United States ambassador to Malaysia Christopher J LaFleur talks about the challenges confronting the Malaysian economy and the areas which investors would like to see improvement in this final of a two-part interview with malaysiakini .

Malaysiakini: There's concern that US foreign direct investment (FDI) in Malaysia has dropped. Some argue that China is gobbling up all the FDI. What's your view on this?

LaFleur: The first question to ask in response to your question is: is it in fact dropping? I'm not sure I've seen statistics that would support that. In fact, I think what we're seeing is that the US companies that have already invested in Malaysia - depending on how you count, we have perhaps US$29 billion invested here. We're seeing those companies continue to make investments here.

Just reading this morning, I saw in one of the newspapers, that Motorola is doing some additional investments in their facilities. I'm not sure you're seeing a drop or disinvestment, if that's what you mean. I think the question relates more to what Malaysia is doing or could do to bring in brand new sorts of investments, sometimes termed 'greenfield' investments, something that hasn't been done before.

A couple of thoughts on that: first, you've got a pretty impressive array of companies here so the universe of companies that might be investing in Malaysia may not be quite as large because you've already gotten quite a number of them here to begin with.

But beyond that, I think Malaysia is facing a new set of challenges as it thinks about its economic future. It has an economy that's very successful in terms of agriculture. It exports its agriculture. It has oil and petroleum products, it has a very healthy tourism industry, and it has developed this very impressive high-tech manufacturing capability. It has done great and of course the statistics last year (showed Malaysia) as having seven percent growth, which is impressive.

The impression I've been getting, though, since I've arrived is that people here are worried about what comes next. Everybody appreciates that the Chinese are coming along, the Indians are coming along, so the expectation is that you won't be able to continue to compete as effectively in some of these areas, notably in manufacturing, as you've been able to do up to this point. So what's next?

I've heard a lot of ideas out there, such as moving into knowledge-based industries, bio-technology, trying to develop new ways of developing the productivity of small- and medium-sized farm owners ... and all these strike me as interesting, good ideas. I'm not a development economics expert so I'm not the right person to get an expert professional judgement on it. From my perspective, though, it strikes me that to become an attractive place, to make those kinds of investments, Malaysia needs to build on some of the strengths it already has to make itself even more attractive.

What I'm thinking of are a number of variables: one, to work on the legal and regulatory framework that protects businesses and provides businesses stable and predictable sets of rules for their operations. I think further emphasis on education - and I've been talking to some people in the government on that - is clearly critical, and it is critical in our case. What has happened in Massachusetts, California's Silicon Valley - these places are anchored by world-class universities that produce a lot of graduates in specialised fields that the high-tech knowledge-based industries need.

You have some strong capabilities in the English language and since a lot of back-office operations are conducted in English - that's another source of potential strength that you continue to work to make sure the younger generations have the English capabilities. That strikes me as very valuable.

One area that some good initial work has been done on is intellectual property rights (IPR). I'd say there's probably still a lot of work out there that needs to be done. Malaysia's difficulties in this area aren't unique, but since here you are looking at developing knowledge-based industries, I think that IPR protection is a really critical element to focus on.

You have law-enforcement authorities going after people who pirate entertainment software - VCDs, CDs, DVDs - which a lot of effort seem to be made along those lines but I have to tell you that the software makers association in the US told me before I came out here that they believe Malaysia is the biggest exporter in the world of pirated entertainment. That kind of reputation can only discourage people from coming to invest their money here.

Why do you think that's the case?

As a newcomer here, my impression is that there is still the feeling among a lot of people that it's okay to buy pirated software. Some people say, 'well, the regular DVDs are too expensive.' As I said, this is not a problem unique to Malaysia. We have a big problem in the US, we face the same sort of thing, particularly in the music area - things being copied over the Internet. So Malaysia, like many other countries, needs to be working on how to change the mindset. That's in terms of the domestic situation.

When you get into export, then I think you're bringing in a different set of problems. I think Malaysia has achieved this unfortunate distinction in part because it is a technologically-advanced place. There are facilities that are capable of making these products well and unfortunately, the criminal syndicates who do this sort of thing are really taking advantage of Malaysia. They probably can operate all around the region but they find a good combination of facilities here to take advantage of.

I know your law enforcement authorities are working on this. I saw a report of some bust on a factory the other day so people are beginning to work very seriously on this problem. But I think it is important to flag it because it is one of the things that would discourage the new investment that you want so the more people see that the authorities are both serious and effective, I think the faster you'll be attracting investments.

Some would argue that we are fighting a losing battle. There is a strong demand for pirated software.

Well, technology is always creating new challenges in terms of giving opportunities both for useful production and also for criminals to take advantage of, but the more you fight against it here in Malaysia, the more attractive Malaysia is going to be as opposed to other places for investors.

So at the end of the day, it seems to me, this is a situation which is win-win from the viewpoint of our bilateral relationship because it's really something that you would want to be doing for yourselves anyway.

The thing that strikes me is, Malaysia itself is trying to develop its own entertainment industry. You have some very popular singers, you're putting out some very good movies, but if your business people, if your actors and actresses and directors can't make money in this field because their work is being pirated and people won't go into this field, it would disappear.

So again, we're all in this together. This isn't us versus you, this is us in the fight together against criminals. I think the more successful you are in those efforts, the better off you'll be, the better off everybody's going to be.

