IBE

MASTER OF BUSINESS ADMINISTRATION

International Business Environment

1

Executive Summary

This report looks at Malaysia the multiethnic, upper‐middle‐income country in terms of a

potential country of manufacturing operations for the transnational company Caterpillar Inc. In

analyzing the country using the PESTEL model we evaluate the macro-environmental factors

and make conclusions on the attractiveness of the market.

The method of analysis was through research based on data and reliable information from

various governmental agencies from Malaysia and other worldwide organizations which track

business trends and collate useable data. Recent publications, newspaper reports on Malaysian

market analysis and international business texts were also used to concur. All relevant data and

information are included in the appendices. The information in this report is up-to-date till

22/02/2012.

After careful consideration of the information available at this current time, the findings revealed

that the country is mostly stable in terms of the various environments analyzed. However the

political and economic environment is of a little concern mostly due to flip-flop policies and the

threat of a global recession due to the Euro crisis respectively. There is also the risk of inflation

and low GDP growth due to the spike in global oil prices. Caterpillar should also study

individual State laws where they may choose to enter, as these sometimes may differ from

Federal legislations.

In conclusion Caterpillar may enter Malaysia after the impending elections due this year. This is

to reduce its entry risk and prevent it from being a victim of any flip-flop policies (i.e. minimum

wages) which may differ from those already in this report’s findings. Further research can also

be undertaken to decide if joint ventures or acquisitions are viable options to reduce risks for

entry.

The limitations of this report are that information used in the analysis are mostly of past trends

and do not reflect substantially current market situations. Hence it is crucial for Caterpillar to

watch the market for any new developments which the scope of this report has not covered. The

critical views expressed are based on my risk propensity. Ultimately Caterpillar has to decide on

the course of action based on its risk adverseness.

2

Introduction

Background information of Caterpillar Inc.

I will be analyzing the transnational company Caterpillar Inc. using the PESTEL model on its

potential manufacturing entry into Malaysia. By definition a transnational company is one which

has invested in foreign operations, has a central corporate facility but gives decision-making,

R&D and marketing powers to each individual foreign market. i Caterpillar definitely fits the bill

with its vast worldwide operations through various modes of market entry strategies and

decentralized decision making.

Caterpillar Inc. which is also known as “CAT” is a corporation listed on the New York Stock

Exchange.ii CAT is a manufacturer of construction and mining equipment, diesel and natural gas

engines, industrial gas turbines and diesel-electric locomotives. The company is also a service

provider through Caterpillar Financial Services, Caterpillar Remanufacturing Services,

Caterpillar Logistics Services and Progress Rail Services.

Overseas markets penetration

CAT has a global dealer network of more than 200 in a 178 countries. This global network is one

of their most important competitive advantages. Most of these dealers have had relationships

with CAT for at least two generations. Hence these dealers provide an excellent insight into local

market conditions whilst reducing the business risks for CAT at that particular market. CAT also

has 50 manufacturing facilities in the United States alone and another 65 worldwide catering to

its vast dealers providing excellent support capabilities.

Much of CAT’s growth has been through acquisition strategies worldwide. Through acquisitions

CAT has been able to penetrate foreign markets quickly and gain greater market share. As Asia

is still forecasted to grow albeit at a slower pace due to the Euro crisis, CAT has an impetus to

develop a manufacturing plant in South-East Asia to cater to this growing region.iii

i http://leeiwan.wordpress.com/2007/06/18/difference-between-a-global-transnational-international-and-multinational-company/

ii http://www.nyse.com/about/listed/lcddata.html?ticker=CAT3

The rising GDP in growth markets such as Brazil, India and China, the large emerging middle

class with a higher standard of living coupled with increased urbanization, increase need for

infrastructure are just some of the drivers fueling their growth performance. Figure.1 shows the

various other factors.

Figure.1 Factors driving Caterpillar performance (source: Caterpillar annual reports)

These driving forces hence call for increased production to cater to emerging markets which

entails setting up a manufacturing facility in a country with good connectivity network,

infrastructure to support the industry, and policies which encourage investments as well as a

stable, growing economy.

Overview of Malaysia

4

In choosing a country to set up a Foreign Direct Investment (FDI) for manufacturing, the various

driving factors mentioned earlier would put Malaysia in a suitable position. Malaysia is a federal

constitutional monarchy in Southeast Asia. It consists of thirteen states and three federal

territories. Land borders are shared with Thailand, Indonesia, and Brunei, and maritime borders

exist with Singapore, Vietnam, and the Philippines. In 2010 the population exceeded 27.5

million, with over 20 million living on the Peninsula.iv The country consists of 3 main ethnic

groups namely Malays 50.4%, Chinese 23.7% and Indians 7.1%. The official language is Bahasa

Malaysia and Islam is the predominant religion, however English is spoken widely especially in

the capital areas.v

This upper middle income society has relied heavily on income derived from natural resources to

engineer a diversification towards manufacturing. Their natural resources include tin, petroleum,

timber, copper, iron ore, natural gas and bauxite. Most of the government’s revenue is from the

state owned oil producing company Petronas and there is now a move to have lesser reliance on

this major source. According to the “Third Industrial Master Plan (IMP3)” published by the

Ministry of International Trade and Industry (MITI) Malaysia’s push towards global

competitiveness is through the transformation and innovation of the manufacturing and services

sectors. In the 12 industries targeted by the Government, manufacturing of machinery and

equipment is listed as one of the non-resource based industries targeted thus reducing micro-

political risk for CAT. These targeted growth areas include the strategic thrust of the IMP3 so as

to encourage MNC’s to establish and expand operations in Malaysia whilst providing them a

favorable environment to invest in.vi In Malaysia, FDI has been considered the most important

contributing factor to its economic success.vii (The Straits Times, 22 February 2012, “Malaysia’s

foreign direct investment soars to $14b”, Appendix A)

