Generally, the Government of Malaysia encourages FDI, especially in relation to the high-tech sector and for back office service operations, as reported by the US Department of State 2011. Malaysia has good infrastructure and an institutional foundation for a competitive market-based economy firmly in place. However, according to Bertelsmann Foundation 2010, the number of high-profile corruption cases, growing political instability, the government’s inability to control inflation, an increasing budget deficit and declining macroeconomic performance have raised concerns among foreign investors about doing business in Malaysia. The Bertelsmann Foundation 2010 further reports that there is widespread corruption among the country's political and business elite, whose close connections are often known as ‘money politics’. According to the Transparency International's Global Corruption Report 2009, a study conducted by the World Bank estimates that corruption costs the government approximately MYR 10 billion annually, which is equivalent to between 1% to 2% of Malaysia's annual GDP. Another significant impediment to the economic growth of the country is the complex network of ethnic preferences to promote the acquisition of economic assets and government contracts by the bumiputera (all ethnic Malays and other Malaysian indigenous peoples), as reported by the US Department of State 2011.

According to ABC-Amega Credit-to-Cash Advisor 2008, it should be noted that some prosperous Malaysian companies are nominally privately-owned, but in many ways remain 'political businesses' that owe their growth to the preferential treatment they receive from the ruling party, if not outright ownership by political officials. Rewarding supporters is embedded in the Malaysian political system and high-ranking officials or business representatives with well-connected companies are rarely targeted in anti-corruption cases. This is reflected in the Merdeka Center for Opinion Research Malaysia Voter Values Survey 2010, where 77% of ‘true believers’ (who are defined as socially conservative and would refer to themselves as Muslim/follower of a religion) believe that people with political connections and wealthy individuals benefit from government programmes. According to the business executives surveyed by the World Economic Forum Global Competitiveness Report 2010-2011, the level of unethical behaviour of companies in Malaysia constitutes a competitive disadvantage for doing business, as does both the diversion of public funds to companies, individuals or groups due to corruption and the likelihood of government officials to favour well-connected companies and individuals when deciding on policies and contracts. Furthermore, the Bertelsmann Foundation 2010 reports that a closed-door tender process is used for key government contracts because the government wants to ensure the bumiputera equity, and all smaller government contacts are only open to bumiputera owned companies. The US Department of State 2011 also reports that for most of the public procurements, in particular for major infrastructure, foreign companies are only allowed to participate if they take on a local partner. Companies should note that the government procurement process is not transparent and lacks competitive bidding. There are cases where huge infrastructure projects have been awarded without open tendering (see 'Public Procurement and Contracting' in the Corruption Levels section). Companies are recommended to use a specialised public procurement due diligence tool in order to mitigate corruption risks involving procurement in Malaysia.

According to the World Bank & IFC Enterprise Surveys 2007, more than 16% of companies surveyed identify corruption as a major constraint to doing business. Furthermore, Transparency International's Global Corruption Barometer 2010 reports that 15% of the surveyed households perceive the business and private sector as 'extremely corrupt'. Nevertheless, in recent years, both business organisations and the government have introduced corporate codes of conduct that address anti-corruption issues (see 'Public and Private Anti-Corruption Initiatives' in the Initiatives section). One example of such an initiative was in March 2011, when the Prime Minister’s Department as well as the Performance Management and Delivery Unit (PEMANDU), launched the Corporate Integrity Pledge and Anti-Corruption Principles for Corporations in Malaysia 2011. By voluntarily signing the Pledge to adhere to these principles, companies commit to a long-term programme to establish an effective system and to increase integrity in the Malaysian corporate sector. According to a 2011 news article by The Malay Mail, big companies such as Siemens Malaysia Sdn Bhd have already signed the Pledge, and more companies are expected to join the effort. Companies should be aware of the corruption risks and legal liabilities associated with joint ventures and the use of agents, and are strongly advised to develop, implement and strengthen integrity systems and to conduct extensive due diligence when planning to do or already doing business in Malaysia.

