Determinants of Foreign Direct Investment in Malaysia and other Asian Countries

Chin, Sheina Haw Yan (2024) Determinants of Foreign Direct Investment in Malaysia and other Asian Countries. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

Foreign direct investment (FDI) can significantly contribute to a country's economic growth by providing capital, technology, managerial expertise, and access to global markets. FDI inflows can stimulate domestic investment, create jobs, increase productivity, and foster innovation, thereby boosting overall economic activity and competitiveness. By using annual time series data spanning 1972 to 2022, this study examines the key factors that influence foreign direct investment (FDI) inflows to Malaysia, India and Singapore. The purpose of this study is to identify the relationship of the determinants on FDI, examine which factors have the greatest impact on FDI, and investigate the existence of mediation effect on inflation rate between COVID-19 and FDI. Autoregressive Distributed Lag (ARDL) model is adopted in this study to evaluate the long run co-integration relationship of FDI and the determinants. In addition, Granger causality test is used to analyze the causal relationship between the variables. Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is employed in gauging the implications over the entire period of study. The findings reveal that GDP and inflation rate are the factors that attract the FDI inflows and outflows to Malaysia. For India, only GDP are the factors that attract both FDI inflows and outflows, population affect only in FDI inflow, inflation rate affects only in FDI outflow. For Singapore, exchange rate is the only factor that affect both FDI inflows and outflows, while GDP attract FDI inflows, population brings impact in FDI outflows. Nonetheless, the research concludes that COVID-19 only affect FDI outflows in Malaysia and Singapore, no significant negative association between COVID-19 and FDI to India during the overall period. Diagnostic Checking such as White’s Heteroscedasticity test, Ramsey RESET test, and Jarque-Bera Test will be used to ensure the model is best linear unbiased estimator. Moreover, the Sobel test is conducted in this study as a mediation analysis to investigate the existence of mediator effect of inflation rate between COVID-19 and FDI. The results indicate that inflation rate mediates the relationship between COVID-19 and FDI in Malaysia and Singapore. However, there is no evidence of mediation effect in India.