The Role of FDI Inflows in Economic Growth in Malaysia (Time Series: 1975-2010)

Abstract

Recently, Malaysia has been recognized as one of the most popular destinations for Foreign Direct Investment (FDI) in Southeast Asia. But how do these FDI inflows affect Malaysia economy? This paper aims to identify the role of FDI inflows in Malaysia economic growth through a proposed endogenous growth model. Annual data covers from 1975 to 2010. Unit root test and Johansen Co-integration test are adopted to respectively verify the time series data is stable and the linear combination of the variables is stationary. Hierarchical Multiple Regressions (HMR) Analysis is then conducted to find out the momentum of the Malaysia economic growth including FDI inflows. The results show that the FDI inflows together with the human capital development contribute strongly to the host country's economic growth. But the technology spillovers of FDI inflows are still not sufficiently combined with human capital to contribute to the economic growth. Thus, it suggests government make more efforts to develop national human capital to attract and serve for FDI inflows. Moreover, the openness of the economy and the foreign exchange environment shall continue moving in favourable track.

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