MASTER OF BUSINESS ADMINISTRATION International Business Environment

Executive Summary
This report looks at Malaysia the multiethnic, uppermiddleincome country in terms of a potential country of manufacturing operations for the transnational company Caterpillar Inc. In analyzing the country using the PESTEL model we evaluate the macro-environmental factors and make conclusions on the attractiveness of the market. The method of analysis was through research based on data and reliable information from various governmental agencies from Malaysia and other worldwide organizations which track business trends and collate useable data. Recent publications, newspaper reports on Malaysian market analysis and international business texts were also used to concur. All relevant data and information are included in the appendices. The information in this report is up-to-date till 22/02/2012. After careful consideration of the information available at this current time, the findings revealed that the country is mostly stable in terms of the various environments analyzed. However the political and economic environment is of a little concern mostly due to flip-flop policies and the threat of a global recession due to the Euro crisis respectively. There is also the risk of inflation and low GDP growth due to the spike in global oil prices. Caterpillar should also study individual State laws where they may choose to enter, as these sometimes may differ from Federal legislations. In conclusion Caterpillar may enter Malaysia after the impending elections due this year. This is to reduce its entry risk and prevent it from being a victim of any flip-flop policies (i.e. minimum wages) which may differ from those already in this reports findings. Further research can also be undertaken to decide if joint ventures or acquisitions are viable options to reduce risks for entry. The limitations of this report are that information used in the analysis are mostly of past trends and do not reflect substantially current market situations. Hence it is crucial for Caterpillar to watch the market for any new developments which the scope of this report has not covered. The critical views expressed are based on my risk propensity. Ultimately Caterpillar has to decide on the course of action based on its risk adverseness.
2

Introduction
Background information of Caterpillar Inc. I will be analyzing the transnational company Caterpillar Inc. using the PESTEL model on its potential manufacturing entry into Malaysia. By definition a transnational company is one which has invested in foreign operations, has a central corporate facility but gives decision-making, R&D and marketing powers to each individual foreign market.i Caterpillar definitely fits the bill with its vast worldwide operations through various modes of market entry strategies and decentralized decision making. Caterpillar Inc. which is also known as CAT is a corporation listed on the New York Stock Exchange.ii CAT is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company is also a service provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services, Caterpillar Logistics Services and Progress Rail Services. Overseas markets penetration CAT has a global dealer network of more than 200 in a 178 countries. This global network is one of their most important competitive advantages. Most of these dealers have had relationships with CAT for at least two generations. Hence these dealers provide an excellent insight into local market conditions whilst reducing the business risks for CAT at that particular market. CAT also has 50 manufacturing facilities in the United States alone and another 65 worldwide catering to its vast dealers providing excellent support capabilities. Much of CATs growth has been through acquisition strategies worldwide. Through acquisitions CAT has been able to penetrate foreign markets quickly and gain greater market share. As Asia is still forecasted to grow albeit at a slower pace due to the Euro crisis, CAT has an impetus to develop a manufacturing plant in South-East Asia to cater to this growing region.iii The rising GDP in growth markets such as Brazil, India and China, the large emerging middle class with a higher standard of living coupled with increased urbanization, increase need for infrastructure are just some of the drivers fueling their growth performance. Figure.1 shows the various other factors.
3

Figure.1 Factors driving Caterpillar performance (source: Caterpillar annual reports) These driving forces hence call for increased production to cater to emerging markets which entails setting up a manufacturing facility in a country with good connectivity network, infrastructure to support the industry, and policies which encourage investments as well as a stable, growing economy. Overview of Malaysia In choosing a country to set up a Foreign Direct Investment (FDI) for manufacturing, the various driving factors mentioned earlier would put Malaysia in a suitable position. Malaysia is a federal constitutional monarchy in Southeast Asia. It consists of thirteen states and three federal territories. Land borders are shared with Thailand, Indonesia, and Brunei, and maritime borders exist with Singapore, Vietnam, and the Philippines. In 2010 the population exceeded 27.5 million, with over 20 million living on the Peninsula.iv The country consists of 3 main ethnic
4

groups namely Malays 50.4%, Chinese 23.7% and Indians 7.1%. The official language is Bahasa Malaysia and Islam is the predominant religion, however English is spoken widely especially in the capital areas.v This upper middle income society has relied heavily on income derived from natural resources to engineer a diversification towards manufacturing. Their natural resources include tin, petroleum, timber, copper, iron ore, natural gas and bauxite. Most of the governments revenue is from the state owned oil producing company Petronas and there is now a move to have lesser reliance on this major source. According to the Third Industrial Master Plan (IMP3) published by the Ministry of International Trade and Industry (MITI) Malaysias push towards global competitiveness is through the transformation and innovation of the manufacturing and services sectors. In the 12 industries targeted by the Government, manufacturing of machinery and equipment is listed as one of the non-resource based industries targeted thus reducing micropolitical risk for CAT. These targeted growth areas include the strategic thrust of the IMP3 so as to encourage MNCs to establish and expand operations in Malaysia whilst providing them a favorable environment to invest in.vi In Malaysia, FDI has been considered the most important contributing factor to its economic success.vii (The Straits Times, 22 February 2012, Malaysias foreign direct investment soars to $14b, Appendix A)

PESTEL Analysis
Political environment overview Malaysia is a democratic multi-ethnic society with the predominant political party United Malays National Organization (UMNO) holding power since its independence in 1957. UMNO is part of the coalition of Barisan Nasional consisting of two other race based parties namely the Malaysian Chinese Association (MCA), and the Malaysian Indian Congress (MIC).viii Most of Malaysias economic development gathered during the reign of its former Prime Minister Mahathir Mohamad from 1981 -2003.ix During his period in office he emphasized the importance of economic development specifically the export sector. His end of tenure was one muddled with the falling out with his deputy Anwar Ibrahim which has had repercussions on Malaysian politics till date. Anwar Ibrahim with his newly formed Pakatan Rakyat party has
5

managed to garner considerable seats in parliament at the last elections and has now renewed his challenge to the current Premier Mohd Najib for the coming elections slated for this year.x

