Vincent Koen
OECD Economic Surveys: Malaysia 2026
Abstract
Malaysia's productivity level is high compared to most regional peers, but its growth rate has fallen short of the country’s targets in recent years. This gap, along with a mounting demographic challenge, calls for stepping up structural reform and digitalisation efforts. Regulatory and institutional barriers remain significant, as reflected in the latest OECD product market regulation indicators. While the business environment has improved, regulatory complexity and skills shortages continue to hinder innovation and firm growth. This chapter examines the need to reduce regulatory bottlenecks, streamline public governance, and enhance digitalisation to boost productivity. It shows there is room to improve foreign direct investment policies and to lower domestic barriers for businesses, including by ensuring more of a level playing field between public and private enterprises. Strengthening anti-corruption frameworks and leveraging digital tools for governance are critical for the success of these reforms.
Sustained and vigorous productivity growth is key to continue to improve living standards, and even more so in the face of forthcoming demographic pressures, as underscored in Malaysia’s successive five-year plans. Notwithstanding sizeable gains, and a level of labour productivity that compares favourably with most regional peers (Figure 3.1), its growth rate has fallen short of target during the past two five-year plans (2016-20 and 2021-25), and like elsewhere (OECD, 2025b) has trended down over time (Figure 3.2). The slowdown partly reflects the fact that Malaysia has been converging towards the productivity frontier of the most advanced economies, leaving less scope for further gains from this process. Even so, the Thirteenth Malaysia Plan (2026-30) targets 3.6% average annual growth for labour productivity, and the government’s Malaysia Digital Economy Blueprint aims at a 30% increase in the level of labour productivity over the 2020s as a whole.
Note: This measure is defined as GDP at constant basic prices per worker, evaluated in US dollars using 2021 purchasing power parities (PPP), reference year 2023, based on the official national accounts in each country.
Source: Asian Productivity Organisation, APO Productivity Database 2025.
Productivity performance is conditioned by the pace and quality of physical and human capital investment, and incentives to invest are themselves influenced by the regulatory environment, against the backdrop of a turbulent and uncertain global context (see Chapter 1). The regulatory environment is also key for ensuring that competition can channel resources to high-performing firms, as restrictive regulations can act as market entry barriers and hamper competition. Indeed, the recently compiled results of the OECD product market regulation (PMR) indicator for Malaysia (Box 3.1) point to further scope for improving regulations. Malaysia’s overall score of 2.74 in 2026 implies that Malaysia’s regulations are less conducive to competition than in the OECD average (Figure 3.3). The PMR indicator suggests some but limited progress since 2020, when the overall score was 2.83 when applying the same methodology. The progress between 2020 and 2026 is approximately equivalent to the current difference between Malaysia and South Africa on this indicator and may reflect recent reform initiatives including those envisioned in the Thirteenth Malaysia Plan.
Note: Annual average growth rates. Labour productivity is defined as GDP per worker. The cut-off year for the latest decade is 2019 so as to minimise the distortion entailed by the 2020 COVID-19 shock.
Source: Asian Productivity Organisation, APO Productivity database 2025.
The PMR indicator is a composite indicator measuring distortions to competition that can be induced by regulatory barriers to entry and expansion faced by firms across the economy, as well as by the involvement of the state in the economy. The PMR indicator relies on a qualitative dataset of laws and regulations that are in place in the surveyed countries at a specific point in time and assesses them against internationally accepted best practices. This approach ensures that the results reflect the ‘de jure’ policy settings, instead of the subjective assessments by market participants or country authorities. This enhances the comparability of the results, as it eliminates potential discrepancies in the evaluation of similar regulations across different geographic and temporal contexts. This qualitative information is turned into quantitative values by scoring against internationally accepted best practices. The scores range from 0 for the most competition-enhancing regulatory approaches to 6 for the least competition friendly. They are compiled for each of 15 regulatory domains and then averaged, following a pyramidal structure, until a single economy-wide value is attained, as shown in Figure 3.3. The PMR data for Malaysia reflect the situation in Peninsular Malaysia as of 1 January 2026. The 2020 PMR data for Malaysia appearing in the previous two OECD Economic Surveys of Malaysia (OECD 2021a, 2024a) showed an overall score of 2.54 based on the methodology used during the previous PMR round. When recalculated based on the latest PMR methodology, the 2020 score comes out at 2.83.
Source: OECD.
A recent Malaysian Business Productivity and Operations Survey conducted by the Malaysia Productivity Corporation (MPC, 2025) sheds light on some critical bottlenecks: 95% of surveyed firms reported persistent skills shortages, and only 56% were satisfied with the skill set of graduates from the education system, a skills mismatch that limits firms’ ability to innovate, to adopt emerging technologies and to scale up. Moreover, echoing the findings for OECD countries presented in the recent Simplifying for Success Survey (OECD, 2025d), half of the respondents identified regulatory compliance as a major constraint, especially due to the complexity and overlap of existing regulations, an issue felt most acutely by micro and small and medium-sized enterprises (MSMEs). One third of firms also pointed to inadequate internet infrastructure as a hurdle.