PESTEL Analysis

Political environment overview

Malaysia is a democratic multi-ethnic society with the predominant political party United

Malays National Organization (UMNO) holding power since its independence in 1957. UMNO

5

is part of the coalition of Barisan Nasional consisting of two other race based parties namely the

Malaysian Chinese Association (MCA), and the Malaysian Indian Congress (MIC).viii

Most of Malaysia’s economic development gathered during the reign of its former Prime

Minister Mahathir Mohamad from 1981 -2003.ix During his period in office he emphasized the

importance of economic development specifically the export sector. His end of tenure was one

muddled with the falling out with his deputy Anwar Ibrahim which has had repercussions on

Malaysian politics till date. Anwar Ibrahim with his newly formed Pakatan Rakyat party has

managed to garner considerable seats in parliament at the last elections and has now renewed his

challenge to the current Premier Mohd Najib for the coming elections slated for this year.x

Evaluating the political environment

I will be adapting some of the criteria of quantifying political risk from Dichtl and Koeglmayr

(1986) in evaluating the political risk. As the list is quite exhaustive I have chosen a few key

areas which I feel are more critical to evaluate. For a complete list of the criteria’s please refer to

Appendix B.

Although the risk scores given are subjective and are based on my perceptions from the research

material available to me, they are relevant events and circumstances which may affect companies

planning to invest in Malaysia. Of course ideally these scores must be continually reviewed to

reflect the present time.

1. Stability of political system

Minimum Score Score Maximum Score

3 8 14

The last elections held in March 2008 have exposed the falling political strength of BN

somewhat. According to the Economist Intelligence Unit (EIU) from their research over the last

50 years or so political stability in Malaysia was dependent on 3 calming factors.xi

6

the firm power enjoyed by the BN coalition;

the tight control the United Malays National Organization has exerted over the BN;

the continued support of the Malay majority for the United Malays National Organization

Yet in the 2008 elections these factors were weakened to some extent. The ruling party has also

lost the support of the Malay majority. EIU also reports that there is dissatisfaction among the

political parties in Sabah and Sarawak with BN and these could erode their power base. With the

impending elections due this year BN is still widely expected to win two thirds majority to make

constitutional changes unchallenged.

It would be advisable for Caterpillar to wait for the elections to happen before making any

decision to invest in Malaysia as a sudden change of government however remote can have

disastrous macro-political effects on them. However the likelihood of this risk happening is low

but the impact is high.xii (Neutral)

2. Reliability of the country as trading partner

Minimum Score Score Maximum Score

4 9 12

As for being a reliable trading partner Malaysia is a member of these regional and international

integration agreements, ASEAN, APEC and WTO. As highlighted earlier on the importance of

FDI inflows to Malaysia's economy, companies have the confidence in Malaysia to be a reliable

trading partner due to its adoption of the rule based multilateral trading system under the World

Trade Organization (WTO). It is also pursuing regional and bilateral trading arrangements to

complement the multilateral approach to trade liberalization. Malaysia has signed a number of

Free Trade agreements (FTA) aimed at providing quicker access to markets between the

participants of the FTA. Malaysia at the moment does not have an FTA with the United States

7

where CAT’s HQ is based.xiii However both countries are negotiating a regional FTA, the Trans-

Pacific-Partnership with others.xiv

In protecting foreign investment, foreign investors are theoretically guaranteed against

expropriation of property without compensation by virtue of Article 13 of the Federal

Constitution. Malaysia is also a member of the Convention on the Settlement of Investment

Disputes (ICSID) since 1966.xv

According to the World Bank Group outfit “Doing Business” rankings of countries in the ease of

doing businesses, Malaysia is ranked 4th in East Asia and the Pacific (Appendix C) and a credible

18th in the world rankings of a 183 countries.xvi Caterpillar can be assured of Malaysia as a

reliable trading partner due to the various integration agreements mentioned. As Malaysia relies

more and more on FDI for economic progress they would not want to jeopardize their standing in

the international markets by creating any issues which may deem them an unreliable country to

do business in. (Positive)

3. Effectiveness of public administration

Minimum Score Score Maximum Score

3 7 12

Public administration effectiveness in Malaysia has been improving all the time but there have

been instances on policy flip flops.xvii It takes 11 procedures and 14 days to establish a foreign-

owned limited liability company (LLC) in Kuala Lumpur, Malaysia. This is faster than both the

average for Investing across Borders (IAB) countries in East Asia and the Pacific and the IAB

global average. A study in Management Capability Index (MCI), in 2010, shows that Malaysian

government agencies performed 72% of its potential 100% capability, which is regarded as an

‘average’ performance and has potential to move to good and greater performance. The MCI is

made up of ten major drivers of management capability that deliver profitable growth. The driver

category and scores are shown in Table.1 for year 2010.xviii

8

Table.1 Ranking of Malaysian MCI 2010 Index

Table.1 shows that Malaysian agencies scored the highest in “Integrity and Corporate

Governance” and Financial Management. This was followed by the categories highlighted in

green with scores above 70. This can suggest that the agencies are consistently committed to

good practices and structures with improvements being made.

The primary value of the MCI is to identify areas where improvements can be made. From the

index we can see that urgent attention is needed for “Organization Capability” as it is the only

category dropping below the 70 mark.

9

Table.2 Variance of 2010 – 2008 Malaysian MCI Indexxix

Table.2 depicts the comparison of the MCI index for 2008 and 2010. It indicates that Malaysia’s

MCI 2010 Index surpasses that of 2008 in all categories. This suggests an improvement of

management capabilities for Malaysian government agencies in varied areas. However,

organizations are yet to achieve organizational excellence as they should aim to achieve 80 out

of 100 for all capabilities.