Evaluating the political environment

I will be adapting some of the criteria of quantifying political risk from Dichtl and Koeglmayr (1986) in evaluating the political risk. As the list is quite exhaustive I have chosen a few key areas which I feel are more critical to evaluate. For a complete list of the criterias please refer to Appendix B. Although the risk scores given are subjective and are based on my perceptions from the research material available to me, they are relevant events and circumstances which may affect companies planning to invest in Malaysia. Of course ideally these scores must be continually reviewed to reflect the present time. 1. Stability of political system Minimum Score 3 8 Score Maximum Score 14

The last elections held in March 2008 have exposed the falling political strength of BN somewhat. According to the Economist Intelligence Unit (EIU) from their research over the last 50 years or so political stability in Malaysia was dependent on 3 calming factors.xi the firm power enjoyed by the BN coalition; the tight control the United Malays National Organization has exerted over the BN; the continued support of the Malay majority for the United Malays National Organization

Yet in the 2008 elections these factors were weakened to some extent. The ruling party has also lost the support of the Malay majority. EIU also reports that there is dissatisfaction among the political parties in Sabah and Sarawak with BN and these could erode their power base. With the
6

impending elections due this year BN is still widely expected to win two thirds majority to make constitutional changes unchallenged. It would be advisable for Caterpillar to wait for the elections to happen before making any decision to invest in Malaysia as a sudden change of government however remote can have disastrous macro-political effects on them. However the likelihood of this risk happening is low but the impact is high.xii (Neutral) 2. Reliability of the country as trading partner Minimum Score 4 Score 9 Maximum Score 12

As for being a reliable trading partner Malaysia is a member of these regional and international integration agreements, ASEAN, APEC and WTO. As highlighted earlier on the importance of FDI inflows to Malaysia's economy, companies have the confidence in Malaysia to be a reliable trading partner due to its adoption of the rule based multilateral trading system under the World Trade Organization (WTO). It is also pursuing regional and bilateral trading arrangements to complement the multilateral approach to trade liberalization. Malaysia has signed a number of Free Trade agreements (FTA) aimed at providing quicker access to markets between the participants of the FTA. Malaysia at the moment does not have an FTA with the United States where CATs HQ is based.xiii However both countries are negotiating a regional FTA, the TransPacific-Partnership with others.xiv In protecting foreign investment, foreign investors are theoretically guaranteed against expropriation of property without compensation by virtue of Article 13 of the Federal Constitution. Malaysia is also a member of the Convention on the Settlement of Investment Disputes (ICSID) since 1966.xv According to the World Bank Group outfit Doing Business rankings of countries in the ease of doing businesses, Malaysia is ranked 4th in East Asia and the Pacific (Appendix C) and a credible 18th in the world rankings of a 183 countries.xvi Caterpillar can be assured of Malaysia as a
7

reliable trading partner due to the various integration agreements mentioned. As Malaysia relies more and more on FDI for economic progress they would not want to jeopardize their standing in the international markets by creating any issues which may deem them an unreliable country to do business in. (Positive) 3. Effectiveness of public administration Minimum Score 3 7 Score Maximum Score 12

Public administration effectiveness in Malaysia has been improving all the time but there have been instances on policy flip flops.xvii It takes 11 procedures and 14 days to establish a foreignowned limited liability company (LLC) in Kuala Lumpur, Malaysia. This is faster than both the average for Investing across Borders (IAB) countries in East Asia and the Pacific and the IAB global average. A study in Management Capability Index (MCI), in 2010, shows that Malaysian government agencies performed 72% of its potential 100% capability, which is regarded as an average performance and has potential to move to good and greater performance. The MCI is made up of ten major drivers of management capability that deliver profitable growth. The driver category and scores are shown in Table.1 for year 2010.xviii

Table.1 Ranking of Malaysian MCI 2010 Index Table.1 shows that Malaysian agencies scored the highest in Integrity and Corporate Governance and Financial Management. This was followed by the categories highlighted in green with scores above 70. This can suggest that the agencies are consistently committed to good practices and structures with improvements being made. The primary value of the MCI is to identify areas where improvements can be made. From the index we can see that urgent attention is needed for Organization Capability as it is the only category dropping below the 70 mark.

Table.2 Variance of 2010 2008 Malaysian MCI Indexxix Table.2 depicts the comparison of the MCI index for 2008 and 2010. It indicates that Malaysias MCI 2010 Index surpasses that of 2008 in all categories. This suggests an improvement of management capabilities for Malaysian government agencies in varied areas. However, organizations are yet to achieve organizational excellence as they should aim to achieve 80 out of 100 for all capabilities. According to Transparency International, Malaysia has a lowly score of 4.3 out of 10 in the Corruption Perceptions Index for 2011. The Corruption Perceptions Index ranks countries based on how corrupt their public sector is perceived to be. A countrys score indicates the perceived level of public sector corruption on a scale of 0 - 10, where 0 meaning that a country is perceived as highly corrupt and 10 meaning that a country is perceived as very clean. A country's rank indicates its position relative to the other countries included in the index. Malaysia is ranked 60th in a list of 183 countries.xx Although the public administration has seen a 4.3% increase from 2008 to 2010 in performance according to the MCI index there is still evidence of corruption and policy flip flops in the Government. As such Caterpillar would be wise to put in place measures to reduce exposures to these risks. (Negative)
10

4. Labour relations and social peace Minimum Score 3 9 Score Maximum Score 15

Historically Malaysia has had incidents of racial riots as well as other political rallies which have had disturbing effects on the country.xxi
xxii