This chapter focuses on how addressing regulatory chokepoints and advancing digitalisation can boost productivity in the public sector and economywide. Other important drivers of productivity, discussed in the previous OECD Economic Survey of Malaysia (OECD, 2024a), include facilitating the transition from lower-productivity, informal to higher-productivity, formal jobs; narrowing the digital divide separating large firms from MSMEs and rural enterprises; improving education and lifelong training, as also explored in greater depth in Chapter 4 of this Survey; and raising the quantity and quality of spending on research and development, which is low in Malaysia, at only around 1% of GDP. This chapter first highlights some of the regulatory barriers that may still hold back greater foreign investment in Malaysia and cross-border trade. It then turns to domestic barriers to firm creation and competition and discusses the role of government-linked companies and the need to ensure a level playing field for private firms. The subsequent sections focus on the need to streamline public governance, to leverage digitalisation to enhance the efficiency and overall performance of the public sector, and to continue to combat corruption and money laundering.
Note: Other non-OECD member countries are shaded in grey. The PMR scores are for Peninsular Malaysia.
Source: OECD 2023-25 PMR indicators for comparator countries; OECD 2026 PMR indicators for Malaysia.
Foreign direct investment (FDI) inflows into Malaysia bounced back after the COVID-19 crisis but vary over time and across sectors. The stock of FDI has expanded considerably in recent years, not least owing to large foreign investments in data centres (UNCTAD, 2025), notably but not only by leading US and Chinese firms. The latter have expanded operational capacity in Malaysia, particularly in cloud computing, data management, artificial intelligence, and digital content services. The rise in the FDI stock also reflects numerous initiatives by the Malaysian Investment Development Authority, a number of which are listed in the 2021 OECD Economic Survey of Malaysia (OECD, 2021a). More recent ones include:
The establishment in 2023 of the Invest Malaysia Facilitation Centre, a one-stop centre seeking to expedite various approval processes, with a streamlined experience for businesses. It brings together key ministries and agencies, such as the Inland Revenue Board of Malaysia, the Immigration Department of Malaysia, the Royal Malaysian Customs Department, the Malaysian Communications and Multimedia Commission, the Department of Labour Peninsular Malaysia, the Tenaga Nasional Berhad and Telekom Malaysia Berhad.
The Golden Pass scheme introduced in 2024 to attract unicorn start-ups and venture capitalists, facilitating visa, employment and licensing procedures.
The launch in 2024 of the InvestMalaysia portal, a platform providing investors with economic insights and connecting them to relevant government agencies.
The introduction of the Investor Pass in 2025, aimed at streamlining entry for foreign investors and enhancing ease of doing business. As an upgrade to the conventional Social Visit Pass, the Investor Pass allows a stay of up to six months, extendable for another six months, and includes a Multiple Entry Visa, improving flexibility compared to the typical 14-90 day single-entry arrangement.
FDI in sectors other than the digital economy and electrical and electronics manufacturing has been less dynamic, however, with Malaysia facing stiff competition from Viet Nam for manufacturing and from Singapore for financial services.
One factor holding back FDI is the comparatively restrictive regime applying to foreign equity holdings in certain sectors (Figure 3.4), which translates into only 19% of Malaysian equities being foreign owned as of mid-2025, down from a peak of 25% 12 years earlier. While foreign ownership is allowed up to 100% in manufacturing for new projects or expansions, caps apply in other sectors, at 70% telecommunications and 49% for power and utilities. For the financial sector, all shareholding and licensing applications are assessed on a case-by-case basis, taking into account, among others, “best interest of Malaysia” considerations under the Financial Services Act and Islamic Financial Services Act 2013. Existing foreign ownership is at 30% in commercial banking (among the lowest in the region), 70% in investment banking, Islamic banking and insurance, whilst foreign equity participation in a locally incorporated foreign bank is at 100%. In agriculture and plantations, restrictions apply, with often a minimum Malaysian or Bumiputera (indigenous Malaysian) equity participation (Box 3.2). In real estate, there are state-level restrictions for certain land categories. Caps apply for private hospitals and clinics. In oil and gas, joint ventures are common but local participation is mandatory in upstream activities. The Ministry of Investment, Trade and Industry has been evaluating the possibility of relaxing foreign equity caps in strategic sectors as part of negotiations with the United States to avoid tariff hikes, but no major changes had been implemented by the end of 2025. Higher foreign entry in restricted sectors might facilitate knowledge transfer and greater competition from foreign players might spur innovation and benefit consumers. An appropriate mechanism to review inbound foreign investment with the goal of safeguarding national security concerns could help to ensure consensus for a more open investment climate.