According to Transparency International, Malaysia has a lowly score of 4.3 out of 10 in the

Corruption Perceptions Index for 2011. The Corruption Perceptions Index ranks countries based

on how corrupt their public sector is perceived to be. A country’s score indicates the perceived

level of public sector corruption on a scale of 0 - 10, where 0 meaning that a country is perceived

as highly corrupt and 10 meaning that a country is perceived as very clean. A country's rank

indicates its position relative to the other countries included in the index. Malaysia is ranked 60 th

in a list of 183 countries.xx

xix http://www.mpc.gov.my/mpc/images/file/Highlights/MPC2011-lowress.pdf

xx http://cpi.transparency.org/cpi2011/results/10

Although the public administration has seen a 4.3% increase from 2008 to 2010 in performance

according to the MCI index there is still evidence of corruption and policy flip flops in the

Government. As such Caterpillar would be wise to put in place measures to reduce exposures to

these risks. (Negative)

4. Labour relations and social peace

Minimum Score Score Maximum Score

3 9 15

Historically Malaysia has had incidents of racial riots as well as other political rallies which have

had disturbing effects on the country.xxi xxii There were even incidents of civil unrest last year in

downtown Kuala Lumpur. These street protests were against the ruling government for electoral

reform.xxiii These protests will spook foreign investors who are worried that any groundswell of

anti-government sentiment could delay economic reforms seen essential to draw investment.

In a country where there is one dominant race in the civil service, frequent racial tensions stoked

by a variety of reasons are a norm. For instance just recently a customer was attacked by a

Kentucky Fried Chicken employee after some words were exchanged due to poor service.xxiv

Someone took a video of the attack and it soon went viral on the internet where netizens

exchanges racial slurs.xxv In another incident a church was fire-bombed after it used the word

“Allah” in reference to god.xxvi A recent newspaper article also reported that 11% of Chinese and

Indians think that the 1Malaysia policy introduced by current premier Najib Razak is a ‘political

ploy to secure electoral gains’. (Appendix D)

Malaysia is generally a peaceful country but there are instances where stability can be affected

due to many reasons beyond a company’s control. Even the government has difficulties to

balance expectations of the many races when any incident happens. As such companies investing

in Malaysia must be aware of this medium to high risk on their operations. Again Caterpillar

must weigh the risk and have contingencies to deal with these sensitive situations should they

arise. (Neutral)

11

Evaluating the economic environment

Banking system

Banks in Malaysia are supervised by Bank Negara Malaysia (BNM) the central bank. Besides

the commercial banks, merchant banks and finance companies there are also the Islamic banks

that operate on Islamic principles to fill the void in the existing banking system.xxvii The Base

Lending Rate (BLR) is currently at 6.6%. xxviii (Positive)

External threats

Malaysia like most nations will be looking to the Euro zone sovereign debt crisis and the fate of

the Euro in order to gauge if their economy will perform better in 2012. The spike in oil prices

will also lead to higher inflation and low growth.xxix With world growth forecast being cut and

some predictions of a recession in sight in the Euro zone, demand for Malaysian exports will be

curtailed somewhat. Malaysian exports to the EU have dropped from an average of 9.4% of GDP

from 2001 to 2008 to 7.4% between 2009 and 2010 (ADB, Asia Economic Monitor 2011).

Exports to the US have declined even more dramatically in the same period from 17.6% to 9.6%.

In contrast, the China export market grew from 6.7% to 14.6%. Weaker demand from the Euro

zone is definitely a worry for Malaysia but the greater worry is the slowdown in the Chinese

economy due to domestic constraints such as power shortages, rising wages, threat of inflation

and a property bubble.xxx These can put a dampener on Caterpillar's manufacturing operations as

demand from these critical markets are expected to hit a slowdown. (Negative)

Internal threats

There is also a threat of slowing domestic demand due to the dimming external outlook. This is

worrying as growth is dependent more on domestic consumption due to external factors

mentioned earlier. With the 2012 Budget touted to be an election budget experts have also

cautioned the government on greater fiscal discipline by restraining budget deficit growth.xxxi

12

One very important announcement which can affect all companies operating in Malaysia is the

national minimum wage. This announcement which is much anticipated by workers, trade unions

and employers will have an effect/risk on competitiveness, inflation and unemployment and

company survival.xxxii The current minimum wage in force is only for plantation workers.

(Negative)

Source: Economic Planning Unitxxxiii

For a more detailed picture of Malaysia’s economic state please refer to Appendix E.

Evaluating the sociocultural environment

Cultural evolution

13

With the elections expected this year

this normally means there will be

programmes tailored to ensure

economic conditions are favorable and

the business climate is conducive. After

taking into account the points

mentioned above Malaysia still seems

capable of handling any uncertain

economic conditions due to its

available resources and policy capacity.

Hence Caterpillar can enter the market

on this point albeit being cautious

about the minimum wage

announcement which can have

detrimental effects on its bottom line.

The table on the left gives a snapshot of

the economic situation in Malaysia.

From its beginning Malaysia has been a meeting point of a diverse range of external cultures and

religions. As a result of these external influences the Malay culture has emerged. Present day

Malaysia represents a multiracial fusion of Malay, Chinese and Indian traditions creating a

pluralistic and multicultural nation that has its character entrenched in social harmony, religion

and pride in its ancestral background. In representing such a rich cultural heritage, acquiring the

right skills and cultural knowledge in order to conduct business in Malaysia is pertinent to your

success here. (Neutral)

Cultural practices

One important factor in Malaysian culture as with most Asian cultures is the concept of face. To

lose face is to suffer public embarrassment. From a business context it is crucial to save face and

causing your Malaysian business counterpart to lose face may influence the outcome of your

business dealings negatively. In a high context culture such as Malaysia meaning is often more

explicit and less direct as compared to many western cultures. This basically means words have

lesser importance and greater importance must be given to additional forms of communication.

