Determinants of Foreign Direct Investment Inflows in Malaysia

Leong, Chan Foong (2020) Determinants of Foreign Direct Investment Inflows in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

Malaysia is a developing country and FDI inflow is a very important factor for those developing countries. This is because developing countries are facing several problems such as lack of capital and lack of access to modern technology. Based on the past researches where most of them states that FDI inflow does contribute to economic growth of a country. This paper attempts to examine the impact of independent variables on the FDI inflows in Malaysia. There are two specific objective of the study which is to investigate the relationship between the independent variables and FDI inflows, to examine the causal relationship between independent variables and FDI inflows. There are three independent variables (infrastructure, GDP and trade openness) and one dependent variable (FDI inflow) adopted in this study. Unit root test have shown that the model is stationary at first difference with intercept and trend & intercept. Then, it is proceed to Johansen cointegration test and the result indicated that there is long run relationship between the independent variables and FDI inflow in Malaysia. Besides, Vector Error Correction Model (VECM) found that infrastructure had positive long run relationship with FDI inflow, whereas, trade openness and GDP are negatively associated to FDI inflow in the long run. The Granger causality test is employed in this study. The result shown that there is one unidirectional causality relationship in this research. The causality relationship is running from FDI to infrastructure. This study conclude that the infrastructure is a significant factor that affect FDI inflow towards Malaysia from year 1974 to 2014.