In 1971, Malaysia launched the New Economic Policy (NEP) to promote national unity and foster nation-building by eradicating poverty. It also aimed to restructure society by improving the well-being of Bumiputera (literally “sons of the land”), which refers to the Malays and indigenous people. Bumiputera accounted for 63% of Malaysia’s population in 2023, with smaller population shares accounted for by ethnic Chinese (20%), ethnic Indians (6%) and foreigners (10%). The Bumiputera agenda remains a central pillar of national policy, aiming to strengthen Bumiputera participation and achieve fair, equitable and inclusive growth across the country.
With respect to merchandise trade, Malaysia has sought to broaden its network of bilateral and regional free trade agreements (FTAs), advancing integration on multiple fronts (Chen et al., 2025; Petri et al., 2021; Ledezma and López-Villavicencio, 2023). The Regional Comprehensive Economic Partnership (RCEP) entered into force for Malaysia in 2022, complementing its status as an original signatory of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The United Kingdom’s accession to CPTPP in December 2024 further broadened preferential access for Malaysian exporters through this plurilateral framework. In 2025, discussions about an EU-Malaysia FTA resumed, while Malaysia signed an Economic Partnership Agreement with European Free Trade Association members and a Comprehensive Economic Partnership Agreement with the United Arab Emirates. Furthermore, an FTA with Korea was announced in October 2025, supplemented by a Memorandum of Understanding on Strategic Cooperation on Supply Chains, recognising the importance of deepening cooperation on economic security and supply chain resilience. Alongside these FTAs, Malaysia also participates actively in the Indo-Pacific Economic Framework for Prosperity that was launched in 2022.
These agreements have contributed to productivity by deepening Malaysia’s integration into global value chains (GVCs), facilitating technology and knowledge transfer via increased FDI and trade in intermediate goods, and heightening competitive pressures that encourage firms to upgrade. Participation in RCEP and CPTPP has reduced trade costs across a wide set of partners, enabling Malaysian manufacturers and service providers to source higher-quality inputs and export more complex products, a channel linked in empirical research to productivity improvements through GVC participation and FDI spillovers.
Note: The OECD FDI Regulatory Restrictiveness Index measures statutory restrictions on foreign direct investment as a weighted average of all 22 sectoral scores, using common sector weights across countries to ensure that any variance in scores is due to policy differences, not differences in sectoral weights. Foreign equity restrictions limit the extent of foreign ownership that is permitted in companies or in the aggregate of companies in a given sector. Other restrictions include approval requirements of varying scope that discriminate against foreign investors; rules that completely prohibit the appointment of key foreign personnel or impose nationality requirements for the board of directors; reciprocity requirements; restrictions on profit or capital repatriation establishment of branches not allowed or local incorporation required, restrictions on access to local finance, discriminatory minimum capital requirements; discriminatory local content requirements; preference to locally-owned firms in government procurement offers; and restrictions on access to land or real estate.
Source: OECD FDI Regulatory Restrictiveness Index database, 2024.
Based on the OECD Services Trade Restrictiveness Index, Malaysia’s openness to and successful integration into merchandise trade has not been matched by its performance in services trade. Focusing on one of the key areas for digitalisation, Malaysia maintains certain restrictions on the trade of computer services, requiring foreign firms to incorporate locally or register a branch to provide digitally-enabled services. This limits cross-border supply and imposes compliance burdens, contributing to Malaysia’s relatively high score on the OECD Services Trade Restrictiveness Index (Figure 3.5). These barriers also hinder cross-border data flows, constraining the development of cloud services, artificial intelligence (AI), and other digital solutions, and ultimately slowing integration into global digital value chains. To strengthen Malaysia’s position as a regional digital hub, entry requirements for foreign service providers could be eased, thereby fostering greater competition and innovation in the digital economy.
Note: The STRI score take values between zero and one, with one indicating the most restrictive trade environment. The indices are based on the laws and regulations in force as of 31 October of the relevant year.
Source: OECD Services Trade Restrictiveness Index, 2025.
As documented in the previous OECD Economic Survey of Malaysia (OECD, 2024a), regulations affecting product markets have long been relatively restrictive, limiting competition and entry. The PMR sub-indicator for licenses and permits suggests that they remain high in Malaysia, with a score of 5.0 as against an OECD average of 2.2. Compliance costs associated with licenses and permits, once estimated at 2.3% of GDP (OECD, 2024a), fall disproportionally on smaller firms and can be an obstacle to formalisation. Further regulatory reforms could ease these barriers and strengthen growth, especially in services such as retail trade, where price ceilings on essential goods limit competition, and in the logistics sector.
Malaysia’s ranking on business legislation in the World Competitiveness Yearbook (IMD, 2025) has drifted downwards from the 20s in the 2000s to the mid‑40s in recent years. An improvement was recorded in 2025, however, reflecting efforts to reduce procedural delays and compliance costs under the aegis of the Reformasi Kerenah Birokrasi initiative and of the broader Public Service Reform Agenda, coordinated through the Special Task Force on Agency Reform (MPC, 2025). One striking example is the acceleration of business licensing approvals. These used to take five to ten days but with the introduction of the e-Lesen digital platform they are now issued within 24 hours.
