Determinants of Foreign Direct Investment (FDI) in Developing Country - Malaysia

Lee, Win Yee (2022) Determinants of Foreign Direct Investment (FDI) in Developing Country - Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

As a developing country, Malaysia always been striving to attract higher FDI inflow with attractive incentives and financial supports provided to the investors. Despite the initiatives taken, Malaysia FDI performance remained behind its neighbour countries like Singapore, Indonesia and Vietnam. Besides, notwithstanding numerous of study has already address the topic of FDI determinants, several core variables such as inflation, interest rate, fixed telephone subscriptions and electricity production, which are unstable and have long-established effects on FDI have not been deeply scrutinised to provide a clearer picture of the relationships. Hence, the main objective of this study is to examine the determinants of FDI inflow in Malaysia. In this study, a total of six variables have been employed and were breakdown into two categories namely macroeconomic variables and non-macroeconomic variables. Macroeconomic variables include inflation rate, interest rate, exchange rate and gross domestic product (GDP) whereas non-macroeconomic variables include electricity production and fixed telephone subscriber. These data are gathered from year 1983 to 2018, a total of 36 sample size. Tests are conducted by applying Eviews 11 software. After ensuring the data exists no stationarity problem with ADF and KPSS tests, it is then proceed with Johansen Cointegration test, VECM test and Granger causality test. The results suggested that inflation rate, exchange rate, electricity production and fixed telephone subscriber have a long run impact on FDI inflow in Malaysia. On the other hand, GDP impacts FDI inflow negatively and interest rate is insignificant to explain FDI. To conclude, the findings shown that non-macroeconomic variable, in this case, electricity production is the most impactful determinant of FDI in Malaysia. Hence, this study has shed a light on the determinants that have highest magnitude impact on FDI inflow in Malaysia and provided several suggestions for future research and policy recommendations to improve FDI inflow.