The Impact of Monetary Policy on Foreign Direct Investment: Evidence from Malaysia

Wong, Kah Feng (2025) The Impact of Monetary Policy on Foreign Direct Investment: Evidence from Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

Text 202405_BBBE3053_WONG KAH FENG (FULL FYP).pdf Restricted to Registered users only Download (2MB)

Abstract

This study investigates the relationship between key macroeconomic factors—monetary policy, exchange rates, economic growth, and trade openness—and their influence on foreign direct investment (FDI) inflows in Malaysia. Using the Autoregressive Distributed Lag (ARDL) model, the research analyzes both long-run and short-run dynamics between these variables to determine how Malaysia’s monetary policy affects FDI. The empirical results reveal a significant long-run positive correlation between Malaysia's monetary policy and FDI inflows, where a lower OPR attracts more foreign investment by reducing borrowing costs. Additionally, GDP growth demonstrates a delayed but positive impact on FDI inflows, indicating that foreign investors respond cautiously to economic growth. In the short run, trade openness significantly influences FDI, reflecting the importance of Malaysia’s engagement in global trade, while exchange rates show a less pronounced effect. However, the volatility of exchange rates and inflation present potential risks to maintaining consistent FDI inflows. The findings highlight that stable and transparent monetary policy is essential for sustaining Malaysia’s appeal as an FDI destination. Furthermore, trade liberalization policies and participation in regional trade agreements enhance Malaysia’s market access and attractiveness for foreign investors. Policymakers are encouraged to improve monetary policy transparency and create strategies to buffer against external shocks like global economic downturns and currency fluctuations, which could hinder long-term FDI growth. This study contributes to the existing body of literature by offering insights into how macroeconomic variables interact with FDI within the context of an emerging economy, providing a deeper understanding of the factors that influence foreign investment in Malaysia.