More generally, the Government Service Efficiency Commitment Act 2025 creates a comprehensive inventory of all regulatory instruments to establish accurate baseline measurements of compliance costs. All ministries and government entities must develop targeted simplification plans to revise their existing rules, streamline processes, remove or amend problematic regulations and leverage digital tools where appropriate to ensure efficiency. Furthermore, the new framework now requires the mandatory review of all regulatory instruments every three years, to check their ongoing relevance in a context of rapid technological change, focusing on those with high compliance costs or outdated provisions. Under the Act, the objective is to reduce the regulatory burden by 25% within three years, in line with similar targets set in the Netherlands and Denmark (OECD, 2025a). Furthermore, a one-to-one regulatory principle is introduced stipulating that any new regulation must be offset by the repeal of an existing one, albeit without taking into account the costs and benefits associated with the new and repealed regulations.
In line with the recommendations set out in earlier OECD Economic Surveys of Malaysia (OECD, 2021a, 2024a), the Thirteenth Malaysia Plan proposes several key amendments to the Competition Act 2010 to strengthen market regulation and curb anti-competitive practices, notably a unified legal framework to regulate competition across all industries, including communications, civil aviation, and energy. It also proposes enhanced powers for the Malaysia Competition Commission to investigate and act against cartel and monopoly practices; the introduction of a merger control regime; and new mechanisms to detect bid-rigging and cartel behaviour before procurement processes conclude. These reforms would address weaknesses highlighted in the recent Business Ready 2025 diagnosis (World Bank, 2025b) and are important to ensure open and fair economy-wide competition (Figure 3.6). So far, amendments to the Competition Act 2010 are being undertaken in two phases by the Malaysian Competition Commission. The first phase focuses on enhancing the Commission’s existing investigative and enforcement powers. These reforms are intended to address existing gaps and loopholes, ensuring better enforcement of competition law domestically. The second phase will seek to centralise competition powers as well as to introduce a merger control regime through further amendments to the Competition Act 2010 and by revisiting and updating relevant laws under sectoral regulators. Centralising competition powers is essential to ensure uniform, coherent, and effective application of competition law across all sectors in Malaysia.
Higher scores denote better performance
Note: Thailand is not covered yet in Business Ready. It will be from 2026.
Source: World Bank, Business Ready 2025.
Like in a number of other Southeast Asian countries, price controls remain prevalent in Malaysia for some key goods such as fuel, cooking oil and staple foods like sugar and flour (particularly during festive seasons), aiming to shield consumers from price volatility and ensure affordability. To wit, the PMR sub-indicator capturing retail price controls and regulation stands at 2.4, versus an OECD average of 1.1. Indonesia and the Philippines make wider use of price controls, with scores of 3.0 for each of them, but Thailand has a significantly lower score of 1.5. While they provide short-term relief, they tend to distort market signals, discourage investment, and create inefficiencies that undermine competition and long-term consumer welfare. For instance, fuel price caps reduce incentives for energy efficiency and alternative energy development, while subsidised cooking oil has led to shortages and cross-border smuggling. Similarly, controlled sugar prices contribute to overconsumption and health risks. Blanket price controls should be phased out and replaced by targeted subsidies for vulnerable households, while enhancing price transparency and preventing collusion through real-time monitoring and mandating the Competition Commission to curb any anti-competitive practices when controls are lifted. This is indeed what has started to be done, but only to a very limited extent so far, with the BUDI95 scheme for petrol and quota-based diesel subsidies (see Chapters 1 and 2). As well, price controls on eggs were lifted mid-2025. In the medium term, the targeted subsidies could be replaced by targeted transfers, once further progress on the social safety net has been made (Chapter 1).
In the logistics sector, reviewed in an OECD Competition Assessment (OECD, 2021b), room for regulatory progress remains, notably with respect to the road freight transport sector. Capital requirements are still in place and disproportionately affect MSMEs without necessarily ensuring safety. The OECD recommendation to unify cargo and container licences has not been implemented. In the domestic shipping market, where applications for special permits were burdensome, a single window started to be rolled out nationwide in 2025, including all major ports as well as ports in Sabah and Sarawak. User adoption has been strong, with operators across all ports effectively utilising the system, contributing to improved efficiency, transparency, and turnaround times. However, certain regulations governing ship clearance and permit issuance may require further updates to facilitate fully digital processes, and a review is underway to ensure legal consistency and strengthen the mandatory use of the single window across all ports and agencies.
