The Determinants of Foreign Direct Investment in Malaysia: A Revisit

Abstract

The paper re-examines the determinants of foreign direct investment (FDI) in Malaysia, for the period 1970-2006. The cointegration results show that market size of both Malaysia and China have major, and a statistically significant impact, on FDI inflow to Malaysia. The results seem to support the argument that foreign investors tend to be more attracted to the country with a higher growth rate of gross domestic product (GDP) because it indicates a laglecrv potential demand for their products. In addition, the results also demonstrate that openness level of the country has a positive and statistically significant effect on FDI inflow, which supports the hypothesis that FDI can be attracted to a country with more liberalized economic reforms. Finally, the results show that literacy rate (human capital development) has significant positive effect on FDI inflow. The finding suggests the need for labor force expansion and education policy to raise the stock of human capital in the country. Using Granger causality test, we also find that there exist unidirectional causality from real GDP of both Malaysia and China, degree of openness and literacy rate to FDI inflow.Foreign direct investment, market size, literacy rate, cointegration, causality,

The determinants of foreign direct investment in ASEAN

“…The coefficient on ΔTRD_RO has been found positive as expected and statistically significant at 1 percent. This result is as expected in hypothesis and similar to the previous studies of Choong and Lam (2010), Ismail et al (2009), Ramasamy andYeung (2010). This confirms that FDI in ASEAN3 are significantly Rodrik (1995), Tuman and Emmert (1999), and Kosack and Tobin (2006).…”

“…To measure the degree of openness in the country, Kravis and Lipsey (1982), Singh and Jun (1995), and Dees (1998), Anwar and Nguyen (2010) use the ratio of value of export (or import) to GDP; while Choong and Lam (2010) and Ismail et al (2009) used the trade ratio (export plus import values divided by GDP).…”

FDI determinants: Kenya and Malaysia compared

“…At the same time, export oriented investments may prefer to locate in more open countries since increased imperfections that accompany trade protection imply higher transaction costs associated with exporting. This latter case seems to be prevalent in Malaysia and is also consistent with findings by Choong and Lam (2010) and Ang (2008), while the former reflects to a large extent FDI in Kenya. Until recently Kenya's economy especially in A c c e p t e d M a n u s c r i p t 14 manufacturing has remained inward oriented and in the face of liberalization largely uncompetitive.…”

“…Economic growth does not seem to affect growth of FDI in the short run, although it does affect wages. This is in contrast with findings by Choong and Lam (2010) and Chowdhury and Mavrotas (2006) who find evidence of bi-directional causality between FDI and economic growth in Malaysia. The reason is that the previous study suffers from poor model specification where causality is estimated using the VECM model, while the latter study is based on the assumption of optimal lags of 2, which does not hold in our study.…”

“…In Malaysia, several studies have been undertaken in this area(Pradhan, 2008;Ang, 2008;and Choong and Lam, 2010). These studies ignore the role of institutional and political factors.…”