There were even incidents of civil unrest last year in

downtown Kuala Lumpur. These street protests were against the ruling government for electoral reform.xxiii These protests will spook foreign investors who are worried that any groundswell of anti-government sentiment could delay economic reforms seen essential to draw investment. In a country where there is one dominant race in the civil service, frequent racial tensions stoked by a variety of reasons are a norm. For instance just recently a customer was attacked by a Kentucky Fried Chicken employee after some words were exchanged due to poor service.xxiv Someone took a video of the attack and it soon went viral on the internet where netizens exchanges racial slurs.xxv In another incident a church was fire-bombed after it used the word Allah in reference to god.xxvi A recent newspaper article also reported that 11% of Chinese and Indians think that the 1Malaysia policy introduced by current premier Najib Razak is a political ploy to secure electoral gains. (Appendix D) Malaysia is generally a peaceful country but there are instances where stability can be affected due to many reasons beyond a companys control. Even the government has difficulties to balance expectations of the many races when any incident happens. As such companies investing in Malaysia must be aware of this medium to high risk on their operations. Again Caterpillar must weigh the risk and have contingencies to deal with these sensitive situations should they arise. (Neutral)

Evaluating the economic environment

Banking system
11

Banks in Malaysia are supervised by Bank Negara Malaysia (BNM) the central bank. Besides the commercial banks, merchant banks and finance companies there are also the Islamic banks that operate on Islamic principles to fill the void in the existing banking system.xxvii The Base Lending Rate (BLR) is currently at 6.6%. xxviii (Positive) External threats Malaysia like most nations will be looking to the Euro zone sovereign debt crisis and the fate of the Euro in order to gauge if their economy will perform better in 2012. The spike in oil prices will also lead to higher inflation and low growth. xxix With world growth forecast being cut and some predictions of a recession in sight in the Euro zone, demand for Malaysian exports will be curtailed somewhat. Malaysian exports to the EU have dropped from an average of 9.4% of GDP from 2001 to 2008 to 7.4% between 2009 and 2010 (ADB, Asia Economic Monitor 2011). Exports to the US have declined even more dramatically in the same period from 17.6% to 9.6%. In contrast, the China export market grew from 6.7% to 14.6%. Weaker demand from the Euro zone is definitely a worry for Malaysia but the greater worry is the slowdown in the Chinese economy due to domestic constraints such as power shortages, rising wages, threat of inflation and a property bubble.xxx These can put a dampener on Caterpillar's manufacturing operations as demand from these critical markets are expected to hit a slowdown. (Negative) Internal threats There is also a threat of slowing domestic demand due to the dimming external outlook. This is worrying as growth is dependent more on domestic consumption due to external factors mentioned earlier. With the 2012 Budget touted to be an election budget experts have also cautioned the government on greater fiscal discipline by restraining budget deficit growth.xxxi

12

One very important announcement which can affect all companies operating in Malaysia is the national minimum wage. This announcement which is much anticipated by workers, trade unions and employers will have an effect/risk on competitiveness, inflation and unemployment and company survival.xxxii The current minimum wage in force is only for plantation workers. (Negative)

With the elections expected this year this normally means there will be programmes tailored to ensure economic conditions are favorable and the business climate is conducive. After taking into account the points mentioned above Malaysia still seems capable of handling any uncertain economic conditions due to its available resources and policy capacity. Hence Caterpillar can enter the market on this point albeit being cautious about the minimum wage announcement which can have detrimental effects on its bottom line. The table on the left gives a snapshot of the economic situation in Malaysia.

Source: Economic Planning Unitxxxiii

For a more detailed picture of Malaysias economic state please refer to Appendix E.

Evaluating the sociocultural environment

Cultural evolution
13

From its beginning Malaysia has been a meeting point of a diverse range of external cultures and religions. As a result of these external influences the Malay culture has emerged. Present day Malaysia represents a multiracial fusion of Malay, Chinese and Indian traditions creating a pluralistic and multicultural nation that has its character entrenched in social harmony, religion and pride in its ancestral background. In representing such a rich cultural heritage, acquiring the right skills and cultural knowledge in order to conduct business in Malaysia is pertinent to your success here. (Neutral) Cultural practices One important factor in Malaysian culture as with most Asian cultures is the concept of face. To lose face is to suffer public embarrassment. From a business context it is crucial to save face and causing your Malaysian business counterpart to lose face may influence the outcome of your business dealings negatively. In a high context culture such as Malaysia meaning is often more explicit and less direct as compared to many western cultures. This basically means words have lesser importance and greater importance must be given to additional forms of communication. More information is provided on culture context in Appendix F.xxxiv Being a predominantly Muslim country scheduling a business appointment during prayer times and on Fridays are not expected.xxxv Punctuality varies with the different races. The Chinese are usually more punctual as compared to the Malays and Indians who take a more relaxed attitude to time. If there are dealings with government officials as in the case would be for Caterpillar, then they should ensure all communication takes place in the language of Bahasa Malaysia. Most other Malaysian companies use English to correspond. Other business etiquettes are covered in Appendix G.xxxvi (Neutral) Cultural dimensions In relating Geert Hofstede (1980) cultural dimensions to Malaysia we can see that there is a high correlation between the Muslim religion and the Hofstede Dimensions of Power Distance (PDI) and Uncertainty Avoidance (UAI) scores. The combination of these two high scores (UAI) and (PDI) create societies that are highly rule-oriented with laws, rules, regulations, and controls in order to reduce the amount of uncertainty, while inequalities of power and wealth have been allowed to grow within the society. xxxvii Analyzing the other 2 dimensions of Individualism
14

(IDV), and Masculinity (MAS) reveal Low and Average scores respectively. For the complete analysis refer to Appendix H. Being an American transnational firm Caterpillar has to assess the cultural compatibility of international operations as this critical aspect can lead to business failure if mismanaged. Sociocultural risk can be reduced to manageable levels as long as the market where the company is entering is studied and the relevant skills are employed to reduce this risk. On this dimension of risk Caterpillar can enter Malaysia as long as due diligence is done as there are no extremes in culture in Malaysia which may hamper business operations. If Caterpillar's final decision is to enter the Malaysian market through an alliance instead of a Greenfield operation then the Eight Stage Process for Cultural Compatibility by Fedor and Werther (1996) and the compressed Four Key Strategies version by Brett et al. (2006) may be useful as shown in Appendix I together with more psychographics and sociographics information.xxxviii (Neutral)

