This study examines the justification for local goverment in Peninsular Malaysia at present and how its role can be enhanced in future. The general approach in this study is mainly by consolidating the various theoretical contributions toward the case for local goverment. One strong argument in favour a system of local goverment in delivering local public goods and services is explained by the diversity of preferences between communities. Our study has indicated that the communal nature of Malaysian society seems compatible with the establishment of a local goverment. A local goverment in general can provide certain local public goods and services to the satisfaction of local people as compared to higher goverments. The domination of Malaysia's central goverment in public activities does not necessarily leads to an efficient resource allocation. The variation in spatial benefits of public goods provides a strong case for establishing different levels of goverment to performvarious public functions. In this study we examine the basis of division of funtions between different levels of goverment. Further we provide some suggestions with respect to areas of activities in which local goverment in Malaysia should perform in future. To meet the expanded local goverment role we also suggest some reform with respect to its finance. There are a number of factors which may help to strengthen and enhance the role of local govermentin Penninsular Malaysia. To approach this we employ a regression analysis to see the relevant factors which may influence the level of services provided by local goverment. Our study has revealed that like economic base as measured by rate-able value and urbanization are two significant factors in affecting the level of services provided by local goverment. The study has suggested the lack of importance of grants (both federal and state grants) in helping local goverments to raise their expenditure levels. This is consistent with the relatively low level of grants given to local goverments. In the light of this empirical study we outline the necessary policy reforms for local goverment in Malaysia in future. Finally the study suggests for areas of further research.