More information is provided on culture context in Appendix F.xxxiv

Being a predominantly Muslim country scheduling a business appointment during prayer times

and on Fridays are not expected.xxxv Punctuality varies with the different races. The Chinese are

usually more punctual as compared to the Malays and Indians who take a more relaxed attitude

to time. If there are dealings with government officials as in the case would be for Caterpillar,

then they should ensure all communication takes place in the language of Bahasa Malaysia. Most

other Malaysian companies use English to correspond. Other business etiquette’s are covered in

Appendix G.xxxvi (Neutral)

Cultural dimensions

In relating Geert Hofstede (1980) cultural dimensions to Malaysia we can see that there is a high

correlation between the Muslim religion and the Hofstede Dimensions of Power Distance (PDI)

and Uncertainty Avoidance (UAI) scores. The combination of these two high scores (UAI) and

(PDI) create societies that are highly rule-oriented with laws, rules, regulations, and controls in

order to reduce the amount of uncertainty, while inequalities of power and wealth have been

14

allowed to grow within the society.xxxvii Analyzing the other 2 dimensions of Individualism

(IDV), and Masculinity (MAS) reveal Low and Average scores respectively. For the complete

analysis refer to Appendix H.

Being an American transnational firm Caterpillar has to assess the cultural compatibility of

international operations as this critical aspect can lead to business failure if mismanaged.

Sociocultural risk can be reduced to manageable levels as long as the market where the company

is entering is studied and the relevant skills are employed to reduce this risk. On this dimension

of risk Caterpillar can enter Malaysia as long as due diligence is done as there are no extremes in

culture in Malaysia which may hamper business operations. If Caterpillar's final decision is to

enter the Malaysian market through an alliance instead of a Greenfield operation then the Eight

Stage Process for Cultural Compatibility by Fedor and Werther (1996) and the compressed Four

Key Strategies version by Brett et al. (2006) may be useful as shown in Appendix I together with

more psychographics and sociographics information.xxxviii (Neutral)

Evaluating the technological environment

Technical infrastructures

Malaysia is one of the more technologically developed countries in the Asean region. They

persistently engage in modern technologies for greater advantage for manufacturers. It has a well

developed infrastructure where telecommunications network is served by digital and fiber optic

technology.xxxix The government has even set up the Malaysian Technology Development

Corporation to concentrate on the promotion and commercialisation of local research and invests

in new ventures that can bring in new technologies from abroad.xl Being an economy open to

new technology this can only mean that investing companies like Caterpillar can employ new

processes of production which can raise productivity and output. According to the International

Telecommunication Union 64.6% of the Malaysian population is wired to the internet.xli The

Economist Intelligence Unit (EIU) forecast internet penetration rate in Malaysia is estimated to

reach 77% by 2015. See Table.3 for details. (Positive)

15

Table.3 Malaysian Internet Penetration Forecast

New energy generation sources

Malaysia is exploring new renewable energy options including biomass, biogas, mini-

hydropower systems, solar photovoltaics, nuclear and generating electricity from municipal

waste.xlii These measures would ensure long term energy needs are met.

Entry of Caterpillar into the Malaysian market would also mean technology transfer for domestic

companies. This can be in the form of an internalized or externalized transfer of technology.xliii

As an open economy to technology, Malaysia is an attractive proposition for Caterpillar in terms

of the technological environment. They can also be assured of incentives from the government

for research and development as these already exists.xliv (Positive)

Evaluating the ecological/environmental environment

Environmental issues

Despite the many laws protecting the environment in Malaysia (Appendix J) they still face

problems of deforestation, pollution of inland and marine waters, soil and coastal erosion,

overfishing and coral reef destruction, along with air pollution, water pollution and the problem

of waste disposal.xlv This is due to a variety of reasons such as lack of resources to police the

laws, characteristics of the civil society and lack of coordination between agencies. However the

government is trying its best to control environmental degradation to promote sustainable

development. (Negative)

Bilateral agreements

16

Malaysia had various bilateral or multilateral environmental commitments through agreements,

resolutions, declarations and international conventions.xlvi They are also trying to reduce CO2

emissions by 40% by the year 2020. According to a lifestyle survey conducted in Malaysia, 54%

answered yes to this question, “Despite the need to preserve the environment, I do not want to

lose my current richness and convenience”. xlvii Table.4 shows its position relative to the 12 other

countries. (Neutral)

Table.4 Countries surveyed and their positions

Sustainable development

Caterpillar is being serious about sustainability as mentioned by them “meeting the needs of the

present without compromising the ability of future generations to meet their needs.”xlviii We can

see that their remanufacturing division already says alot about the company and its sustainable

development policies. Although Malaysia is still grappling with environmental controls, the laws

are in place for investors to follow. Companies like Caterpillar can benefit from these laws and

take advantage of them for their benefit in promoting themselves as an organization which is

serious about going green. (Positive)

Evaluating the legal environment

Legal system

17

The legal system of Malaysia was modeled after the English legal system of common law.

Legislative power is divided between federal and state legislatures. The federal government has

the authority over external affairs. There are state laws governing local governments and Islamic

law enacted by the state legislative assembly which applies in the particular state. (Neutral)

Foreign Equity policy

In terms of foreign equities policies, previously manufacturing projects had been governed by the

level of exports for their equity participation but now foreign investors can hold 100% equity

irrespective of the level of exports.xlix (Positive)

Monopolies and restraint of trade

Malaysia does not have any antitrust legislation or a formal definition of monopoly. It is a free

enterprise economy. The government has gazetted The Malaysian Competition Act due to come

into force very soon. The act is anti-monopoly and anti-cartel includes anti-competitive

agreements, abuses of dominant position and mergers having the effect of substantially lessening

competition.l This protects investors from abuses arising from collusions. (Positive)

Intellectual property protection

Malaysia is a member of the World Intellectual Property Organization (WIPO) and a signatory of

the Paris Convention for the protection of industrial property. It has also signed the agreement on