Malaysia's regulatory environment changes frequently, based on the relationship between pressures on the government to expand affirmative action policies to provide the bumiputera with more extensive benefits, and pressures from the private sector and other actors to liberalise the economy and reduce regulatory hurdles. The government has not only struggled to reduce corruption, but also to sustain its campaign to cut back on extensive red tape, which is particularly prevalent in relation to licensing. Foreign companies have complained that the procedures for obtaining work permits are time-consuming and burdensome, although steps have been taken to facilitate expatriate employment. While the government is officially committed to the maximum privatisation of government assets, critics note that these assets will only be privatised to Malay interests. All manufacturing and related projects are subject to an approval system operated through the Malaysian Industrial Development Agency (MIDA). According to the US Department of State 2011, the Ministerial Functions Act grants relevant ministries broad discretionary powers over the approval of specific investment projects. The details of the government's affirmative action policy implementation are left to the discretion of various line ministries. Policies and practices vary greatly. Some practices are explicit while others are informal, leaving much ambiguity for potential investor. According to the same source, one of the government's racial preference policies is a requirement that foreign and domestic non-manufacturing companies take on bumiputera partners with a minimum of 30% of share capital. Bumiputera equity and local content requirements affect many areas of business operations, from start-up, acquisitions, mergers and take-overs, human resources, and distribution and direct selling to an array of required permits and licences, many of which must be renewed either annually or biannually. Investors in industries prioritised by the government can often negotiate favourable terms with the relevant ministry or regulatory body. This can include assistance in navigating a complex web of regulations and policies, a few of which can be waived on a case-by-case basis. Despite general government encouragement of foreign investment, investors in non-targeted industries tend to receive less government assistance in obtaining the necessary approvals from regulatory bodies, and therefore face more bureaucratic obstacles.

The government has recognised red tape as an obstacle to doing business and as a generator of opportunities for corruption to occur. According to the business executives surveyed by the World Economic Forum Global Competitiveness Report 2010-2011, complying with government administrative requirements (e.g. permits, regulations, reporting) is easy enough to constitute a competitive advantage for Malaysia. The government has relaxed regulations on property investments by foreign investors and has released a guidebook on registering property. The Bertelsmann Foundation 2010 reports that property ownership rights and the regulation of property acquisition are virtually problem-free and well-defined. Another recent change has enabled companies to renew their business premise licences at any time during the year instead of year-end re-registration, and the validity of the licence has been extended from one to three years. Business can commence upon application of licence and receipt of acknowledgement from the relevant authority. The World Bank & IFC Doing Business 2011 supports these positive changes and states that the overall regulatory environment in Malaysia has been significantly improved in recent years. The government has facilitated business start-up by introducing more online services. Now starting a business in Malaysia requires a company to go through 9 procedures and 17 days, and no minimum capital is required to do it. 

Malaysia's secular legal system is based on English common law. However, Muslims are subject to Sharia, and Article 121 of the constitution stipulates that all matters related to Islam should be dealt with within Sharia courts. According to Freedom House 2011, the interpretation of Sharia law varies regionally. Malaysia's regulatory environment frequently gives rise to commercial disputes. In addition, the judiciary is reportedly not independent and there have been several instances of selective prosecution, preferential treatment and arbitrary or politically motivated verdicts. According to the US Department of State 2011, the domestic legal system is accessible, but generally requires any non-Malaysian citizen to make a large deposit before pursuing a case in the Malaysian courts. The courts can be slow and bureaucratic and take years to even address cases, which is why many companies choose to include mandatory arbitration clauses in their contracts. According to a January 2008 article by Malaysia Today, foreign investors have shown little faith in the Malaysian legal system. Lawyers report that more and more foreign companies prefer to seek legal redress in Singapore, Hong Kong or London. The government has set up the Kuala Lumpur Regional Centre for Arbitration, which is the only recognised centre for arbitration in Malaysia. Malaysia has signed and ratified the New York Convention 1958 as well as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, granting jurisdiction over investment disputes between the Government of Malaysia and non-Malaysian citizens to the International Centre for Settlement of Investment Disputes (ICSID). Access the Lexadin World Law Guide for a collection of legislation in Malaysia.