Evaluating the technological environment

Technical infrastructures Malaysia is one of the more technologically developed countries in the Asean region. They persistently engage in modern technologies for greater advantage for manufacturers. It has a well developed infrastructure where telecommunications network is served by digital and fiber optic technology.xxxix The government has even set up the Malaysian Technology Development Corporation to concentrate on the promotion and commercialisation of local research and invests in new ventures that can bring in new technologies from abroad.xl Being an economy open to new technology this can only mean that investing companies like Caterpillar can employ new processes of production which can raise productivity and output. According to the International Telecommunication Union 64.6% of the Malaysian population is wired to the internet.xli The Economist Intelligence Unit (EIU) forecast internet penetration rate in Malaysia is estimated to reach 77% by 2015. See Table.3 for details. (Positive)

15

Table.3 Malaysian Internet Penetration Forecast New energy generation sources Malaysia is exploring new renewable energy options including biomass, biogas, minihydropower systems, solar photovoltaics, nuclear and generating electricity from municipal waste.xlii These measures would ensure long term energy needs are met. Entry of Caterpillar into the Malaysian market would also mean technology transfer for domestic companies. This can be in the form of an internalized or externalized transfer of technology.xliii As an open economy to technology, Malaysia is an attractive proposition for Caterpillar in terms of the technological environment. They can also be assured of incentives from the government for research and development as these already exists.xliv (Positive)

Evaluating the ecological/environmental environment

Environmental issues Despite the many laws protecting the environment in Malaysia (Appendix J) they still face problems of deforestation, pollution of inland and marine waters, soil and coastal erosion, overfishing and coral reef destruction, along with air pollution, water pollution and the problem of waste disposal.xlv This is due to a variety of reasons such as lack of resources to police the laws, characteristics of the civil society and lack of coordination between agencies. However the government is trying its best to control environmental degradation to promote sustainable development. (Negative) Bilateral agreements

16

Malaysia had various bilateral or multilateral environmental commitments through agreements, resolutions, declarations and international conventions.xlvi They are also trying to reduce CO2 emissions by 40% by the year 2020. According to a lifestyle survey conducted in Malaysia, 54% answered yes to this question, Despite the need to preserve the environment, I do not want to lose my current richness and convenience. xlvii Table.4 shows its position relative to the 12 other countries. (Neutral)

Table.4 Countries surveyed and their positions Sustainable development Caterpillar is being serious about sustainability as mentioned by them meeting the needs of the present without compromising the ability of future generations to meet their needs. xlviii We can see that their remanufacturing division already says alot about the company and its sustainable development policies. Although Malaysia is still grappling with environmental controls, the laws are in place for investors to follow. Companies like Caterpillar can benefit from these laws and take advantage of them for their benefit in promoting themselves as an organization which is serious about going green. (Positive)

Evaluating the legal environment

Legal system

17

The legal system of Malaysia was modeled after the English legal system of common law. Legislative power is divided between federal and state legislatures. The federal government has the authority over external affairs. There are state laws governing local governments and Islamic law enacted by the state legislative assembly which applies in the particular state. (Neutral) Foreign Equity policy In terms of foreign equities policies, previously manufacturing projects had been governed by the level of exports for their equity participation but now foreign investors can hold 100% equity irrespective of the level of exports.xlix (Positive) Monopolies and restraint of trade Malaysia does not have any antitrust legislation or a formal definition of monopoly. It is a free enterprise economy. The government has gazetted The Malaysian Competition Act due to come into force very soon. The act is anti-monopoly and anti-cartel includes anti-competitive agreements, abuses of dominant position and mergers having the effect of substantially lessening competition.l This protects investors from abuses arising from collusions. (Positive) Intellectual property protection Malaysia is a member of the World Intellectual Property Organization (WIPO) and a signatory of the Paris Convention for the protection of industrial property. It has also signed the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). IP protection in Malaysia consists of trademarks, patents, copyright, industrial designs etc. There is an intellectual property court and the government has a National Intellectual Property policy. Hence intellectual property (IP) protection in Malaysia conforms to international standards and provides protection to both local and foreign investors. (Positive)

Exchange controls The central bank handles all foreign exchange controls. Repatriations of capital, profits and income, which include dividends, interests, royalties, rental and commissions are freely permitted. (Positive)
18

Tax Breaks The government provides tax breaks for manufacturing companies in the form of, Pioneer status, Investment Tax Allowances and Reinvestment Allowances.li (Refer to Table.4 below) (Positive) Labour legislations The main labour laws include the Employment Act 1955, the Trade Unions Act 1959, the Industrial Relations Act 1967, the Employees Social Security Act 1969 and the Employees Provident Fund (EPF) Act 1991. Normal working hours are limited to 48-hours or six days per week at eight hours per day. A 44-hour working week is common for industrial and office employees. An employer must contribute to an employee EPF fund which is tax deductible. (Neutral) Employment of foreigners It is widely encouraged that foreign firms hire Bumiputras (indigenous people) at all levels proportional to the local ethnic composition. The government also requires ALL foreign investment firms to set up training programmes for their Malaysian staff and plan for gradual replacement of expatriates (except those holding key posts) by Malaysians. However a labor shortage has compelled the government to be more flexible in applying these policies.lii Malaysia has some sound legal policies in place for foreign investors to come in confidently and do business. But as we saw with its bending of certain rules to meet current market conditions these may not always be favorable to foreign companies. This again relates back to our earlier comment on their flip-flop policies. Caterpillar should beware of these legal risks and make provisions for these dynamic risks. (Negative)

19

Table.4 List of tax breaks for manufacturing firms

20

Conclusion
From the PESTEL analysis we have seen that in each environment analyzed we have found that there are potential risks which may affect Caterpillars manufacturing entry plans into the Malaysian market. Based on these analyses it was found that the political and economic risks are the two most crucial elements. Caterpillar being a transnational company should be able to put in place various measures to moderate the other environmental risks as it has a global workforce which can manage these risks from experience. However factors beyond their control like government policies and global economic health may have detrimental effects on them. These risks can be reduced if Caterpillar chooses to enter the market through a Joint Venture (JV) or acquisition but feasibility studies must be conducted prior. Hence they should look closer at the dynamic political and economic environment before making any foray into the Malaysian market.

