Easing foreign equity caps may boost FDI but raises sovereignty risks, say economists
Malaysia has gradually liberalised its foreign equity rules including allowing up to 100 per cent ownership in the manufacturing sector since 2009.
The country, however, still imposes significant limits in sectors like telecoms, finance, insurance, agriculture, property and healthcare.
Investment, Trade and Industry Ministry last week reportedly said it was in talks with regulators and key industries about relaxing foreign ownership limits as part of efforts to reduce the 25 per cent US tariff on Malaysian goods.
UCSI University Malaysia associate professor in finance and research fellow at Centre for Market Education Dr Liew Chee Yoong said the economic and structural impacts would likely be multifaceted.
Liew said relaxing equity limits in Malaysia could potentially boost FDI inflows by 15-25 per cent in selected sectors, offering much-needed capital for infrastructure upgrades and technological progress.
"This could facilitate valuable knowledge transfer, particularly in areas like 5G deployment, financial technology and cloud infrastructure," he told Business Times.
Greater competition from foreign players could spur innovation and may lead to more competitive pricing for consumers, he added.
"Strengthening linkages with global corporations might also bolster Malaysia's position within international supply chains," he said.
Liew said the push for Malaysia to ease the caps is driven by a combination of interrelated factors.
"Primarily, the US seeks enhanced market access for its corporations, particularly large financial institutions, telecommunications providers and technology firms, enabling them to gain controlling stakes and greater operational influence within Malaysia's developing economy.
"This push also aims to secure competitive parity for US companies against regional rivals, such as Singaporean or Chinese firms, which may operate under different frameworks or have established significant regional headquarters."
He added that these kinds of requests are frequently used as bargaining tools in broader trade talks, such as under the Indo-Pacific Economic Framework, to gain certain advantages.
From a geopolitical standpoint, strengthening economic ties through investment is a strategic move to offset China's growing influence in the region, he said.
Balancing growth and sovereignty
Liew said one of the main advantages from the possible relaxation is the substantial inflow of foreign capital, which plays a crucial role in enhancing national infrastructure and supporting the growth of high-value industries.
He added that gaining access to advanced technologies and international best practices could boost productivity and competitiveness, create jobs in higher-value sectors, and deepen economic ties with key partners such as the US.
"However, these advantages are counterbalanced by substantial risks. Foremost is the erosion of control over strategic national assets and key industries, raising sovereignty concerns.
"Domestic firms, particularly small and medium enterprises and Bumiputera-owned companies, face the risk of marginalisation or acquisition," he added.
Liew said the disruption to long-standing socio-economic policies designed to ensure equitable wealth distribution could have significant political and social repercussions.
"Furthermore, substantial profit outflows from foreign-controlled entities could negatively impact Malaysia's foreign exchange reserves and current account stability over time," he added.
Putra Business School associate professor Dr Ahmed Razman Abdul Latiff said Malaysia imposes equity restrictions to promote greater local participation in industries and to ensure that wealth distribution benefits local investors and, ultimately, the broader population.
"Lifting up such restrictions is still doable as long as the initial objectives are maintained or strengthened.
"Maybe no longer through equity participation but perhaps with higher technology transfer such as technical know-how and co-sharing of intellectual properties rights," he added.
Razman said this approach helps accelerate innovation within local industries and enables the development of competitive homegrown products, which in turn supports the long-term sustainability of local businesses.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said opening up Malaysia's economic sectors to foreign investors must be done thoughtfully to safeguard local interests.
"At the same time, we would also want our local companies to be able to compete effectively and be able to penetrate the overseas market," he said.
Current landscape of foreign equity in Malaysia
Afzanizam said as of June 2025, foreign ownership in Malaysian equities stood at 19 per cent, down from the historical peak of 25.1 per cent recorded in June 2013.
This comes despite the market's appealing valuation, with the FTSE Bursa Malaysia KLCI trading at a price-to-earnings ratio of around 14 times, compared to the historical average of 17 times.
"Among the criticisms is the liquidity of the stocks as the large companies, especially the government linked companies are being held by domestic institutions such as the government linked investment companies.
"This has led to the amount of available stocks to invest is not economically viable for the foreign institution to invest from the liquidity stand point," Afzanizam told Business Times.
Meanwhile, Liew said many service industries in Malaysia still face strict foreign ownership limits.
For example, the telecommunications sector generally allows up to 49 per cent foreign ownership, while commercial banks are subject to a lower cap of 30 per cent.
Investment and Islamic banking are typically limited to 49 per cent as well.
"The insurance sector allows up to 70 per cent foreign ownership. Further limitations apply to agriculture and property, such as thresholds between 30 per cent and 50 per cent for agricultural land.
"Crucially, the long-standing Bumiputera policy, mandating a 30 per cent equity share for Bumiputera interests, continues to influence ownership structures across various sectors," he shared.
Key industries likely under review
Afzanizam said Tengku Zafrul may have been referring to key sectors such as telecommunications and banking, given their significant role in Malaysia's economy.
Sharing a similar view, Liew noted that the telecommunications sector is currently subject to a 49 per cent foreign ownership cap, which impacts major companies like Maxis Bhd and Axiata Group Bhd.
He added that banking restrictions are even more pronounced, with commercial banking limited to 30 per cent foreign ownership and investment banking to 49 per cent.
"Other sectors likely under discussion include professional services such as legal, accounting, and engineering firms, which often face limits between 30 per cent and 49 per cent; private healthcare, capped at 30 per cent; and potentially defence-related industries or critical transport infrastructure like ports and airports, deemed vital for national security and sovereignty," Liew said.
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