This article first appeared in the Caravanserai Magazine of the Royal Society of Asian Affairs (Spring 2026 Issue 9) here.
Balancing Malaysia’s Economic Ambitions and Political Constraints
Tricia Yeoh
Malaysia is at a critical juncture. Amid a rapidly shifting global geopolitical landscape, the country benefits from multinational companies adopting a China+1 strategy – a business approach in which companies diversify their manufacturing and supply chains beyond China to reduce risks associated with rising costs, geopolitical tensions, and potential disruptions. At the same time, Malaysia continues to maintain an open trading relationship with the United States, further strengthening its position as an attractive alternative hub for investment and production.
While Malaysia has a clear roadmap for high-value growth, especially in the logistics, semiconductor and rare earth sectors, it continues to grapple with internal structural legacies that, if not managed efficiently, will weigh it down. The country’s success is still tethered to a political economy defined by its State-Owned Enterprise (SOE) dominance, ethnic distributive policies and federal–state friction. As the next General Election is due by February 2028 at the latest, there is only about a year left for any significant policy implementation – and even less if early polls are called, possibly as soon as the last quarter of 2026 if the intention is to hold national elections simultaneously with the state elections of the two Peninsular states of Malacca and Johor.
The country has long established itself in the global semiconductor industry, primarily in the back end of assembly, testing and packaging. Most recently, its National Semiconductor Strategy has put forward ambitious goals of moving into front-end integrated circuit (IC) design and advanced manufacturing.
The federal government’s deal signed with UK chip design firm Arm Holdings was meant to do precisely this. Under the 10-year agreement, Malaysia would pay US$250 million (RM1.11 billion) to Arm in exchange for its intellectual property licences and computer subsystems (CSS), assets that would be made available to domestic companies in the electrical and electronics sector.
Domestic politics, however, has introduced some complications. The Malaysian Anti-Corruption Commission (MACC) is currently investigating several individuals involved in alleged mismanagement and haste in the deal. The investigation, however, has been accused by the former Minister of Economy of being politically motivated and retaliatory, following his public calls for the suspension of the MACC Chief Commissioner after incriminating Bloomberg reports alleged that the commission was involved with “the corporate mafia”. While the Arm deal is still ongoing, these developments risk spooking other investors who may fear being caught in a similar political-economy quagmire.
Malaysia has also been keen to showcase other industrial Foreign Direct Investment, particularly in the data centre space. Clusters in the central Klang Valley region and the southern Peninsular state of Johor have benefitted from global demand for data centres and the increasing use of artificial intelligence (AI). While some local infrastructure sectors – particularly construction and ICT – as well as knowledge transfer may benefit from this influx of investment, data centres could also significantly deplete the country’s resources. The water and electricity appetite of this sector is expected to place unprecedented strain on Malaysia’s water sustainability and energy supply, and may also risk jeopardising the nation’s own climate goals. The National Energy Transition Roadmap (NETR), for instance, aims for 70% renewable energy capacity by 2050.
Another major policy decision Malaysia will have to grapple with is whether the state should continue to be the primary engine of its economy. SOEs, better known in Malaysia as Government-Linked Companies (GLCs), have a heavy presence in the economy. Nine of the 13 largest listed companies in Malaysia are GLCs, while 41 GLCs account for 55% of assets, 40% of revenue, and 42% of equity and market capitalisation among the 1,043 publicly listed companies. They crowd out private investment and dominate sectors ranging from public utilities to banking, property and plantations.
The Economic Planning Unit (EPU) has now introduced a new regulation that may affect market liquidity and investor perception even further. Under the new ruling, companies intending to acquire properties of GLCs and GLICs (government-linked investment companies, of which there are seven in the country) valued at RM20 million and above will be required to “have at least 50% bumiputera equity ownership”, increased from the previous 30% threshold. The Ministry of Economy states that this is meant to align with national socioeconomic objectives and the bumiputera agenda.
In Malaysia, bumiputera comprises the Malay and indigenous populations. The nation has a long history of ethnic-based affirmative action policies tracing back to the New Economic Policy of 1971, which continues to exist in various forms, including the latest Bumiputera Economic Community (BEC), across multiple sectors such as housing, education and enterprise development. While the results of these policies, implemented over the past 50 years, have been mixed, the latest regulatory changes will likely introduce uncertainty in the short term. Market competitiveness may also be affected, given that the policy significantly narrows the pool of potential buyers.
The nation will also have to strike a delicate balance between closing its fiscal deficit and navigating the effects of the “three-headed monster”: post-COVID recovery, the Ukraine and Iran conflicts, and global inflation. In 2025, the government made positive strides in reducing its subsidy bill on electricity, diesel, RON95 petrol and some basic goods, although the reforms remain incomplete. Proceeding to remove blanket subsidies wholesale will be politically challenging, given rising living costs combined with relatively stagnant wages.
Malaysia continues to rely significantly on its petrol-related dividends, signalling the oil and gas sector’s sustained relevance to the economy. The country’s fragile internal union, particularly concerning the Sarawak factor, is now putting this to the test. In recent months, both Petronas (the national oil company) and the Sarawak state government in East Malaysia have filed lawsuits at the Federal Court seeking clarification on whether the national law – the Petroleum Development Act 1974 – has jurisdiction in Sarawak. Sarawak is contesting the federal government’s ownership and rights over mining in the state, the consequences of which could reshape both the political and economic arrangements of the nation.
Even in the case of the country’s “new oil” – rare earth elements – the federal–state equation has yet to be resolved. While the nation has ambitions of building its midstream and downstream capabilities in the rare earth sector – elements that are in high global demand due to their use in medical, technological and defence industries – international investment will not be forthcoming if the country cannot present a coherent narrative and policy environment. In Malaysia, land and mining fall under state jurisdiction, environmental regulation is a joint responsibility, and export licensing is controlled by the federal government.
While global bifurcation is unfolding across technological, trade and digital spaces, with standards increasingly splitting down the middle, it may prove difficult for any country to maintain a neutral regulatory environment. Malaysia, however, is well placed geopolitically and geoeconomically to benefit from these developments. It will leverage its pre-existing Port Klang, the China-invested East Coast Rail Link (ECRL), and the upcoming Kuantan Port to link the Straits of Malacca on the Peninsular west coast with the South China Sea on the east coast – both crucial maritime channels for logistics and transportation. These developments could position Malaysia as an essential hub in regional supply-chain linkages.
Malaysia’s economic story has been a compelling one since its early years, particularly during its rapid growth in the 1990s. Since the fall of its dominant Barisan Nasional coalition in 2018, however, the country has been undergoing democratic consolidation alongside increasing political fragmentation, adding another layer of complexity to how its economy should be understood.
To truly escape the middle-income trap and become the global tech hub it aspires to be, the government must ultimately harmonise its national socioeconomic objectives with the ruthless efficiency demanded by global supply chains. To achieve this, sound policies grounded in both competition and equity must demonstrably deliver for its people regardless of ethnicity. Nevertheless, Malaysia’s economic execution will almost always be political – something all stakeholders will need to keep in mind, especially as the country moves closer to the next election cycle.
