Factor Influencing Foreign Direct Investment Inflow into Malaysia

Hu, Chen Hau (2026) Factor Influencing Foreign Direct Investment Inflow into Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study examines the key macroeconomic factors influencing Foreign Direct Investment (FDI) inflows into Malaysia. FDI is critical for Malaysia’s economic growth through technological advancement, industrial development, and job creation, yet inflows have fluctuated in recent years due to macroeconomic conditions and rising regional competition. The analysis focuses on the relationship between unemployment, inflation, the real effective exchange rate (REER), trade openness, and FDI. Using annual time series data from 1985 to 2024, the study applies the Autoregressive Distributed Lag (ARDL) bounds testing approach to assess both short-run and long-run relationships, complemented by Granger causality analysis. The results indicate a significant long-run negative relationship between FDI and both the exchange rate and unemployment, while inflation and trade openness show no significant long-run effects. In the short run, however, all variables exhibit significant relationships with FDI at different lag structures. The Granger causality test further reveals unidirectional causality from FDI, inflation, exchange rate, and trade openness toward unemployment. This research provides valuable insights for policymakers seeking to attract and sustain FDI. Ensuring exchange rate stability and reducing unemployment are especially important for fostering a favorable investment environment. By addressing these macroeconomic dynamics, Malaysia can strengthen its competitiveness as a preferred destination for foreign investors