The Southeast Asian neighbours will work towards a full-fledged pact, aiming to co-operate on renewable energy and smoothing procedures from business approvals to border clearance, they said in a joint statement.
"The zone presents an unprecedented opportunity," said Malaysia's Economy Minister Rafizi Ramli, adding that it would boost the cross-border flow of goods and people, strengthening business, and benefit the economies of both.
Rafizi and Singapore's trade and industry minister signed the deal at a ceremony in Johor, in the presence of the leaders of both countries.
Singapore was Johor's second-largest foreign investor from January to June 2022, and contributed about 70% of Johor's total foreign direct investment in manufacturing, according to the statement.
Earlier on Thursday, Malaysian Prime Minister Anwar Ibrahim and Singapore counterpart Lee Hsien Loong attended an event to complete the connecting span of a 4-km (2.5-mile) light rail link between the state's capital of Johor Bahru and Singapore.
Estimated to cost about 10 billion ringgit ($2.2 billion) and dogged by delays, the project, when completed by the end of 2026, will ease traffic congestion on the causeway between the neighbours, one of the world's busiest land crossings.
Thousands of Malaysians commute every day to small but wealthy Singapore for work and school.