A more effective insolvency framework would support productivity growth and business dynamism by facilitating the timely restructuring of viable firms and the orderly exit of non-viable ones. Malaysia has made progress in recent years, notably through the introduction of corporate rescue mechanisms under the Companies Act 2016, which have improved recovery prospects and reduced resolution times, as noted in the 2024 OECD Economic Survey of Malaysia (OECD, 2024a). However, important weaknesses remain. The World Bank’s Business Ready 2025 indicators show that Malaysia compares unfavourably to many regional and OECD peers on business insolvency, reflecting gaps in regulatory quality, the effectiveness of insolvency services and the overall efficiency of procedures. Further reforms should aim to reduce the stigma and long-term economic costs of business failure by better differentiating between honest and fraudulent bankruptcies, easing restrictions on post-insolvency entrepreneurship and access to finance (getting a bankruptcy discharge to be able to start a new venture is a long and arduous legal process), and expanding asset exemptions for individuals. Strengthening creditor rights and transparency in insolvency proceedings, including clearer rules on information disclosure and creditor involvement in key decisions, would enhance confidence and improve outcomes. Aligning the framework more closely with international best practice, including in cross-border insolvency, would further support investment, improve capital reallocation and enhance Malaysia’s medium-term growth prospects. Work on this front has started in 2025 with the creation of a Cross-Border Insolvency Working Committee tasked to review the adoption of the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency and to recommend a standalone act for cross-border insolvency in Malaysia.
Government-linked companies (GLCs) and government-linked investment companies (GLICs) – in which ownership gives the State control – continue to play a major role in the Malaysian economy, hindering competition, as underlined in the previous OECD Economic Survey of Malaysia (OECD, 2024a). This is reflected in the PMR sub-indicator measuring the scope and governance of state-owned enterprises (Figure 3.7), which stands at 2.7 as against an OECD average of 1.2 and scores of 1.2 for Indonesia, 1.6 for Thailand and 1.9 for the Philippines. The legacy of the New Economic Policy and its Bumiputera empowerment objectives has entrenched GLC dominance in strategic sectors, often at the expense of private initiative. To foster a more dynamic business environment, Malaysia should adopt competitive neutrality principles, ensuring that GLCs operate on equal terms with private firms, particularly in government procurement and access to finance. Strengthening the Malaysian Competition Commission’s mandate to enforce antitrust rules in sectors where GLCs and MSMEs overlap would further level the playing field.
Note: Malaysia is shaded in red, while other non-OECD member countries are shaded in grey. The PMR scores are for Peninsular Malaysia. The PMR captures the GLCs but not the GLICs.
Source: OECD 2023-25 PMR indicators for comparator countries except for the Philippines (2022 indicator); OECD 2026 PMR indicators for Malaysia.
Governance weaknesses in GLCs exacerbate market distortions and undermine investor confidence. Despite commitments under the Twelfth and Thirteenth Malaysia Plans to strengthen governance, political appointments and opaque decision-making persist. As documented in the Auditor General’s 2024 report, strategic decisions, including major investments and procurement, are often made without proper board approval, and financial reporting lacks transparency. Political appointments continue to undermine accountability and corporate governance standards. These practices have contributed to recurring losses and ineffective risk management. Aligning governance frameworks with OECD Guidelines on Corporate Governance of State-Owned Enterprises (2024d) — through merit-based board appointments, cooling-off periods for politicians, and mandatory disclosure of financial and procurement decisions — would help professionalise GLCs and reduce political influence and corruption (see Table 3.2 further down).
While MSMEs also benefit from state support – through grants, tax incentives, and capacity-building programmes – the asymmetry in resources and influence remains stark. Besides, state support for MSMEs is delivered through a large and fragmented institutional landscape. In 2024 alone, 325 entrepreneurship and MSME development programmes (Bernama, 2025) were implemented by 14 federal ministries, more than 50 agencies, and all 13 state governments. This dispersion has contributed to overlap, duplication and administrative complexity, creating confusion for MSMEs seeking support. Strengthening coordination and consolidating public support programmes therefore remains an important policy priority. Notwithstanding a number of new measures to further assist MSMEs, progress in this regard has been uneven (Table 3.1).
Ownership restrictions have also emerged in the context of Malaysia’s policies to advance the economic empowerment of the Bumiputera population (Box 3.2). Affirmative action measures aimed at improving Bumiputera participation in the economy have historically relied on ownership quotas and preferential treatment in public procurement and licensing. While these policies have expanded Bumiputera representation in corporate ownership, they can also distort market signals and diminish efficiency. More market-friendly approaches, based on experience elsewhere (Box 3.3) could include targeted capacity-building programmes, skills upgrading, and access-to-finance schemes that are transparent and performance-based rather than ownership-based. For example, competitive grant schemes, open innovation funds, and supplier development programmes linked to clear productivity benchmarks could help Bumiputera firms scale without undermining competition. Digital platforms for procurement and MSME financing could also ensure equal access while maintaining affirmative action objectives through transparent scoring systems rather than discretionary exemptions.
International experience offers models for achieving inclusion without undermining competition. South Africa’s Broad-Based Black Economic Empowerment framework, for example, uses enterprise development scorecards and skills training incentives rather than blanket ownership quotas, encouraging firms to build supplier capacity and invest in workforce development. Canada’s Indigenous Procurement Strategy sets clear targets for Indigenous-owned businesses in federal contracting but relies on transparent bidding and capacity-building rather than preferential pricing. Similarly, Australia’s Indigenous Business Directory and mentoring programmes combine market access with performance-based support. These approaches share common features: transparent eligibility criteria, competitive processes, and emphasis on capability development rather than permanent structural advantages. Malaysia could adapt such mechanisms linking affirmative action to productivity benchmarks and innovation outcomes to broaden Bumiputera participation while preserving efficiency and contestability.