Trade-Related Aspects of Intellectual Property Rights (TRIPS). IP protection in Malaysia

consists of trademarks, patents, copyright, industrial designs etc. There is an intellectual property

court and the government has a National Intellectual Property policy. Hence intellectual property

(IP) protection in Malaysia conforms to international standards and provides protection to both

local and foreign investors. (Positive)

Exchange controls

18

The central bank handles all foreign exchange controls. Repatriations of capital, profits and

income, which include dividends, interests, royalties, rental and commissions are freely

permitted. (Positive)

Tax Breaks

The government provides tax breaks for manufacturing companies in the form of, Pioneer status,

Investment Tax Allowances and Reinvestment Allowances.li (Refer to Table.4 below) (Positive)

Labour legislations

The main labour laws include the Employment Act 1955, the Trade Unions Act 1959, the

Industrial Relations Act 1967, the Employees’ Social Security Act 1969 and the Employees’

Provident Fund (EPF) Act 1991. Normal working hours are limited to 48-hours or six days per

week at eight hours per day. A 44-hour working week is common for industrial and office

employees. An employer must contribute to an employee EPF fund which is tax deductible.

(Neutral)

Employment of foreigners

It is widely encouraged that foreign firms hire Bumiputras (indigenous people) at all levels

proportional to the local ethnic composition. The government also requires ALL foreign

investment firms to set up training programmes for their Malaysian staff and plan for gradual

replacement of expatriates (except those holding key posts) by Malaysians. However a labor

shortage has compelled the government to be more flexible in applying these policies.lii

Malaysia has some sound legal policies in place for foreign investors to come in confidently and

do business. But as we saw with its bending of certain rules to meet current market conditions

these may not always be favorable to foreign companies. This again relates back to our earlier

comment on their flip-flop policies. Caterpillar should beware of these legal risks and make

provisions for these dynamic risks. (Negative)

19

\

Table.4 List of tax breaks for manufacturing firms

Conclusion

From the PESTEL analysis we have seen that in each environment analyzed we have found that

there are potential risks which may affect Caterpillar’s manufacturing entry plans into the

Malaysian market. Based on these analyses it was found that the political and economic risks are

the two most crucial elements. Caterpillar being a transnational company should be able to put in

place various measures to moderate the other environmental risks as it has a global workforce

20

which can manage these risks from experience. However factors beyond their control like

government policies and global economic health may have detrimental effects on them. These

risks can be reduced if Caterpillar chooses to enter the market through a Joint Venture (JV) or

acquisition but feasibility studies must be conducted prior. Hence they should look closer at the

dynamic political and economic environment before making any foray into the Malaysian

market.

21

Appendix A -The Straits Times, February 22 2012, Pg. A14 “Malaysia’s foreign direct

investment soars to $14b”

22

Appendix B – Selection criteria’s for Evaluating Political Risk

Appendix A - Selection Criteria for Evaluating Political Risk

ScoreMajor Area Criteria Minimum MaximumPolitical Economic Environment 1 Stability of political system 3 14

2 Imminent internal conflicts 0 143 External threats to stability 0 124 Degree of control of the economic system 5 95 Reliability of the country as a trading partner 4 126 Constitutional gurantees 2 127 Effectiveness of public administration 3 128 Labour relations and social peace 3 15

Domestic Economic Conditions 9 Size of the population 4 810 Per capita income 2 1011 Economic growth over the last 5 years 2 712 Potential growth over the next 3 years 3 1013 Inflation over the past 2 years 2 1014 Accessibility of the domestic capital market to outsiders 3 715 Availibility of high-quality local labour force 2 816 Possibility of employing foreign nationals 2 817 Availibility of energy resources 2 1418 Legal requirements regarding environmental pollution 4 819 Infrastructure, including transportation and communication systems 2 14

External Economic Conditions 20 Import restrictions 2 1021 Export restrictions 2 1022 Restrictions on foreign investment 3 923 Freedom to set up or engage in partnerships 3 924 Legal protection for brands and products 3 925 Restrictions on monetary transfers 2 826 Revaluation of the currency during the last 5 years 2 727 Balance of payment situation 2 928 Drain on foreign funds through oil and energy imports 3 1429 International financial standing 3 830 Restriction on the exchange of local money into foreign currencies 2 8

Source: Adapted from Dichtl and Koeglmayr (1986), p.6.

23

Appendix C – Ease of doing business rankings in East Asia and Pacific

Economy Ease of Doing Business RankSingapore 1Hong Kong SAR, China 2Thailand 3Malaysia 4Taiwan, China 5Tonga 6Samoa 7Solomon Islands 8Vanuatu 9Fiji 10Brunei Darussalam 11Mongolia 12China 13Vietnam 14Papua New Guinea 15Marshall Islands 16Kiribati 17Palau 18Indonesia 19Philippines 20Cambodia 21Micronesia, Fed. Sts. 22Lao PDR 23Timor-Leste 24

Source: www.doingbusiness.org/rankings

24

Appendix D – The Straits Times, February 20 2012, Pg. A13 “Many still not won over by

1Malaysia”.

