Barriers on Foreign Participation in Distributive Trade in Malaysia

DISTRIBUTIVE trade can be defined as trade activities that channel goods and services down the supply chain to intermediaries for either resale purposes or to end-buyers.
It is an important revenue generating economic sector that comprises wholesalers, master distributors, resellers, retailers, franchises, direct sellers and commission agents or other representatives including international trading companies.
The Ministry of Domestic Trade Co-operatives and Consumerism (MDTCC) has promulgated the Guidelines on Foreign Participation in the Distributive Trade Services in Malaysia (Guidelines) to regulate foreign participation in certain distributive trade sectors in Malaysia.
It is interesting to note however that the Guidelines does not have the force of law although foreigners intending to participate in the regulated forms of distributive trade sector who choose not to comply with the Guidelines may encounter administrative consequences when dealing with Government bodies, thus deterring non-compliance.
Under the Guidelines, all foreigners (except manufacturers) intending to participate in the various regulated forms of distributive trade are generally required to seek the approval of the MDTCC. The MDTCC may impose certain equity or other conditions to grant such approval.
Whilst the aim of Guidelines is to strike a balance between allowing foreign investors to participate in certain distributive trade sectors against cushioning local entrepreneurs from direct competition with international players, some of the conditions imposed by the MDTCC may act as barriers that may potentially be strong enough to deter foreign investment in Malaysia.
The types of barriers vary depending on the scale and type of form of distributive trade. One may differentiate the regulated sectors into three broad categories.
The first is those conducted on a large scale such as hypermarkets, superstores, for example Tesco. The second are those conducted on a smaller scale such as specialty stores selling only a particular brand or class or line of goods such as Casio watch retailer and thirdly, those prohibited forms of distributive trade.
Foreign investors who intend to participate in the hypermarket business are required to have a minimum paid up capital of RM50 million and to comply with a minimum 30% bumiputera shareholding requirement. No shareholding requirements however apply to superstores. Other public interest conditions may also be imposed on hypermarkets including that a hypermarket is not permitted to operate within a 3.5 km radius from residential areas or town centres and there can only be one hypermarket for every 250,000 residents. For superstores, only one superstore is permitted for every 200,000 residents. Both hypermarkets and superstores would require at least 30% of total store keeping units (SKUs) displayed on the shelf space are to be allocated to Bumiputera SME goods in each outlet.
The requirements for smaller scale distributive trade such as to operate a specialty store or other trade formats are less stringent but are nonetheless restrictive as well. Specialty stores operated by foreigners are only allowed to operate if certain criteria are met such as by contributing to socio-economic development or generating substantial foreign direct investment, whether there is technology transfer or absence of local players or whether it would create employment opportunities.
The minimum paid up capital requirement for foreigners to operate a specialty store is RM1 million although under the Guidelines, the MDTCC may impose RM1 million in paid up capital for each specialty outlet open. As specialty stores may need to adopt economies of scale in order to be decently profitable, a condition of RM1 million in paid up capital for each specialty store outlet may deter foreign investors as not many would be willing to invest a huge initial capital amount for specialty stores.
Foreigners should also note that regardless of the form of distributive trade, all such businesses must appoint bumiputera directors and formulate clear policies and plans to assist bumiputera participation in the distributive trade. The businesses are also required to employ personnel at all levels including management to reflect the racial composition of the Malaysian population. These requirements may not appeal to certain international players who are not accustomed to such control within their business.
Lastly, apart from the above forms of distributive trade, some other forms of distributive trade can be viewed as reserved for Malaysians only with no foreign participation permitted. These formats prohibited under the Guidelines include mini markets, 24 hour convenience stores, miscellaneous sundry goods store, news agents and fuel station with convenience stores. This is understandable given that there are many lower income Malaysians who are actively plying the trade in those distributive trade formats and may not be able to compete with international players with significantly larger monetary war chest.
Given that Malaysia is moving towards a globalised world and many other economic sectors are gradually being liberalised by the government to encourage competition, it remains to be seen whether the government will liberalise the distributive trade sector in Malaysia by eliminating the above barriers to encourage more foreign participation in the years to come.

Contributed by Kelvin Kho Hui Khiang of Christopher & Lee Ong (www.christopherleeong.com).