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Penang was originally ruled by the Malay Sultanate of Kedah. In 1786, it was handed over to the East India Company in exchange for military protection against the Siamese and Burmese armies threatening to attack Kedah. On the 11 August 1786 Captain Francis Light arrived on Penang and named it Prince of Wales Island in honor of heir to the British Throne.
When Siam attacked Kedah, Francis Light did not provide military assistance, and this caused the Sultan of Kedah to attack Penang in 1790. Of course the British who were better equipt with modern fire power, easily beat Kedah's forces.

The Sultan was forced to sign an agreement between the East India Company noting that Penang was to be handed to East India Company in exchange a fee of 6000 Spanish Dollars per year.An annual sum of 10,000 ringgits continues to this day be paid by the Malaysian Federal Government to the state of Kedah.
In 1826, Penang, along with Malacca and Singapore, became part of the Straits Settlements under the British administration in India, moving to direct British colonial rule in 1867. In 1946 it became part of the Malayan Union, before becoming in 1948 a state of the Federation of Malaya, which gained independence in 1957 and became Malaysia in 1963.
The island was a free port until 1969. Despite the loss of the island's free-port status, from the 1970s to the late 1990s the state built up one of the largest electronics manufacturing bases in Asia, in the Free Trade Zone around the airport in the south of the island.
In early July 2008, George Town, was recently recognized as a UNESCO World Heritage Site alongside with Malacca. It is officially recognized as having a unique architectural and cultural townscape without parallel anywhere in East and Southeast Asia.