25

Appendix E – Key Malaysian economy figures

Labour force – 12.47 million as of November 2011 (www.statistics.gov.my)

Unemployment rate – 3.1% as of November 2011(www.statistics.gov.my)

Monthly Manufacturing Statistics Malaysia December 2011

1. Sales Value – year-on-year growth of 1.1% (positive impact)

2. Average salaries and wages per employee – Increase of 12% month-on-month to RM2615

(negative impact on bottom line but positive in attracting employees)

3. Productivity – Increase of 3.4% month-on-month (positive impact)

4. Number of employees – decrease of 0.4% (negative impact)

xxxii http://www.freemalaysiatoday.com/2011/12/07/minimum-wage-definitely-more-than-rm740/

xxxiii http://www.epu.gov.sg/home

xxxiv Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall.Pg. 173, Table 5.1

xxxv Business opportunities in Penang, Malaysia. Nanyang Business Report Series. Prentice Hall. (1996). Pg. 4826

Gross Domestic Product (GDP) 2010 – RM 765,965 Million

Gross Domestic Product (GDP) Percentage growth from 2009 – 7.2%

Gross Domestic Product (GDP) Per Capita (PPP) – US$ 14,700

Gross National Income Per Capita – US$7,547

xxxvi http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-malaysia/

xxxvii http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-malaysia/

xxxviii Wall S, Minocha S, Rees B. International Business, 3rd edition. (2010) Prentice Hall. Pg. 197 - 199

xxxix http://www.mida.gov.my/env3/index.php?page=invest-in-malaysia

xl http://www.mtdc.com.my/catalyst

xli http://www.itu.int/en/pages/default.aspx

xlii http://www.thebulletin.org/web-edition/ops-ed/the-sixth-fuel-nuclear-energy-malaysia/

xliii Wall S, Minocha S, Rees B. International Business, 3rd edition (2010) Prentice Hall, p.166-168

xliv http://www.mrepc.com/trade/external_incentives/ResearchandDevelopment.pdf

xlv http://wwf.panda.org/who_we_are/wwf_offices/malaysia/environmental_problems_malaysia/

xlvi Rose, G., “Regional Environmental Law in South East Asia”, (1995) Review of European Community and International Environmental Law, Vol. 4(1) pp.40-48 at p.42. The resolutions and declarations are The Manila Declaration, 1981; The Bangkok Declaration, 1981; The Jakarta Resolution, 1987; The Manila Summit Declaration, 1987; The Langkawi Declaration, 1989; The Kuala Lumpur Accord on Environment and Development, 1990.

xlvii http://ssl.aip-global.com/EN/asia_express/archives/617

xlviii http://www.environmentalleader.com/2007/05/04/caterpillar-releases-sustainability-report-gets-real-about-going-green/

xlix http://www.aseansec.org/8825.htm

l http://www.deloitte.com/assets/Dcom-global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/2010/dttl_tax_guide_2010_Malaysia.pdf

li http://library.wou.edu.my/vertical/vf2011-6.pdf

lii http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/2010/dttl_tax_guide_2010_Malaysia.pdf

27

GDP Growth from 2000 – 2010 – Historically, from 2000 until 2010, Malaysia's average

quarterly GDP Growth was 1.17 percent reaching an historical high of 5.90 percent in September

of 2009 and a record low of -7.60 percent in March of 2009

Data from World Bank

Trade Restrictions – there are several barriers to trade and investment that still constitute

potentially important distortions to competition and thus potential impediments to Malaysia's

long-term development. (http://www.wto.org/english/tratop_e/tpr_e/tp180_e.htm)

28

BLR: is a minimum interest rate calculated by banking institutions based on a formula which

takes into account the institutions cost of funds and other administration costs. This is defined by

the central bank.

29

Appendix F - High Context and Low Context Cultures

High Context Cultures Low Context Cultures

Define personality more in terms of the group than the individual

Are more individualistic than group oriented

Tend to have a high sensory involvement (low boundaries in terms of personal space)

Tend to have low sensory involvement (high boundaries in terms of personal space)

Initiate and receive more bodily contact when talking

Convey more information via explicit codes which do not rely so heavily on non-verbal language

Are polychronic, i.e. time does not have a totally linear aspect so that punctuality and scheduling have low priority

Are monochronic, i.e. time is viewed in more linear terms involving punctuality and tight scheduling

Adapted from:W.Stuart, M.Sonal, R.Bronwen, International Business (3rd edition). 2010.

Prentice Hall. Pg. 173, Table 5.1

30

Appendix G – Malaysian Business Etiquette (Do's and Don'ts)

1. DO be patient with your Malaysian counterparts during business negotiations. The

process is often a long and detailed one that should not be hastened.

2. DO remain polite and demonstrate good etiquette at all times. Elderly Malaysian business

people for example should be treated with respect and always acknowledged before

younger members of the organization. This is an essential part of achieving successful

business dealings in Malaysia.

3. DO take time to establish productive business relationships with your Malaysian

colleagues. Initial meetings are generally orientated towards developing such

relationships and will be maintained throughout and beyond the negotiations. Without

them, your business plans may be fruitless.

4. DON’T assume that a signed contract signifies a final agreement. It is common for

negotiations to continue after a contract has been signed.

5. DON’T be surprised if your Malaysian counterparts ask what you may consider to be

personal questions. In Malaysia, asking people about their weight, income and marital

status for example, is not uncommon and is viewed as an acceptable approach to initial

conversations.

6. DON’T enter into business with a Malaysian company without a letter of introduction

from a bank or mutual acquaintance. This will help your request for a future meeting, as

Malaysians prefer to conduct business with those they are familiar with.

Source:http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-

malaysia/

31

Appendix H - Geert Hofstede™ Cultural Dimensions

1. Power Distance Index (PDI), High – Suggests that the degree to which the less powerful

members of organizations and institutions (like the family) accept and expect that power

is distributed unevenly. This represents high inequality. It implies that a society’s level of

inequality is allowed by the followers as much as by the leaders.

2. Individualism (IDV), Low - Collectivism, that is the degree to which individuals are inte-

grated into groups. Given that the IDV index of Malaysia is low, it is implied that

collectivism is more manifested than individualism in its culture. On the individualist

side we find societies in which the ties between individuals are loose: everyone is

expected to look after him/herself and his/her immediate family. On the collectivist side,

we find societies in which people from birth onwards are integrated into strong, cohesive

in-groups, often extended families (with uncles, aunts and grandparents) which continue

protecting them in exchange for unquestioning loyalty. The word ‘collectivism’ in this

sense has no political meaning: it refers to the group, not to the state.