21

Appendix A -The Straits Times, February 22 2012, Pg. A14 Malaysias foreign direct investment soars to $14b

22

Appendix B Selection criterias for Evaluating Political Risk

Appendix A - Selection Criteria for Evaluating Political Risk S core Minim um Ma um xim 3 14 0 14 0 12 5 9 4 12 2 12 3 12 3 15 4 8 2 10 2 7 3 10 2 10 3 7 2 8 2 8 2 14 4 8 2 14 2 10 2 10 3 9 3 9 3 9 2 8 2 7 2 9 3 14 3 8 2 8

Major Area Political Economic Environment

Domestic Economic Conditions

External Economic Conditions

Criteria 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Stability of political system Imminent internal conflicts External threats to stability Degree of control of the economic system Reliability of the country as a trading partner Constitutional gurantees Effectiveness of public administration Labour relations and social peace Size of the population Per capita income Economic growth over the last 5 years Potential growth over the next 3 years Inflation over the past 2 years Accessibility of the domestic capital market to outsiders Availibility of high-quality local labour force Possibility of employing foreign nationals Availibility of energy resources Legal requirements regarding environmental pollution Infrastructure, including transportation and communication systems Import restrictions Export restrictions Restrictions on foreign investment Freedom to set up or engage in partnerships Legal protection for brands and products Restrictions on monetary transfers Revaluation of the currency during the last 5 years Balance of payment situation Drain on foreign funds through oil and energy imports International financial standing Restriction on the exchange of local money into foreign currencies

Source: Adapted fromDichtl and Koeglmayr (1986), p.6.

23

Appendix C Ease of doing business rankings in East Asia and Pacific

Economy Singapore Hong Kong SAR, China Thailand Malaysia Taiwan, China Tonga Samoa Solomon Islands Vanuatu Fiji Brunei Darussalam Mongolia China Vietnam Papua New Guinea Marshall Islands Kiribati Palau Indonesia Philippines Cambodia Micronesia, Fed. Sts. Lao PDR Timor-Leste Ease of Doing Business Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Source: www.doingbusiness.org/rankings
24

Appendix D The Straits Times, February 20 2012, Pg. A13 Many still not won over by 1Malaysia.

25

Appendix E Key Malaysian economy figures Labour force 12.47 million as of November 2011 (www.statistics.gov.my) Unemployment rate 3.1% as of November 2011(www.statistics.gov.my)

Monthly Manufacturing Statistics Malaysia December 2011

1. Sales Value year-on-year growth of 1.1% (positive impact) 2. Average salaries and wages per employee Increase of 12% month-onmonth to RM2615 (negative impact on bottom line but positive in attracting employees) 26

3. Productivity Increase of 3.4% month-on-month (positive impact) 4. Number of employees decrease of 0.4% (negative impact)

Gross Domestic Product (GDP) 2010 RM 765,965 Million Gross Domestic Product (GDP) Percentage growth from 2009 7.2% Gross Domestic Product (GDP) Per Capita (PPP) US$ 14,700 Gross National Income Per Capita US$7,547 GDP Growth from 2000 2010 Historically, from 2000 until 2010, Malaysia's average quarterly GDP Growth was 1.17 percent reaching an historical high of 5.90 percent in September of 2009 and a record low of -7.60 percent in March of 2009

Data from World Bank Trade Restrictions there are several barriers to trade and investment that still constitute potentially important distortions to competition and thus potential impediments to Malaysia's long-term development. (http://www.wto.org/english/tratop_e/tpr_e/tp180_e.htm)

27

BLR: is a minimum interest rate calculated by banking institutions based on a formula which takes into account the institutions cost of funds and other administration costs. This is defined by the central bank.

28

Appendix F - High Context and Low Context Cultures High Context Cultures Define personality more in terms of the group than the individual Low Context Cultures Are more individualistic than group oriented

Tend to have a high sensory involvement (low Tend to have low sensory involvement (high boundaries in terms of personal space) boundaries in terms of personal space) Initiate and receive more bodily contact when talking Convey more information via explicit codes which do not rely so heavily on non-verbal language Are monochronic, i.e. time is viewed in more linear terms involving punctuality and tight scheduling

Are polychronic, i.e. time does not have a totally linear aspect so that punctuality and scheduling have low priority

Adapted from:W.Stuart, M.Sonal, R.Bronwen, International Business (3rd edition). 2010. Prentice Hall. Pg. 173, Table 5.1

Appendix G Malaysian Business Etiquette (Do's and Don'ts)

29

1. DO be patient with your Malaysian counterparts during business negotiations. The process is often a long and detailed one that should not be hastened. 2. DO remain polite and demonstrate good etiquette at all times. Elderly Malaysian business people for example should be treated with respect and always acknowledged before younger members of the organization. This is an essential part of achieving successful business dealings in Malaysia. 3. DO take time to establish productive business relationships with your Malaysian colleagues. Initial meetings are generally orientated towards developing such relationships and will be maintained throughout and beyond the negotiations. Without them, your business plans may be fruitless. 4. DONT assume that a signed contract signifies a final agreement. It is common for negotiations to continue after a contract has been signed. 5. DONT be surprised if your Malaysian counterparts ask what you may consider to be personal questions. In Malaysia, asking people about their weight, income and marital status for example, is not uncommon and is viewed as an acceptable approach to initial conversations. 6. DONT enter into business with a Malaysian company without a letter of introduction from a bank or mutual acquaintance. This will help your request for a future meeting, as Malaysians prefer to conduct business with those they are familiar with.

