The Relationship Between Foreign Direct Investment and Economic Growth in Malaysia

Fuan, Zhi Bin (2026) The Relationship Between Foreign Direct Investment and Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

Text Fuan Zhi Bin_2409582_full.pdf Restricted to Registered users only Download (1MB)

Abstract

This study examines the relationship between Foreign Direct Investment (FDI) and economic growth in Malaysia using annual time-series data. FDI is considered an important driver of economic growth through capital inflows, technology transfer, and employment creation. However, the impact of FDI on Malaysia’s economic performance remains uncertain. Therefore, this study aims to investigate the short-run and long-run relationships between FDI and economic growth in Malaysia. The variables included in this study are gross domestic product (GDP), foreign direct investment (FDI), inflation rate, trade openness, and labor force. This study adopts a quantitative research approach using secondary data collected from reliable sources. The Augmented Dickey-Fuller (ADF) test and Phillips-Perron (PP) test are used to examine stationarity, while the Autoregressive Distributed Lag (ARDL) model is employed to analyze both long-run and short-run relationships. In addition, the Granger causality test and diagnostic tests such as Ramsey RESET, Jarque-Bera, LM test, CUSUM, and CUSUMSQ are conducted to ensure model reliability and stability. The empirical results indicate that there is a long-run relationship between FDI and economic growth in Malaysia. The long-run estimation shows that FDI has a positive and statistically significant effect on economic growth, while inflation has a negative relationship. Trade openness and labor force show positive but insignificant effects in the long run. In the short run, inflation, trade openness, and labor force influence economic growth, and the error correction term confirms adjustment toward long-run equilibrium. The diagnostic and stability tests confirm that the model is reliable and stable. Overall, the findings suggest that FDI plays an important role in promoting Malaysia’s economic growth. The study recommends that policymakers strengthen FDI attraction strategies, maintain macroeconomic stability, improve trade performance, and enhance labor force quality to achieve sustainable economic development