An Overview and Examination of the Malaysian Services Sector

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An Overview and Examination of the Malaysian
Services Sector

• Lisa Alejandro
• Jennifer Baumert Powell
• Samantha Brady Pham
• Isaac Wohl
• Office of Industries, Services Division

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Key Findings

• The service sector is a large and growing
  component of Malaysias economy
• Malaysia is one of Asias leading service
  economies, and maintains significant bilateral
  trade and investment relationships with the
  United States
• As part of its current economic strategy, the
  Malaysian government aims to improve the
  competitiveness of its service industries (with
  special emphasis on those segments that provide
  specialized services to Muslims) and has
  introduced various incentives and programs to
  achieve this goal
• Although Malaysia continues to maintain
  significant trade barriers in certain service
  sectors, recent liberalization may lead to an
  increase in service sector exports to Malaysia

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The Malaysian Services Sector

• The services sector accounts for over half of
  Malaysias GDP and employment.
• Wholesale and retail trade and finance and
  insurance account for the largest shares of
  Malaysian service sector GDP.
• Small- and medium-sized enterprises account for
  over 99 percent of Malaysian services companies.

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Government policies have had a significant impact
on the Malaysian services sector

• Bumiputra preferences
• Increased investment in physical infrastructure
• Support for manufacturing-related services
• Policies encouraging service sector investment,
  such as tax incentives and liberalization of
  measures affecting foreign equity participation

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Other factors that affect the Malaysian services
sector

• Growth in disposable incomes and spending power
  in Asia
• Persistent labor shortages

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Malaysian services trade with the world

• In 2008, Malaysian services exports and imports
  each totaled approximately 30 billion,
  accounting for about one percent of world
  services trade and 13 percent of Malaysian trade
• Travel accounts for over half of Malaysian
  services exports, while sea freight transport
  accounts for the largest share of Malaysian
  services imports

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U.S.-Malaysia services trade

• The United States maintains a services trade
  surplus with Malaysia, with exports of 2.0
  billion and imports of 1.3 billion in 2008
• Royalties and license fees and research and
  development services accounted for the largest
  shares of U.S. exports and imports, respectively
  
• In 2007, U.S. affiliate sales to Malaysia
  totaled 3.7 billion, while U.S. affiliate
  purchases totaled 422 million

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Trade barriers and recent liberalization

• Malaysias GATS commitments include significant
  foreign equity limitations, and reserve the right
  to restrict services trade pursuant to
  development goals
• Under its Ninth Master Plan (2006-2010), Malaysia
  has lifted bumiputra equity requirements in
  several service industries, and liberalized
  foreign equity restrictions in the financial
  services sector
• Malaysia has also liberalized services trade
  under ASEAN in an effort to create an ASEAN
  Economic community by 2020

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Potential effects of additional liberalization

• A basic gravity model

• i country i
• j country j
• IM imports
• Y GDP
• D distance

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Potential effects of additional liberalization

• Additional variables
• A adjacency
• CL common language
• REM remoteness
• SFDIR services FDI restrictiveness index

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Potential effects of additional liberalization

• Services FDI Restrictiveness Index

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Potential effects of additional liberalization
Panel regression (random effects), 2000-06
Ordinary Least Squares (OLS), 2004
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Potential effects of additional liberalization
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Potential effects of additional liberalization
Malaysias SFDIR score 0.53 Projected increase
in imports
Liberalize to mean SFDIR score (0.24) Liberalize to minimum SFDIR score (0.04)
Random effects 39.82 67.28
OLS 38.11 64.39
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Industry Profiles
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Banking

• The financial services industry is an
  increasingly important segment of the Malaysian
  economybank assets and employment posted overall
  growth of 76 percent and 11 percent,
  respectively, from 2005 to 2010
• Under its Financial Sector Master Plan, the
  Malaysian government aims to strengthen the
  banking sector through consolidation and reform
• Although domestic firms dominate the sector and
  are well protected by foreign equity limitations
  and other government regulations, Malaysias
  foreign banking sector has grown rapidly
• Most financial services liberalization has been
  focused on Islamic banking, as growth in this
  segment of the market is a government priority

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Healthcare Services

• Malaysia has a growing healthcare services
  industry, and is Asias third-largest provider of
  medical tourism services
• Government incentivesincluding infrastructure
  development, tax incentives, and a telehealth
  initiative, among othershave had a substantial
  and positive impact on Malaysias public and
  private healthcare institutions
• Population growth, economic development, and
  sensitivity toward practicing Muslims have also
  contributed to growth and increasing
  competitiveness among Malaysian healthcare
  services providers
• Many foreign firms have entered the Malaysian
  healthcare market, although the country maintains
  significant foreign equity and employment
  restrictions

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Logistics

• Malaysias logistics sector is growing, and is
  emerging as a logistics hub for halal food
  products, but continues to face strong
  competition from Singapores logistics firms
• The Malaysian government has encouraged the
  development of its logistics sector through
  infrastructure investment and improved policy
  coordination, among other efforts.
• Although Malaysia has made some effort to
  liberalize its logistics sector, it continues to
  maintain significant foreign equity limitations.

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Topics for further analysis

• Examinations of additional Malaysian services
  industries
• Passenger air services
• Insurance
• Further comparisons of Malaysias services sector
  to the service sectors of other countries
• Additional research examining the effect of
  previous services liberalization

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Thank You!