The Determinants of Inward Foreign Direct Investment: The Case of Malaysia

Abstract

ABSTRACT This study empirically explores the role of corruption, and the impact of China joining the WTO in 2001 on inward foreign direct investment (FDI) in Malaysia. From the empirical tests, this study suggests:- (1) FDI and its determinants are cointegrated; (2) Openness, interest rate, inflation rate, the joining of China into the WTO, and the level of corruption are the major determinants explaining inward FDI in Malaysia, both in the long-run as well as short- run. In general, these findings do provide the policymakers with empirical information about the policy formation on the variables those stimulating FDI in Malaysia. Keywords: Corruption; Foreign Direct Investment; Malaysia. (ProQuest: ... denotes formulae omitted.) I. INTRODUCTION Since the 1980s, FDI in the global economy has been experiencing rapid and steady growth (Chakrabarti, 2001; Huang, 2002). The inward stock of FDI to developing countries (as a share of GDP) rose from 12.4% in 1980 to 29.3% in 2000, and 31.4% in 2003 (but, it decreased to 26.4% in 2004) as reported by UNCTAD (2004 annex table B-6; 2005 annex table B-3). More precisely, Malaysia, Thailand and the Philippines are among the Association of Southeast Asian Nation (ASEAN) founding countries described as the most popular destinations for FDI (Ismail and Yussof, 2003). The late 1980s witnessed the period of most intense foreign investment activity when firms from Japan and the Newly Industrializing Economies (NIEs) were seeking production bases abroad to escape appreciating home currencies and loss of preferential access to many Organization of Economic Cooperation and Development (OECD) markets (Thomsen, 1999). It initiates the continuing research in examining the causes and consequences of foreign ownership since FDI has become an important source of funds for many developing nations (Moosa, 2002). As Table 1 shows, there are many factors have been identified and tested either from the microeconomics or macroeconomics perceptive in studying the determination of (FDI) using country-wise data. And, the results are varying among the studies. Interestingly, the literature on empirical determinants of FDI in Malaysia is not only wide and varied, but also controversial such as Yusop and Choong (2002), Ismail and Yussof (2003), and Choong and Lim (2007) Yusop and Choong (2002) examine the factors (GNP, exchange rate, interest rate differential, current account deficit, uncertainty, and inflation) influencing the FDI on the Malaysian manufacturing sector for the period 1965-1999. The FDI and its determinants are cointegrated. In the short-run, the GNP, current account deficit, and inflation are found to be crucial in the FDI. In addition, Ismail and Yussof (2003) investigate the relationship between labor market competitiveness and FDI inflows for three ASEAN member countries, namely Malaysia, Thailand, and the Philippines. The study finds that market size and openness are important determinants, while manufacturing wage rate is not a matter for FDI determination in Malaysia - manufacturing sector over the period 1985-1999. In recent, Choong and Lim (2007) reexamine the role of market size, skilled labor and liberalization process on the FDI in Malaysia. The study covers annual data between 1970 and 2001. The results suggest that local market size is significant variable, and the competitor's market size - China shows a negative impact on the FDI inflow. And, the skilled labor and liberalization process have an positive impact on the inflow of FDI in Malaysia. The main objective of this study is to empirically examine and estimate the influences of a group of key determinants of FDI in Malaysia both in the long-run and short-run. Beside the conventional variables such as market size, openness, infrastructure, interest rate, exchange rate, and inflation rate, this study extends the works by Yusop and Choong (2002), Ismail and Yussof (2003), and Choong and Lim (2007) with incorporating two potentially factors viz. …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 43 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.