Source:http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-onmalaysia/

Appendix H - Geert Hofstede Cultural Dimensions

30

1. Power Distance Index (PDI), High Suggests that the degree to which the less powerful

members of organizations and institutions (like the family) accept and expect that power is distributed unevenly. This represents high inequality. It implies that a societys level of inequality is allowed by the followers as much as by the leaders. 2. Individualism (IDV), Low - Collectivism, that is the degree to which individuals are integrated into groups. Given that the IDV index of Malaysia is low, it is implied that collectivism is more manifested than individualism in its culture. On the individualist side we find societies in which the ties between individuals are loose: everyone is expected to look after him/herself and his/her immediate family. On the collectivist side, we find societies in which people from birth onwards are integrated into strong, cohesive in-groups, often extended families (with uncles, aunts and grandparents) which continue protecting them in exchange for unquestioning loyalty. The word collectivism in this sense has no political meaning: it refers to the group, not to the state. 3. Masculinity (MAS), Average There is no eminent distinction of how roles are distributed in Malaysia as according to gender. The index shows moderately-low to average in terms of masculinity. The gap between the two gender roles is not that great which may signify equality between the roles. 4. Uncertainty Avoidance Index (UAI), Moderately-Low - Uncertainty avoiding cultures try to reduce the chance of such situations by strict laws and rules, safety and security measures, and on the philosophical and religious level by a belief in absolute Truth. Malaysia exhibits a moderately-low index, which suggests that the society has a tolerance for uncertainty and ambiguity. The society might be relatively comfortable in unstructured situations which are novel, unknown, surprising, and different from usual.

Source:http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-onmalaysia/ Appendix I Eight-stage process for cultural compatibility

31

1. Corporate cultural profiles. You can't create cultural compatibility unless you first

realize where you are coming from. For this reason, it is important to have an idea of the original corporate culture for each of the partners before working out cultural compatibility. There are, of course, many different ways of carrying out cultural audits. Fedor and Werther suggests that the corporate culture can be defined by the unique set of beliefs and methods of problem-solving which underpin each company activities.
2. Cultural incompatibility identification. At this stage, teams can compare profiles and

identify problem areas. Such exercises usually reveal ambiguities and inconsistencies that should not be ignored. It could also reveal areas of mutuality that may have gone unnoticed.
3. Development of a joint business purpose. Teams need to agree on the nature of their

purpose by reaching consensus about business objectives such as desired rate of return, market shares, salaries, growth and time targets. This should uncover areas where there is any divergence. Recording such divergences early might help avoid future misunderstandings.
4. Operational independence. Both parties need to agree the degree of operational

independence they are hoping to achieve. The degree of independence will depend on how much each party is prepared to reveal about their working practices without making their partners more formidable competitors.
5. Structural choice. The legal structure chosen for the alliance must take into account the

desired culture. The variety of structures are wide: from open-ended joint ventures with varying ownership splits, through to time-specific technology sharing contracts. The choice is likely to be driven by deep-seated cultural preferences. For example, Americanbased partners often gain operational control by choosing a structure that gives them the final say in significant decisions, typically secured through majority ownership. This may, however, create obstacles in the design of an international alliance.
6. Management systems agreement. It is vital that these factors be taken into considerations.

Management systems reflect deeply embedded ways of working that are often manifested in working practices. For example, in the failure of the Colgate-Palmolive/Kao joint
32

venture in the shampoo production, it was the Colgate marketing force that set up the marketing and distribution programme. Even the Colgate people questioned whether the market perspectives and practices successful for toothpaste would work for shampoo. In this way, the culture of the joint venture emerged unconsciously from Colgate's desire to maintain control. These were the driving forces creating the international alliance, rather than the unique needs of the shampoo business.
7. Staffing the international alliance. Care needs to be taken in selecting the managing

director and key senior officers, since corporate cultures tend to be embodied in the values and beliefs of the people who work in them. Careful discussion will also be needed as the job specification and responsibilities, which may reveal deep-seated values about how organizations should be run.
8. Assessing the international alliances demand on the parent company culture. It is

equally important to have a clear picture of what changes may be required in the parent company's culture. How will those changes be made? By whom? These questions may yield further insights into the cultural expectations companies. Four key strategies team managers might use to enhance the effectiveness of multicultural teams
1. Adaptation: team members adapt practices or attitudes themselves, without changing the

and capabilities of the respective

team membership or the tasks allocated.

2. Structural intervention: removing sources of conflict or inter-personal frictions by

formally re-organizing the team or redistributing tasks.

3. Managerial intervention: leader (s) intervene to establish norms of behavior and decision

making that take account of the multicultural characteristics of the team and/or establish networks of communication that are tailored to suit the different subgroups in the team.
4. Exit: removing one or more members from the team.

Other psychographics and sociographics

33

1. Major languages: Malay (official), English, Chinese dialects, Tamil, Telugu,

Malayalam
2. Major religions: Islam, Buddhism, Taoism, Hinduism, Christianity, Sikhism 3. Life expectancy: 72 years (men), 77 years (women) 4. Monetary unit: 1 ringgit = 100 Sen 5. Main exports: Electronic equipment, petroleum and liquefied natural gas, chemicals,

palm oil, wood and wood products, rubber, textiles Sex ratio At birth: 1.07 male(s)/female under 15 years: 1.06 male(s)/female 15-64 years: 1.01 male(s)/female 65 years and over: 0.78 male(s)/female total population: 1.01 male(s)/female (2008 EST.) Income Comparison Malaysia has the largest gap between rich and the poor in Southeast Asia, where the top 10 percent is 22.1 times richer than the poorest 10 percent. The richest 10 percent in Malaysia controls 38.4 percent of the country's economic income as compared to the poorest 10 percent controlling 1.7 percent. Income parameters 8.6 percent of households earn below RM1,000, followed by about 29.4 percent of households who earn between RM1,000 and RM2,000.19.8 percent of households are in the RM2001RM3,000 income bracket, RM3,001-RM4,000 (12.9 percent), RM4,001-RM5,000 (8.6 percent), RM5,001-RM10,000 (15.8 percent) and above RM10,000 (4.9 percent).In short, almost 40 percent of households in Malaysia earn RM2,000 and below. At the other end of the scale, about 20 percent of households earn more than RM5, 000 a month.