But some of these software prices are way too high. Making software affordable for not-so-rich countries like Malaysia can help stem piracy. This issue is not discussed as much as the campaign against piracy.

Well, pricing is a challenge to any company that distributes a product internationally because there are always going to be different costs and different competitive opportunities - one market versus another - and I'm not an expert that would give you an informed opinion on the best way to do that, but my understanding is that, in fact, some manufacturers of software do have various policies in terms of adjusting prices according to the market.

But I guess, in some ways if you want to develop Malaysian industry, you would want to have prices set at a level that helps your own people make a profit. I think a lot of people tend to look at this somehow as though it's the big entertainment companies based in Hollywood or Bollywood versus the individual consumers here in Malaysia. I don't think it's like that because I'm reading in the newspapers all the time about Malaysians making films - Sepet is one of the latest ones and it's doing great business. People, I assume, will be encouraged by that and make more movies here.

But if the counterfeit DVD is out there on the streets and everybody can buy it and they don't go to the theaters, people won't make money. I think this is a problem not just for Malaysia, but for our country, too. How do we convince our young people that someday they may want to be working for companies that are making movies or producing books or making some other form of intellectual property and we've created a culture that makes the theft of this permissible, then our children may not have the jobs that they want. I think that would be too bad.

There is a proposal out there that the US would want, perhaps, to negotiate with Malaysia for some kind of a free trade agreement (FTA) deal.

We're not quite at the stage to be discussing an FTA. What we have done is started a set of talks that are based on a trade-investment framework that was signed last year. We just held the first working-level meeting under that rubric and we're going to be looking at some of these areas, including IPR (intellectual property right) protection that we think are important to resolve.

Having done that, I think both sides will take stock and see what the prospects are to look forward to in a free trade agreement, if any. Some American manufacturing associations have called for that, but we've got some issues here to look at before we reach that stage...

So it's still premature to be really talking about it.

I think it is. We've got some other things to do. The two countries got together and the Malaysian side had a couple of things they wanted us to look at, we put some things on the table that we wanted Malaysia to look at.

What are the key issues that the US and Malaysia are looking at?

Well, we've already talked about IPR and that's one of the big issues. Issues that come under the IPR rubric, of course, entertainment, software, those sorts of things. It also includes pharmaceuticals and other products that require great investment in research and development. An environment for protecting that sort of thing is also important in the discussion of IPR.

There are some other issues, such as government procurement, transparency, whether the rules are clear, the competition is even-handed, how industries get the information on what's out there to bid for. Government procurement is a very important area - issues like that.

What are some of the key complaints American companies have regarding doing business in this country?

Let me say that I haven't been here long enough to meet with all of the companies. I've addressed the US Chamber of Commerce, I've talked to a few people, but I wouldn't say I'd be confident issuing a blanket judgement about what American companies find good and less good about the environment here.

I would say that most of the people I've talked who have big investments here seem very pleased by the business they've been able to do here. Most people are looking at how a good thing can be made better and how the situation can be improved. IPR, transparency, good rule-setting in the government procurement area, level-playing field, good access to people with the right skills coming out of the education system.

I think businesses are really looking at the issues in much the same way Malaysians are. In other words, where's the future here? Where are we going with Malaysia? Everybody has done well together, working together, what's the next stage? What's the next step? Make good rules-based system where the bureaucracy works effectively, promoting business, clearing away obstacles.

All countries, the US and everybody else, is part of a global economy and capital will flow where investors feel welcome and do well. Really, we're all in a competition to attract those sorts of investment dollars.

Of course, we're not in a competition with everybody in the world, because we're at different economic stages in terms of the development process. I think each economy needs to look at what it can do to move to that next stage, and Malaysia, from what I've seen in my early weeks here is very much in the midst of coming to grips with those challenges.

What do you hope to achieve as US ambassador in the coming years?

I would very much like to see the cooperation that we have with Malaysia move to an even higher level. We already have a lot of very good cooperative efforts moving forward. We've talked about the business side, we've talked about the cooperation we have in the fight against terrorism. We have a very good military-to-military relationship. Our armed services get together and do some exercises from time to time. That's very helpful.

We're very encouraged by what Malaysia has been doing in cooperation with some other countries in the region on security here... That's all very positive.

One of the things I'd very much like to see improve or expand - we have a lot of Malaysian students. We've been working very hard here in recent months to make the visa process more quickly and smoothly. We've put most of the forms we use now online. People can now, online, make an appointment to come in and see the consular offices so they don't have to stand in line anymore.

In a few days, we're going to open a brand-new consular section downstairs so that people have a more comfortable and modern-looking place to be when they come. We've done a lot of things to try to improve the provision of that service here, because we really do want Malaysian students to come and study in the United States and we want Malaysian businessmen to come to the United States and we're trying to demonstrate that we're keenly aware that having an efficient and good visa system is a critical first step to encouraging people to take advantage of the opportunities.

We're working very hard on that and we want to improve on that area, so there are a variety of things we can do together but as I say, Malaysia is a very important bilateral ally, bilateral partner I should say, and in the economic sense, it's the 10th largest US trade partner.

It's also a very influential country intellectually, policy-wise, within East Asia and also within the broader Islamic world because of its large Islamic majority and I'm very encouraged by what the prime minister has been enunciating in terms of the Islam Hadhari vision for a moderate forward-looking Islam. I think Malaysia has a great opportunity to play a leadership role in that area as well.

US envoy: Reputation as No 1 pirated software exporter hurting M'sia