Affirmative action, meet economic reality.

Malaysia's Affirmative Action

By MOHAMMED HADI
Affirmative action, meet economic reality.

Facing declining interest from foreign investors and finding itself in an increasingly liberalized neighborhood, Malaysia on Tuesday unveiled some big changes in stock ownership and acquisition rules.

The boldest of these chip away at the country's nearly forty-year-old affirmative action policies -- in this case, rules over corporate ownership. Specifically, the requirement that ethnic Malays own 30% of any listed company will be watered down, effectively, to 12.5%.

Hurdles to acquisitions by foreign buyers too will be lowered, as will ownership restrictions for foreigners on fund management companies and brokerages.

Aimed at improving the lot of the country's ethnic majority Malay population, the affirmative action rules -- which govern everything from university enrollment to work force quotas -- have more recently become an anchor around the economy.

The symptoms of this -- a decline in competitiveness of non-commodity exports and foreign interest in the country -- is evident, Morgan Stanley says. Net foreign direct investment, for example, has been trending lower since the early 1990's -- contrary to the flood of inflows into the much of the region.

Malaysia trails Singapore, Thailand, and Indonesia when it comes to the volume of funds raised on its domestic stock market and value of acquisitions by foreign companies in recent years, according to Dealogic.

Tuesday's changes are unarguably a step toward fostering much needed innovation and risk-taking by Malaysian business, but relaxing rules to encourage foreign investment is surely the easy part.

Malaysia's Byzantine politics may keep any further changes -- particularly to labor laws -- off the table.

Write to Mohammed Hadi at mohammed.hadi@dowjones.com

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