Effect of Foreign Direct Investment on Unemployment Rate of Malaysia

Ng, Ho Ying (2025) Effect of Foreign Direct Investment on Unemployment Rate of Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the impact of Foreign Direct Investment (FDI) on Malaysia’s unemployment rate over the period from 1982 to 2022, incorporating the effects of Gross Domestic Product (GDP) growth and inflation as additional macroeconomic variables. Utilizing annual time-series data sourced from the World Bank and the Department of Statistics Malaysia, the research applies the Autoregressive Distributed Lag (ARDL) modeling approach to explore both short-run dynamics and long-run equilibrium relationships. The empirical findings reveal a statistically significant negative long-term relationship between FDI and unemployment, indicating that increased inflows of FDI contribute meaningfully to job creation in the Malaysian economy. GDP growth also demonstrates a robust inverse association with unemployment, consistent with the theoretical framework of Okun’s Law, further emphasizing the role of economic expansion in reducing joblessness. In contrast, inflation exerts only a negligible long-run effect on unemployment, suggesting that price level changes are less critical in influencing labor market outcomes over time. Granger causality tests provide additional insights, showing that inflation Granger-causes both FDI and GDP in the short run, while unemployment exhibits a marginal predictive power over future GDP fluctuations. These results underscore the strategic importance of FDI as a policy instrument to mitigate unemployment, particularly when supported by complementary measures such as workforce upskilling, industrial diversification, and region-specific investment incentives. Nevertheless, the study acknowledges several limitations, including the reliance on aggregated national data and the potential omission of structural breaks or policy shifts during the study period. Future research is encouraged to adopt disaggregated or sectoral analyses to capture more nuanced dynamics. Overall, this research contributes empirical evidence supporting the formulation of targeted FDI-oriented policies to promote inclusive economic development and sustainable employment growth in Malaysia.