Business Environment Factors in Malaysia

Understanding the Business Environment Factors in Malaysia

Situated along one of the most important maritime routes in the world, Malaysia’s economy is dependent on a mix of natural resources, agriculture and industrial growth. As for being a fertile ground for SME businesses, the government in its Budget 2016 announcement, pledged to invest billions of ringgit into initiatives such as the Malaysian Vision Valley, Cyber City Centre in Cyberjaya, KLIA Aeropolis, Rubber City in Kedah, Samalaju Industrial Park in Sarawak and Palm Oil Jetty in Sabah. It shows that SMEs are highly valued and seen as one of the top contributors to the Malaysian economy.


After gaining independence nearly 59 years ago, Malaysia has been dominated by the same ruling coalition. The coalition has brought together political parties representing different races across the country. Over the past few years, analysts say Malaysia’s political risks are growing as the opposition voice grows louder.

In March, National Australia Bank told Singaporean media, “Political risk has increased with growing tensions seen in the ruling party (and could) potentially impact market confidence in the government’s stability.” While Maybank senior currency strategist countered: “Political risks have always been there, but the key thing is that markets always tend to price in ahead.”

However, if compared to other ASEAN countries, Malaysia is relatively stable, politically, sans riots, military coup and violent efforts to overthrow the government. One thing of note is freedom of speech. Press freedom is restricted and heavily regulated


Malaysia’s GDP was on a trajectory until global oil prices fell, resulting in a lower growth than expected. As the country weans its dependency on oil export, the GDP is largely boosted by SMEs.

The Statistics Department reported that the average compounded annual growth rate of SMEs was 7.1% (2005-2014), higher than the 4.9% growth rate of the Malaysian economy. As a result, SME contribution was from 29.6% in 2005 to 35.9% in 2014. Not forgetting the SME Masterplan 2012 that was launched with the aim to monitor industry development as the country aspires to become a high-income country by 2020.

Bank Negara Malaysia reported that services and manufacturing sectors in Q1 while steps have been taken to diversify other segments such as tourism, construction and technology.

However, growth expansion is hampered by labour shortage, high dependency on foreign workers as well as rising costs. These factors are affecting the manufacturing and construction sectors – either by decreasing productivity or seeking more favourable grounds in China and Vietnam.


The country prides itself as a multi-racial and multi-religious society. However, like many Eastern societies, the older generation holds strong to traditional family values while the younger ones are adopting a more western attitudes.

Malaysia social construct is dominated by Malays, being the largest ethnic group while the rest are made up of Chinese, Indians, native Bumiputras and smaller migrant groups who settled down hundreds of years ago.

Most Malaysians are bilingual, speaking Malay – the national language – and English. Many also speak Mandarin, Tamil and various dialects. Meanwhile business practices put importance on politeness and diplomacy. A good way to bond with clients is through good food and drinks, which Malaysia has an abundance of.


Statistics show that broadband penetration is more than 70% although Internet connectivity is still lagging behind its neighbours. Through government and private efforts, IT startups and entrepreneurs have been growing at a rapid pace. In turn, e-commerce and eB2C models have flourished.

Strong IT infrastructure and hubs such as Cyberjaya and Bukit Jalil Technology Park are an encouraging factor for multinational companies to set up regional operations. Complimenting these efforts are government investment agencies that are helping promote Malaysia.

Strong IT and technological development aspects are also in line with the government’s efforts to push for a knowledge-based economy and an electronic government.


As a former British colony, many Malaysian laws inherited similar to other Commonwealth countries. With that said, there are legislations and regulations made favourable to support flourishing industry development and economic growth.

However, with e-commerce being new, certain areas are still unaddressed. Recently it was suggested online sellers register with the government but that idea was assaulted with criticism. Laws in other areas such as taxation, intellectual property rights, import and export, content and so on are still being improved on.

In a recent Standard Chartered Research survey, SME respondents noted the top constraint affecting growth was government regulations.


For a country with abundant natural resources, Malaysia is faced with numerous environmental challenges – mainly seeking sustainable development. It can be difficult to find the balance between keeping the rainforests pristine and clearing land for oil palm plantations, timber industry, construction and agriculture.

Aside from protecting green lungs dotted around the country and biodiversity especially in East Malaysia, Malaysians are battling transboundary haze. Fires from peat land and slash and burn activities have been affecting the region for 13 years.

ASEAN countries have drawn up an agreement to battle transboundary haze but it has yet to bear tangible fruit. Last year’s air pollution was one of the worst in recent memory. This issue has cost human lives, affect livestock as well as general productivity and health. With this being a regional issue, progress to eradicate it has been slow.

Taking these factors into consideration, Malaysia is still a growing economy and stable ground for entrepreneurs to conduct their businesses. Global brands are able to make their home here as Malaysians possess skills, language and technical abilities to contribute.

Also Read: Social Factors Affecting Business in Malaysia

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