Source: OECD (2018, 2019, 2025e).
Digitalisation is key to boost the productivity of the government sector and can help implement the aforementioned Government Service Efficiency Commitment Act 2025, in addition to being a useful tool to improve transparency, integrity and accountability (section 3.6), as well as to enhance interoperability, data governance, institutional coordination, and evidence-based decision-making. Malaysia has already made considerable strides over the past decade in this respect, in line with a broader international trend towards integrating digital identity systems, one-stop government portals and investor-facing digital platforms to streamline administrative procedures and improve service delivery, as seen for example in Mexico’s recent reforms (OECD, 2026b). The rollout of MyGovCloud has sought to reduce duplication of ICT infrastructure and to help speed up the deployment of digital services. MyDigital ID makes it possible to streamline citizen authentication across an expanding range of services. As mentioned above, the e-Lesen digital platform has considerably compressed the time to approve business licenses. The Ministry of Finance’s ePerolehan procurement platform enables end-to-end online procurement – from supplier registration and tender posting to order issuance, invoice processing, and payment – for government agencies and suppliers, reducing paperwork and mitigating corruption risks. The Ministry of Health’s MySejahtera mobile app, which started as a COVID-19 containment tool facilitating surveillance, tracing, and vaccination, has become a broader digital health platform, supporting telehealth, patient record access, and health monitoring. The creation of a dedicated Ministry of Digital in late 2023 signalled a clear commitment to digital transformation as a lever for fiscal sustainability, service quality and integrity. Last but not least, the Data Sharing Act 2025 facilitates data sharing between government agencies while emphasising security.
Despite progress under the aegis of the Public Sector Digitalisation Plan 2026-2030, digitalisation remains uneven and fragmented, with ministries and agencies often developing parallel systems that cannot interoperate (World Bank, 2025a). This raises administrative costs, limits data reuse and weakens oversight. Strengthening common cloud infrastructure, enforcing whole-of-government data standards, and expanding secure data-sharing frameworks would allow systems to “talk” to each other, reduce duplication and enable once-only data collection. Policy priorities include clarifying data ownership and access rights, mandating interoperability standards for new digital investments, and empowering a central authority to arbitrate technical and institutional disputes. Given their scale, mandatory nature and long‑term implications, major digital and regulatory initiatives more generally should be subject to systematic regulatory impact analysis to ensure that implementation is proportionate, transparent and sensitive to impacts on affected stakeholders. Such reforms would also enhance transparency and integrity by facilitating cross-checks and real-time monitoring across administrative silos and securing audit trails.
Digital transformation is unlikely to deliver sustained benefits without a stronger digitally capable public workforce (see also Chapter 4). Malaysia faces shortages of staff with advanced digital, data and cybersecurity skills, particularly outside central agencies, and high turnover undermines institutional memory. Recruitment and career paths need to be adapted, with greater flexibility in pay, lateral entry from the private sector, and specialist digital tracks. Performance management systems could place greater weight on outcomes such as service speed, data quality and user satisfaction. Integrity incentives should explicitly cover data ethics, cybersecurity practices and responsible AI use. Continuous training, communities of practice and secondments across federal and state administrations would strengthen skills while narrowing gaps between regions, notably in Sabah and Sarawak.
Monitoring the extent to which digitalisation delivers productivity and integrity gains requires better outcome-focused metrics. To date, progress has often been measured in terms of inputs (spending) or outputs (number of digitised services). A more robust framework would track outcomes such as reduced unit costs, faster processing times, lower error rates, increased competition in procurement, and improvements in user trust. Progress is being made on this score under the Public Sector Digitalisation Plan 2026-2030, whose targets include achieving an 85% Digital Trust Index and an 85% customer satisfaction rate. Publishing selected indicators and benchmarking performance across agencies and regions would strengthen accountability and help identify where reforms are most effective. The recently-introduced obligation for all agencies to formulate outcome-based targets rather than mere output metrics in their latest Agency Digital Strategic Plans goes in this direction. Independent evaluation and audit of major digital investments should become standard practice to ensure value for money.
The health sector illustrates both the scale of the opportunity and the complexity of digital transformation, as shown in a recent OECD cross-country study focusing on AI’s potential to boost productivity across sectors, including in health and social services (Filippucci et al., 2026). Health accounts for a large and growing share of public expenditure, with mounting pressures from an ageing population and a rising prevalence of chronic diseases, and costly inefficiencies arising from fragmented records, duplicated tests and weak coordination.