Appendix J Environmental Laws in Malaysia 1. Environmental Quality Act 1974 (Act 127) - www.doe.gov.my
34

I. Environmental Quality (Licensing) Regulations 1977 [P.U.(A) 198/77] Ii. Environmental Quality (Prescribed Premises) (Crude Palm Oil) Order 1977 [P.U.(A) 199/77] Iii. Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations 1977 [P.U.(A) 324/77] Iv. Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Order 1978 [P.U.(A) 250/78] v. Environmental Quality (Clean Air) Regulations 1978 [P.U.(A) 280/78] vi. Environmental Quality (Compounding of Offences) Rules 1978 [P.U. Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Order 1978 [P.U.(A) 250/78] A) 281/78] Vii. Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Regulations 1978 [P.U.(A) 338/78] viii. Environmental Quality (Sewage and Industrial Effluents) Regulations 1979 [P.U.(A) 12/79] Ix. Environmental Quality (Control of Lead Concentration in Motor Gasoline) Regulations 1985 [P.U.(A) 296/85] x. Environmental Quality (Motor Vehicle Noise) Regulations 1987 [P.U.(A) 244/87] Xi. Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 1987 [P.U.(A) 362/87] xii. Environmental Quality (Schedule Wastes) Regulations 1989 [P.U.(A) 139/89]
35

Xiii. Environmental Quality (Prescribed Premises) (Schedule Wastes Treatment and Disposal Facilities) Regulations 1989 [P.U.(A) 141/89] Xiv. Environmental Quality (Prescribed Premises) (Schedule Wastes Treatment and Disposal Facilities) Order 1989 [P.U.(A) 140/89] Xv. Environmental Quality (Delegation of Power on Marine Pollution Control) Order 1993 [P.U.(A) 276/93] Xvi. Environmental Quality (Prohibition on the Use of Chlorofluorocarbons and Other Gases as Propellants and Blowing Agents) Order 1993 [P.U.(A) 434/93] Xvii. Environmental Quality (Delegation of Power on Marine Pollution Control) Order 1994 [P.U.(A) 537/94] Xviii. Environmental Quality (Prohibition on the Use of Controlled Substances in Soap, Synthetic Detergent and Other Cleaning Agents) Order 1995 [P.U.(A) 115/95] xix. Environmental Quality (Control of Emission from Diesel Engines) Regulations 1996 [P.U.(A) 429/96] xx. Environmental Quality (Control of Emission from Petrol Engines) Regulations 1996 [P.U.(A) 543/96] xxi. Environmental Quality (Refrigerant Management) Regulations 1999 [P.U.(A) 451/ 99] xxii. Environmental Quality (Halon Management) Regulations 1999 [P.U.(A) 452/ 99] Xxiii. Environmental Quality (Delegation of Power) Order 1999 [P.U.(A) 501/ 99]
36

Xxiv. Environmental Quality (Prescribed Activities) (Open Burning) Order 2000 [P.U. (A) 308/2000] Xxv. Environmental Quality (Clean Air) (Amendment) Regulations 2000 [P.U.(A) 309/ 2000] Xxvi. Environmental Quality (Compounding of Offences) (Open Burning) Rules 2000 [P.U. (A) 310/2000] Xxvii. Environmental Quality (Delegation of Power) (Investigation of Open Burning) Order 2000 [P.U. (A) 311/2000] Xxviii. Environmental Quality (Sewage and Industrial Effluents) (Amendment) Regulations 2000 [P.U.(A) 398/ 2000] Xxix. Environmental Quality (Control of Emission from Diesel Engines) (Amendment) Rules 2000 [P.U.(A) 488/2000] Xxx. Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) (Amendment) Order 2000 [P.U.(A) 489/2000] Xxxi. Environmental Quality (Delegation of Powers) (Halon Management) Order 2000 [P.U. (A) 490/2000] Xxxii. Environmental Quality (Delegation of Powers) (Perbadanan Putrajaya) Order 2000 [P.U. (A) 233/2000] xxxiii. Environmental Quality (Appeal Board) Regulations 2003. Xxxiv. Environmental Quality (Declared Activities) (Open Burning) Order 2003. xxxv. Environmental Quality (Dioxin and Furan) Regulations 2004 [P.U. (A) 104/2004]
37

Xxxvi. Environmental Quality (Prescribed Conveyance) (Schedule Waste) Order 2005 [P.U. (A) 293/2005] 2. Fisheries Act 1985 - www.moa.gov.my 3. Land Conservation Act 1960 - www.jkptg.gov.my 4. Local Government Act 1979 - www.jkt.gov.my 5. Merchant Shipping (Oil Pollution) Act 1994 6. National Forestry Act 1984 - www.forestry.gov.my 7. National Park Act 1980 - www.wildlife.gov.my 8. Plant Quarantine Act 1976 - www.moa.gov.my 9. Pesticides Act 1974 - www.moa.gov.my 10. Protection of Wildlife Act 1972 - www.wildlife.gov.my 11. Radioactive Substance Act 1968 - www.mosti.gov.my 12. Sewerage Services Act 1993 - www.jpp.gov.my 13. Town and Country Planning Act 1976 - www.jpbd.gov.my 14. Water Enactment 1920 (Revised) Act 1979 - www.ktak.gov.my 15. Sarawak Biodiversity Centre Ordinance 1997 16. Sabah Biodiversity Enactment 2000 17. Sarawak Natural Resources and Environment (Amendment) Ordinance 2001 18. Sabah Environment Protection Enactment 2002 19. Sabah Forest Enactment 1968 20. Sarawak Forest Ordinance 1954
38

Source: Department of Environment Malaysia. www.doe.gov.my

Bibliography Nanyang Business Report Series, Business Opportunities in Penang Malaysia. 1996. Prentice Hall
39

Pearlman J, (2011). Easing the Squeeze Down Under. The Straits Times. 13 May. pB18 Phang Hooi Eng, Foreign Direct Investment, A Study of Malaysias Balance of Payments Position. 1998 Pelanduk Publications Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall

References

40

http://leeiwan.wordpress.com/2007/06/18/difference-between-a-global-transnationalinternational-and-multinational-company/
ii

http://www.nyse.com/about/listed/lcddata.html?ticker=CAT http://www.kitco.com/reports/KitcoNews20120105DeC_outlook.html http://en.wikipedia.org/wiki/Malaysia https://www.cia.gov/library/publications/the-world-factbook/geos/my.html

iii

iv

vi

http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_8ab58e8f-7f00001072f772f7-dbf00272&rootid=com.tms.cms.section.Section_8ab4ec2a-7f000010-72f772f7-d6f41129
vii

P. Athukorala and J. Menon, Developing with Foreign Investment: Malaysia, The Australian Economic Review, Vol. 109 (1995), pp. 9-22.
viii

http://en.wikipedia.org/wiki/Barisan_Nasional http://www.southasiaanalysis.org/%5Cpapers4%5Cpaper304.html

ix

http://www.guardian.co.uk/world/2012/jan/09/malaysia-anwar-ibrahim-acquitted-sodomy http://ecoggins.hubpages.com/hub/Malaysia-Political-and-Economic-for-2011-and-Beyond

xi

xii

Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall, Figure 4.1 p.137 Prioritising Political Risk
xiii

http://export.gov/FTA/index.asp http://www.ustr.gov/tpp

xiv

xv

Details on Malaysia's dispute settlement mechanism can be found at the APEC Secretariat web site at www.apecsec.org.sg
xvi

http://www.doingbusiness.org/rankings

xvii

http://www.themalaysianinsider.com/malaysia/article/teresa-kok-raps-putrajaya-over-flip-floplabour-policy/
xviii

http://www.academicjournals.org/ajbm/pdf/pdf2011/4Mar/Ismail.pdf http://www.mpc.gov.my/mpc/images/file/Highlights/MPC2011-lowress.pdf

xix

xx

http://cpi.transparency.org/cpi2011/results/

xxi

http://www.jihadwatch.org/2010/01/malaysian-govt-appeals-to-muslims-not-to-boil-with-rageover-courts-decision-to-allow-christians-to.html
xxii

http://bbs.chinadaily.com.cn/thread-424326-1-1.html

xxiii

http://theextinctionprotocol.wordpress.com/2011/07/09/civil-unrest-spreads-to-malaysia-1400arrested-by-police/

xxiv

http://malaysianmirror.com/media-buzz-detail/41-opinion/56590-kfc-rage-racial-tension-orshoddy-customer-service
xxv

http://www.youtube.com/watch?v=LXu0Prlo_7M&oref=http%3A%2F%2Fwww.youtube.com %2Fresults%3Fsearch_query%3Dkfc%2Bemployee%2Bbeats%2Bup%2Bcustomer%2Bmalaysia %26oq%3DKFC%2Bemployee%26aq%3D1z%26aqi%3Dg1g-z1g2g-s1g3g-m2%26aql%3D %26gs_sm%3D1%26gs_upl%3D37797l43969l0l45500l16l16l2l1l1l0l312l2281l0.7.4.1l12l0

xxvi

http://www.jihadwatch.org/2010/01/muslims-fire-bomb-malaysian-church-for-using-the-wordallah.html
xxvii

Business opportunities in Penang, Malaysia. Nanyang Business Report Series. Prentice Hall. (1996). Pg. 70 -71
xxviii

http://www.blr.my

xxix

http://www.washingtonpost.com/business/markets/oil-near-9-month-high-below-105-in-asiaas-eu-agrees-to-greece-bailout-deal/2012/02/21/gIQABDCUQR_story.html
xxx

http://www.theedgemalaysia.com/features/198110-global-turmoil-and-the-malaysian-economyin-2012.html
xxxi

http://www.community.com.my/2011/10/12/so-is-budget-2012-an-%E2%80%98election-budget %E2%80%99/
xxxii

http://www.freemalaysiatoday.com/2011/12/07/minimum-wage-definitely-more-than-rm740/ http://www.epu.gov.sg/home

xxxiii

xxxiv

Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall.Pg. 173, Table 5.1
xxxv

Business opportunities in Penang, Malaysia. Nanyang Business Report Series. Prentice Hall. (1996). Pg. 48
xxxvi

http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-malaysia/ http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-malaysia/

xxxvii

xxxviii

Wall S, Minocha S, Rees B. International Business, 3rd edition. (2010) Prentice Hall. Pg. 197 199
xxxix

http://www.mida.gov.my/env3/index.php?page=invest-in-malaysia http://www.mtdc.com.my/catalyst http://www.itu.int/en/pages/default.aspx http://www.thebulletin.org/web-edition/ops-ed/the-sixth-fuel-nuclear-energy-malaysia/ Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall, p.166-

xl

xli

xlii

xliii

168
xliv

http://www.mrepc.com/trade/external_incentives/ResearchandDevelopment.pdf http://wwf.panda.org/who_we_are/wwf_offices/malaysia/environmental_problems_malaysia/

xlv

xlvi

Rose, G., Regional Environmental Law in South East Asia, (1995) Review of European Community and International Environmental Law, Vol. 4(1) pp.40-48 at p.42. The resolutions and declarations are The Manila Declaration, 1981; The Bangkok Declaration, 1981; The Jakarta Resolution, 1987; The Manila Summit Declaration, 1987; The Langkawi Declaration, 1989; The Kuala Lumpur Accord on Environment and Development, 1990.
xlvii

http://ssl.aip-global.com/EN/asia_express/archives/617

xlviii

http://www.environmentalleader.com/2007/05/04/caterpillar-releases-sustainability-report-getsreal-about-going-green/
xlix

http://www.aseansec.org/8825.htm

http://www.deloitte.com/assets/Dcom-global/Local%20Assets/Documents/Tax/Taxation %20and%20Investment%20Guides/2010/dttl_tax_guide_2010_Malaysia.pdf
li

http://library.wou.edu.my/vertical/vf2011-6.pdf

lii

http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation %20and%20Investment%20Guides/2010/dttl_tax_guide_2010_Malaysia.pdf