Determinants of Foreign Direct Investment in Malaysia

Ng, Yi-Xiang (2019) Determinants of Foreign Direct Investment in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

FDI has uncountable direct and indirect impacts on the emerging markets such as economic growth income, employment, production, prices, technology development and general welfare for the host country. Malaysia is one of the developing countries that heavily relied on foreign direct investment. It has been viewed as a key driver to enhance the growth performance and boost Malaysia’s economy. To encourage the FDI in the primary stage, Malaysia government has implemented several approaches, including the Investment Incentives Act 1968, free trade zones 1970s, and offered export incentives alongside the acceleration of trade openness. Besides the policies execution, Malaysia also maintains the quality of macroeconomic management, well-functioning financial system, and sustainable economic growth to stimulate FDI inflow. The purpose of this study is to identify the short-run and long-run relationship between FDI inflows, economic growth, exchange rate, trade openness, inflation rate, political stability, and the global financial crisis in Malaysia. Autoregressive Distributed Lag (ARDL) model is adopted to test the co-integration and Error Correction Model (ECM) based on the ARDL approach with the annual times series data from the year 1988 to 2017. The findings reveal that market size, exchange rate, government stability index, corruption, and trade openness are the factors that attract the FDI inflows to Malaysia in the long-run, but not the short-run. Nonetheless, inflation rate does not influence the FDI decisions in both short-run and long-run. In addition, Diagnostic Checking such as Breusch-Godfrey (BG) test, White’s Heteroscedasticity test, Ramsey RESET test, and Jarque-Bera Test will be used to ensure the model is best linear unbiased estimator (BLUE).