrial Development Authority
…cont’d
10. Where possible, to aim for fast delivery of decision.
Delegation of authority, clear cut and transparent
criteria and conditions are possible options.
11. Aim for equal treatment to FDI and private domestic
investments (PDI) in the grant of incentives except in
areas reserved for domestic SMEs and projects of
national and security interests.
12. Any move to phase out tax incentives has to be
undertaken gradually and selectively and must be
followed with the reduction of income tax rates. It is
also important to note that any review of incentives
will need to include comparison with competing
countries in order to maintain attractiveness in
promoting investments.
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50
Malaysian Industrial Development Authority
Thank You
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51