Success in a global IT economy requires a country's workforce to keep abreast of IT developments and skills. Accordingly, the government is promoting the adoption of more efficient and technology-intensive production methods within the domestic manufacturing industry by encouraging foreign companies to undertake technology transfers with domestic manufacturers and invest in domestic human resources.

While seeking to enhance the nation's productivity and competitiveness, the government also recognizes the need to protect domestic manufacturers from potentially unfair bargaining power. In this regard, the Ministry of International Trade and Industry will approve all technology transfer agreements (TTAs) prior to execution. In addition, all TTAs must comply with the Malaysian Industrial and Development Authority's guidelines on technology transfers. According to the guidelines TTAs must clearly define:

  • the principal features of the technology being transferred;
  • the quality of the products to be manufactured by using such technology; and
  • the manner in which the technology will be provided by the foreign entity.

The guidelines require foreign entities to provide domestic manufacturers with (among other things):

  • access to updates and enhancements;
  • adequate training for their personnel;
  • the use of all intellectual property rights (an arrangement must be made for their continued use where the life of such rights extends beyond the TTA's duration); and
  • a guarantee as to production capacity, product quality and specifications, as well as other features of the manufacturing process developed pursuant to the new technology.

TTAs must also comply with the relevant intellectual property treaties to which Malaysia is a signatory.

While the terms of the guidelines appear to be favourable to the domestic manufacturing industry, the issue arises as to whether the safeguards may inadvertently operate as a disincentive to foreign entities to share their technology. Consequently, automatic approval is given where:

  • TTAs are entered into between foreign holding companies and their wholly owned subsidiaries in Malaysia;
  • technical assistance, licensing and know-how agreements are entered into between local manufacturers or local joint venture companies and foreign entities, and payment of royalties does not exceed 3% of net sales or lump-sum payments of M$500,000;
  • lump-sum payments and royalties collectively do not exceed 3% of net sales; and
  • patent and trademark agreements are entered into between local manufacturers or local joint venture companies and foreign entities, and payment of royalties does not exceed 1% of net sales for each category.

In continuing its efforts to strike a balance between protecting the interests of domestic manufacturers and providing incentives to foreign entities to invest in the local manufacturing industry, the government hopes to achieve its aim of increasing Malaysia's competitiveness and positioning it at the forefront of the IT industry.

For further information on this topic please contact Joanne J Oei at Zaid Ibrahim & Co by telephone (+603 257 9999) or by fax (+603 254 4888) or by email ([email protected]).