Determinants of Foreign Direct Investment in Malaysia

Lam, Ji Shan (2025) Determinants of Foreign Direct Investment in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the determinants of Foreign Direct Investment (FDI) in Malaysia by analyzing the impact of three key macroeconomic variables: the Consumer Price Index (CPI), exchange rate (EXR), and infrastructure (INF). Using econometric techniques such as the Augmented Dickey-Fuller (ADF) test, Johansen cointegration test, Vector Error Correction Model (VECM), and Granger causality test, the research examines both long-run and short-run dynamics of FDI inflows in Malaysia from Q1 2008 to Q3 2024. The findings show that CPI and exchange rate have significant long-term relationships with FDI, while infrastructure development is positively associated with FDI inflows. Results also suggest that inflation stability and exchange rate predictability are crucial for maintaining investor confidence, while investments in transport, digital connectivity, and data centres are vital for sustaining infrastructure-driven FDI. The study concludes that macroeconomic stability and infrastructure readiness are essential to attracting high-quality FDI. These insights are intended to support policymakers in designing strategies that enhance Malaysia’s position as a competitive investment hub in the Southeast Asian region. Keywords: Foreign Direct Investment (FDI), Consumer Price Index (CPI), Exchange Rate (EXR), Infrastructure (INF), Malaysia, Vector Error Correction Model (VECM), Granger causality, Cointegration, Macroeconomic variables, Inflation, Monetary policy.