The Influence of the Average Year of Schooling, GDP and Labour Force on Foreign Direct Investment (FDI) in Malaysia, Indonesia, and Thailand

Tan, Jin Soon (2025) The Influence of the Average Year of Schooling, GDP and Labour Force on Foreign Direct Investment (FDI) in Malaysia, Indonesia, and Thailand. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

The study titled "The Influence of the Average Year of Schooling, GDP, and Labour Force on Foreign Direct Investment (FDI) in Malaysia, Indonesia, and Thailand" provides a thorough and detailed investigation into the critical factors influencing Foreign Direct Investment (FDI) inflows in these three emerging economies. In the context of increasing global interconnectedness and economic competition, FDI has become a crucial driver of development, offering numerous benefits to host countries, such as the infusion of capital, advanced technology, management expertise, and access to international markets. These advantages are especially significant for developing and transitioning economies, which rely on FDI to accelerate industrialization, enhance productivity, and integrate into global value chains. By fostering innovation, creating employment opportunities, and facilitating technology transfer, FDI plays a pivotal role in elevating the economic trajectory of countries like Malaysia, Indonesia, and Thailand. This study focuses on three primary variables that are considered essential in attracting FDI—the average year of schooling, Gross Domestic Product (GDP, and the size of the labour force. These factors are not only indicative of a country’s economic health but are also critical in shaping its long-term attractiveness to foreign investors. In today’s competitive investment landscape, multinational enterprises (MNEs) seek destinations that offer not just cheap labour but also skilled, educated workforces capable of contributing to productivity improvements and innovation. Moreover, a country’s GDP, which reflects its overall economic size and growth potential, remains a major determinant for foreign investors, as it signals market opportunities and the likelihood of future returns. The research employs an econometric analysis, utilizing statistical models such as the Autoregressive Distributed Lag (ARDL) model to investigate both short-run and longrun relationships between the selected variables (average years of schooling, GDP, and labour force) and FDI inflows. The research highlights that educational attainment is crucial in attracting high-value FDI, especially in knowledge-intensive sectors like technology and manufacturing. Countries investing in education and human capital development, such as Malaysia through its Vision 2020 and ETP programs, are better positioned to attract advanced manufacturing and high-tech investments. Additionally, GDP growth and stability are key drivers of FDI, with larger, stable economies being more attractive to foreign investors. The study also emphasizes the importance of macroeconomic stability and regulatory transparency in creating an environment conducive to sustained FDI inflows. The research underscores the importance of the labour force, not only in terms of size but also in terms of quality, as foreign investors increasingly seek skilled workers capable of adapting to technological advancements. Countries like Thailand have successfully attracted FDI in sectors like electronics and automotive through investments in vocational training. The study recommends that Malaysia and Indonesia adopt similar strategies to attract FDI in high-value sectors by focusing on workforce upskilling initiatives. By differentiating between short-run and long-run effects, the study offers policymakers insights into how immediate economic fluctuations and structural improvements in education and workforce quality influence FDI over time, ultimately contributing to sustainable economic growth.