3. Masculinity (MAS), Average – There is no eminent distinction of how roles are

distributed in Malaysia as according to gender. The index shows moderately-low to

average in terms of masculinity. The gap between the two gender roles is not that great

which may signify equality between the roles.

4. Uncertainty Avoidance Index (UAI), Moderately-Low - Uncertainty avoiding cultures try

to reduce the chance of such situations by strict laws and rules, safety and security

measures, and on the philosophical and religious level by a belief in absolute Truth.

Malaysia exhibits a moderately-low index, which suggests that the society has a tolerance

for uncertainty and ambiguity. The society might be relatively comfortable in

unstructured situations which are novel, unknown, surprising, and different from usual.

32

Source:http://predicate.wordpress.com/2009/06/17/geert-hofstedes-cultural-dimensions-on-

malaysia/

Appendix I

Eight-stage process for cultural compatibility

1. Corporate cultural profiles. You can't create cultural compatibility unless you first

realize where you are coming from. For this reason, it is important to have an idea of the

original corporate culture for each of the partners before working out cultural

compatibility. There are, of course, many different ways of carrying out cultural audits.

Fedor and Werther suggests that the corporate culture can be defined by the unique set of

beliefs and methods of problem-solving which underpin each company activities.

2. Cultural incompatibility identification. At this stage, teams can compare profiles and

identify problem areas. Such exercises usually reveal ambiguities and inconsistencies that

should not be ignored. It could also reveal areas of mutuality that may have gone

unnoticed.

3. Development of a joint business purpose. Teams need to agree on the nature of their

purpose by reaching consensus about business objectives – such as desired rate of return,

market shares, salaries, growth and time targets. This should uncover areas where there is

any divergence. Recording such divergences early might help avoid future

misunderstandings.

4. Operational independence. Both parties need to agree the degree of operational

independence they are hoping to achieve. The degree of independence will depend on

how much each party is prepared to reveal about their working practices without making

their partners more formidable competitors.

5. Structural choice. The legal structure chosen for the alliance must take into account the

desired culture. The variety of structures are wide: from open-ended joint ventures with

varying ownership splits, through to time-specific technology sharing contracts. The

choice is likely to be driven by deep-seated cultural preferences. For example, American-

33

based partners often gain operational control by choosing a structure that gives them the

final say in significant decisions, typically secured through majority ownership. This

may, however, create obstacles in the design of an international alliance.

6. Management systems agreement. It is vital that these factors be taken into considerations.

Management systems reflect deeply embedded ways of working that are often manifested

in working practices. For example, in the failure of the Colgate-Palmolive/Kao joint

venture in the shampoo production, it was the Colgate marketing force that set up the

marketing and distribution programme. Even the Colgate people questioned whether the

market perspectives and practices successful for toothpaste would work for shampoo. In

this way, the culture of the joint venture emerged unconsciously from Colgate's desire to

maintain control. These were the driving forces creating the international alliance, rather

than the unique needs of the shampoo business.

7. Staffing the international alliance. Care needs to be taken in selecting the managing

director and key senior officers, since corporate cultures tend to be embodied in the

values and beliefs of the people who work in them. Careful discussion will also be

needed as the job specification and responsibilities, which may reveal deep-seated values

about how organizations should be run.

8. Assessing the international alliance’s demand on the parent company culture. It is

equally important to have a clear picture of what changes may be required in the parent

company's culture. How will those changes be made? By whom? These questions may

yield further insights into the cultural expectations and capabilities of the respective

companies.

Four key strategies team managers might use to enhance the effectiveness of multicultural

teams

1. Adaptation: team members adapt practices or attitudes themselves, without changing the

team membership or the tasks allocated.

2. Structural intervention: removing sources of conflict or inter-personal frictions by

formally re-organizing the team or redistributing tasks. 34

3. Managerial intervention: leader (s) intervene to establish norms of behavior and decision

making that take account of the multicultural characteristics of the team and/or establish

networks of communication that are tailored to suit the different subgroups in the team.

4. Exit: removing one or more members from the team.

Other psychographics and sociographics

1. Major languages: Malay (official), English, Chinese dialects, Tamil, Telugu, Malayalam

2. Major religions: Islam, Buddhism, Taoism, Hinduism, Christianity, Sikhism

3. Life expectancy: 72 years (men), 77 years (women)

4. Monetary unit: 1 ringgit = 100 Sen

5. Main exports: Electronic equipment, petroleum and liquefied natural gas, chemicals, palm oil, wood and wood products, rubber, textiles

Sex ratio

At birth: 1.07 male(s)/female under 15 years: 1.06 male(s)/female 

15-64 years: 1.01 male(s)/female 

65 years and over: 0.78 male(s)/female 

total population: 1.01 male(s)/female (2008 EST.)

Income Comparison

Malaysia has the largest gap between rich and the poor in Southeast Asia, where the top 10

percent is 22.1 times richer than the poorest 10 percent. The richest 10 percent in Malaysia

controls 38.4 percent of the country's economic income as compared to the poorest 10 percent

controlling 1.7 percent.

Income parameters

8.6 percent of households earn below RM1,000, followed by about 29.4 percent of households

who earn between RM1,000 and RM2,000.19.8 percent of households are in the RM2001-

RM3,000 income bracket, RM3,001-RM4,000 (12.9 percent), RM4,001-RM5,000 (8.6 percent),

RM5,001-RM10,000 (15.8 percent) and above RM10,000 (4.9 percent).In short, almost 40

35

percent of households in Malaysia earn RM2,000 and below. At the other end of the scale, about

20 percent of households earn more than RM5, 000 a month.

