Malaysia is to allow international companies to fully own their manufacturing operations in the country, in a key concession to foreign investors.
The policy change marks a significant reversal in the government's 30-year policy of trying to promote the economic interests of the ethnic Malay majority by requiring foreign companies to give a 30 per cent stake to Malay interests.
The bumiputra policy of affirmative action for ethnic Malays has been considered an obstacle to foreign investment in Malaysia amid tough international competition, particularly from China. "In continuing efforts to further improve the investment climate, the government has decided to fully liberalise equity holdings in all manufacturing projects with immediate effect," said Rafidah Aziz, the international trade minister.
Foreign direct investment in Malaysia has been falling over the past few years, including a 40 per cent drop last year to M$11.2bn (US$2.9bn, €2.5bn, £1.8bn).
"The Chinese give 100 per cent equity and we don't. Well, [foreign investors] say [they will] go to China. So we have to compete on even terms," said Ms Rafidah.
The new rules will apply to new investors or those expanding their operations, although the government said it was prepared to adopt a "flexible" attitude to existing investments as well.
Although foreigners must still meet bumiputra requirements in the service sector, including the financial industry, Ms Rafidah indicated the policy would be relaxed further.
The bumiputra policy was adopted in the early 1970s after race riots underscored the poor economic condition of the Malay population in the multiracial country, where business was dominated by the ethnic Chinese minority.
The government has claimed the policy has been successful in raising living standards for ethnic Malays in the past 30 years, with its requirement that they must have a 30 per cent stake in all listed companies.
However, Mahathir Mohamad, the prime minister, has recently suggested phasing out the bumiputra policy because ethnic Malays have become too dependent on it, while saying that Malaysia needs more foreign investment if it is to achieve sustained economic growth.
The government has chipped away at the bumiputra requirements for foreign investors in recent years. Factories geared for exports were allowed complete foreign ownership in the late 1980s and this was extended to some other manufacturing sectors in the late 1990s.
The latest move may also be linked to efforts to improve relations with the US, Malaysia's biggest trading partner and foreign investor, in the wake of Dr Mahathir's blistering criticism of Washington for the war in Iraq.