Malaysia provides public universal healthcare services, alongside private healthcare providers in a dual system. Initiatives such as MySejahtera, the Health Information Exchange pilot and hospital digitalisation efforts show the potential of digital tools to improve care coordination and productivity. However, siloed systems, uneven digital maturity across facilities, and concerns over data protection remain binding constraints. Priorities include mandating interoperable electronic medical records, clarifying governance for data access and use between federal, state and private providers, and strengthening cybersecurity and consent frameworks. As underlined in a recent OECD report on scaling AI in the health care sector (OECD, 2026a), carefully governed use of AI for transcription, co-ordination, diagnosis and treatment could further raise clinical productivity, provided it is accompanied by the requisite capacity building and accountability, equity and professional standards are preserved. Recent Malaysian success stories include using AI to analyse X-rays so as to speed up and sharpen diagnosis, allowing clinicians to prioritise urgent cases more effectively; and the automation of admissions and discharge processes, to reduce waiting times (MPC, 2025).
International experience suggests that sustained efficiency gains in health depend on strong institutions as much as technology. Countries such as Estonia and Denmark have paired national e-health platforms with clear legal frameworks, trusted digital identities and rigorous audit mechanisms (Box 3.4). Malaysia has started to adapt these lessons by reinforcing central stewardship of health data with the creation of a Digital Health Division; it could also use MySejahtera to adopt “once-only” data collection anchored in a trusted national digital ID and consent registry so information follows the patient while citizens retain control; invest more in digital capabilities at the facility level; and systematically measure the impact of digital health investments on costs, outcomes and integrity. Doing so would help ensure that digitalisation in health becomes a durable driver of public-sector productivity rather than a collection of disconnected pilots.
Estonia illustrates how end-to-end digital integration can transform the efficiency of health service delivery while strengthening trust. Since the launch of the National Health Information System in 2008, nearly all healthcare providers have been connected through a single nationwide platform, enabling seamless and secure data exchange. With close to 100% of health records digitised and almost all prescriptions issued electronically, administrative duplication has been virtually eliminated and clinical decision-making accelerated. Patients can access their full medical history online, manage prescriptions, and monitor who has accessed their data, reducing unnecessary visits and improving adherence to treatment. The use of blockchain technology to secure records has reinforced data integrity and accountability, lowering the risk of errors or misuse and reducing costly verification processes. Efficiency gains are further amplified by Estonia’s integration of genomic data into the Health Information System, which supports more targeted diagnoses, prevention and treatment, reducing avoidable interventions and improving the allocation of health resources.
Denmark demonstrates how mature digital platforms and advanced analytics can deliver concrete operational savings in a decentralised health system. Core national tools, such as the Shared Medication Record and the sundhed.dk portal, ensure that general practitioners and pharmacies work from a single, up-to-date source of information, reducing duplicate prescriptions, medication errors and delays at discharge. These improvements translate into lower costs for hospitals and municipalities and smoother patient transitions across care settings. Denmark has also deployed AI-enabled tools in areas such as radiology and infection control, generating estimated annual savings of around DKK 100 million (USD 16 million) through faster diagnostics and fewer hospital-acquired infections. Combined with fully digital health records that eliminate paper-based workflows and manual data exchanges, these systems free up substantial staff time and improve resource allocation. Together, they show how digitalisation can raise productivity in health care not only through better outcomes, but through measurable reductions in transaction costs and operational inefficiencies.
Source: Palm et al. (2025), OECD (2024b), e-estonia.com/solutions/e-health-2/e-health-records, sundhed.dk, Birk et al. (2024), Fourrage (2025).
Streamlining the structure of government and strengthening integrity frameworks would raise Malaysia’s public-sector efficiency and productivity by reducing waste, duplication and opportunities for corruption. Fragmented governance structures weaken accountability, complicate oversight and inflate administrative costs, while weak integrity systems divert public resources from productive uses and undermine trust (OECD, 2023). In Malaysia, recurrent Auditor-General findings and public perceptions of corruption (Figure 3.8) underline the opportunity cost of inaction. The Thirteenth Malaysia Plan rightly links integrity, administrative rationalisation and digitalisation as mutually reinforcing productivity levers; policymakers should therefore treat organisational streamlining and integrity reform as a single, prioritised reform package with time-bound milestones.
Note: Panel A shows the point estimate and the margin of error. In Panel B, data for Singapore, Viet Nam, the Philippines and Indonesia refer to the 2023 World Bank Enterprise Surveys. Data for Thailand refers to the 2016 World Bank Enterprise Survey.
Source: Worldwide Governance Indicators; 2024 World Bank Enterprise Survey.
Fragmentation of policymaking and administration remains a key weakness of Malaysia’s public governance framework and contributes directly to monitoring gaps and cost overruns. Compared with most OECD countries, Malaysia operates with a relatively large number of ministries, agencies and statutory bodies, often with overlapping mandates. The 2025 Auditor-General’s Report found governance weaknesses across seven ministries affecting projects worth RM 49 billion (around USD 12 billion), including contract splitting and weak monitoring (Auditor-General, 2025). The Prime Minister’s 2024 decision to commission a review of overlapping functions and to establish a special committee to rationalise federal statutory bodies was a commendable first step. The review should now translate into concrete consolidation, clearer allocation of mandates, and stronger centre-of-government steering capacity, following OECD lessons that mergers and clarified ministerial remits reduce duplication and lower administrative costs.