Appendix J – Environmental Laws in Malaysia

1. Environmental Quality Act 1974 (Act 127) - www.doe.gov.my

I. Environmental Quality (Licensing) Regulations 1977 [P.U.(A) 198/77]

Ii. Environmental Quality (Prescribed Premises) (Crude Palm Oil) Order 1977

[P.U.(A) 199/77]

Iii. Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations

1977 [P.U.(A) 324/77]

Iv. Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Order

1978 [P.U.(A) 250/78]

v. Environmental Quality (Clean Air) Regulations 1978 [P.U.(A) 280/78]

vi. Environmental Quality (Compounding of Offences) Rules 1978 [P.U.

Environmental Quality (Prescribed Premises) (Raw Natural Rubber) Order

1978 [P.U.(A) 250/78] A) 281/78]

Vii. Environmental Quality (Prescribed Premises) (Raw Natural Rubber)

Regulations 1978 [P.U.(A) 338/78]

viii. Environmental Quality (Sewage and Industrial Effluents) Regulations 1979

[P.U.(A) 12/79]

Ix. Environmental Quality (Control of Lead Concentration in Motor Gasoline)

36

Regulations 1985 [P.U.(A) 296/85]

x. Environmental Quality (Motor Vehicle Noise) Regulations 1987 [P.U.(A) 244/87]

Xi. Environmental Quality (Prescribed Activities) (Environmental Impact

Assessment) Order 1987 [P.U.(A) 362/87]

xii. Environmental Quality (Schedule Wastes) Regulations 1989 [P.U.(A) 139/89]

Xiii. Environmental Quality (Prescribed Premises) (Schedule Wastes Treatment and

Disposal Facilities) Regulations 1989 [P.U.(A) 141/89]

Xiv. Environmental Quality (Prescribed Premises) (Schedule Wastes Treatment and

Disposal Facilities) Order 1989 [P.U.(A) 140/89]

Xv. Environmental Quality (Delegation of Power on Marine Pollution Control) Order

1993 [P.U.(A) 276/93]

Xvi. Environmental Quality (Prohibition on the Use of Chlorofluorocarbons and

Other Gases as Propellants and Blowing Agents) Order 1993 [P.U.(A) 434/93]

Xvii. Environmental Quality (Delegation of Power on Marine Pollution Control) Order

1994 [P.U.(A) 537/94]

Xviii. Environmental Quality (Prohibition on the Use of Controlled Substances in

Soap, Synthetic Detergent and Other Cleaning Agents) Order 1995 [P.U.(A)

115/95]

xix. Environmental Quality (Control of Emission from Diesel Engines) Regulations

1996 [P.U.(A) 429/96]

xx. Environmental Quality (Control of Emission from Petrol Engines) Regulations

37

1996 [P.U.(A) 543/96]

xxi. Environmental Quality (Refrigerant Management) Regulations 1999 [P.U.(A)

451/ 99]

xxii. Environmental Quality (Halon Management) Regulations 1999 [P.U.(A) 452/ 99]

Xxiii. Environmental Quality (Delegation of Power) Order 1999 [P.U.(A) 501/ 99]

Xxiv. Environmental Quality (Prescribed Activities) (Open Burning) Order 2000 [P.U.

(A) 308/2000]

Xxv. Environmental Quality (Clean Air) (Amendment) Regulations 2000 [P.U.(A)

309/ 2000]

Xxvi. Environmental Quality (Compounding of Offences) (Open Burning) Rules 2000

[P.U. (A) 310/2000]

Xxvii. Environmental Quality (Delegation of Power) (Investigation of Open Burning)

Order 2000 [P.U. (A) 311/2000]

Xxviii. Environmental Quality (Sewage and Industrial Effluents) (Amendment)

Regulations 2000 [P.U.(A) 398/ 2000]

Xxix. Environmental Quality (Control of Emission from Diesel Engines) (Amendment)

Rules 2000 [P.U.(A) 488/2000]

Xxx. Environmental Quality (Prescribed Activities) (Environmental Impact

Assessment) (Amendment) Order 2000 [P.U.(A) 489/2000]

Xxxi. Environmental Quality (Delegation of Powers) (Halon Management) Order 2000

[P.U. (A) 490/2000]

38

Xxxii. Environmental Quality (Delegation of Powers) (Perbadanan Putrajaya) Order

2000 [P.U. (A) 233/2000]

xxxiii. Environmental Quality (Appeal Board) Regulations 2003.

Xxxiv. Environmental Quality (Declared Activities) (Open Burning) Order 2003.

xxxv. Environmental Quality (Dioxin and Furan) Regulations 2004 [P.U. (A) 104/2004]

Xxxvi. Environmental Quality (Prescribed Conveyance) (Schedule Waste) Order 2005

[P.U. (A) 293/2005]

2. Fisheries Act 1985 - www.moa.gov.my

3. Land Conservation Act 1960 - www.jkptg.gov.my

4. Local Government Act 1979 - www.jkt.gov.my

5. Merchant Shipping (Oil Pollution) Act 1994

6. National Forestry Act 1984 - www.forestry.gov.my

7. National Park Act 1980 - www.wildlife.gov.my

8. Plant Quarantine Act 1976 - www.moa.gov.my

9. Pesticides Act 1974 - www.moa.gov.my

10. Protection of Wildlife Act 1972 - www.wildlife.gov.my

11. Radioactive Substance Act 1968 - www.mosti.gov.my

12. Sewerage Services Act 1993 - www.jpp.gov.my

13. Town and Country Planning Act 1976 - www.jpbd.gov.my

14. Water Enactment 1920 (Revised) Act 1979 - www.ktak.gov.my

15. Sarawak Biodiversity Centre Ordinance 1997

39

16. Sabah Biodiversity Enactment 2000

17. Sarawak Natural Resources and Environment (Amendment) Ordinance 2001

18. Sabah Environment Protection Enactment 2002

19. Sabah Forest Enactment 1968

20. Sarawak Forest Ordinance 1954

Source: Department of Environment Malaysia. www.doe.gov.my

40

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42

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