Improving coordination and internal controls across ministries is essential to reduce waste and corruption risks, especially as public investment and digital projects scale up. Auditor-General reports suggest the root causes are systemic: weak ex ante project appraisal, fragmented risk management and limited follow-up on audit recommendations. Progress has been made following the Public Finance and Fiscal Responsibility Act 2023. The government now produces a Mid-Year Expenditure Performance Report, tabled before Parliament and reviewed by the Public Accounts Committee. Even so, there remains room to expand standardised project-management and risk-assessment frameworks, strengthen the scrutiny role of central finance and planning agencies for major investments (as is now being done for digital/AI procurements), and more systematically mandate time-bound corrective actions linked to budgetary incentives.
Strong, independent enforcement institutions are essential to sustain integrity gains and to deter state capture. Malaysia’s Anti-Corruption Commission (MACC) has been strengthened legally but would benefit from greater budgetary predictability, stronger protection from political interference and more transparent leadership appointments (e.g. with parliamentary vetting and fixed terms) consistent with OECD good practice for independent watchdogs (OECD, 2020).
Enhancing public-sector integrity also requires sustained implementation of focused anti-corruption strategies. The National Anti-Corruption Plan (NACP) 2019-23 contained 115 initiatives but showed uneven follow-through. The National Anti-Corruption Strategy (NACS) 2024-28 stresses enforcement, institutional accountability and strengthening digital governance. To be effective, NACS implementation should concentrate on a smaller set of high-impact reforms (for example digital procurement controls, beneficial-ownership transparency and conflict-of-interest avoidance), assign clear lead agencies, set measurable indicators and require regular public progress reports, consistent with the OECD Recommendation on Public Integrity (2017) and Public Integrity Handbook guidance (OECD, 2020).
Greater transparency on asset ownership and conflicts of interest would strengthen integrity at the highest levels of government. Civil servants currently declare assets periodically, but there is no comprehensive, regular, mandatory disclosure regime for ministers and Members of Parliament and previous NACP commitments in this field fail to be implemented in full. OECD guidance on managing conflicts of interest and public integrity emphasises systematic, verifiable asset and interest disclosures, independent verification and proportionate sanctions for non-compliance (OECD, 2005). Malaysia should legislate mandatory disclosures for all high-level members of the executive and for legislators, deploy digital verification tools, and task an independent body to review and publish compliance results.
Progress was made in 2025 with the passing of the amended Whistleblower Protection Act (Table 3.2), which enhances disclosure rights and protections and establishes an oversight committee. A key reform is the removal of the former provision that denied protection for disclosures that contravened secrecy laws such as the Official Secrets Act or Section 203A of the Penal Code, meaning whistleblowers may now receive legal immunity even when reporting information otherwise protected under such laws. However, the amendments did not address the absence of safeguards against employment‑related retaliation, a key element in international whistleblower‑protection norms, and reporting channels remain largely restricted to public‑sector enforcement agencies. These reforms therefore fall short of transforming Malaysia’s framework into a full whistleblower‑protection regime, amounting instead to an improved but still partial reporting‑channels law. Effective whistleblower legislation must include more comprehensive anti‑retaliation protections, independent reporting avenues, and greater enforcement clarity are now needed to refine eligibility criteria and define implementation protocols.
Finally, continued vigilance against money laundering is necessary to protect integrity gains and the investment climate. The FATF (2025) Mutual Evaluation finds that Malaysia has significantly strengthened its legal and supervisory framework for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), which is now broadly comparable to that of its peers (Figure 3.9). However, vulnerabilities endure, including insufficient understanding of trade‑based and third‑party money‑laundering risks, exposure to illicit flows linked to corruption, fraud, digital‑finance expansion, and Malaysia’s role as a regional transit hub. Despite improved investigative capacity, Malaysia has historically struggled to translate investigations into prosecutions and convictions, and mutual legal assistance remains underutilised, weakening cross‑border enforcement effectiveness. However, recent efforts under the National Coordination Committee to Counter Money Laundering Roadmap 2024-2026 demonstrate progress: in 2025, Malaysia secured 969 convictions against mule account holders and recovered over MYR 400 million in criminal assets. Additionally, the Anti-Money Laundering (Amendment) Act 2025 (effective March 2026) aims to further enhance the freezing, seizure, and forfeiture of illicit proceeds. Risks can also stem from complex corporate ownership and cross‑border flows. OECD (2024c) work on beneficial-ownership frameworks and AML/CFT best practice underscores the need for public, accessible beneficial-ownership registers (or tightly governed central registers), stronger inter-agency data sharing between AML, tax and procurement authorities, and robust analytics to detect suspicious flows. Malaysia has made progress on transparency in this area with beneficial ownership registries that are accessible to the competent authorities.
Note: The figure shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
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