Determinant Of Foreign Direct Investment In Malaysia Economics Essay


Presents, Malaysia seems to be one of the most successful states in Asiatic that can pull Foreign Direct Investment ( FDI ) . There are tonss of determiners for foreign direct investing in Malaysia. The schemes to pull more foreign direct investing are by bettering the present determiner. There are three parts of income in FDI. There are reinvented net incomes, dividends and involvements. Interests are income on loans and debt securities. Dividends are distributed net incomes allocated to portions and the equity of integrated private endeavors, public corporations and co-ops.

First, FDI flows provide an of import window through which houses can avoid rapid increasing production costs at place and happen attractive markets abroad. Second, since FDI are non-debt making fiscal committednesss, so this instrument are more likely to be applied to financing external current history shortages peculiarly in developing states ( Demekas et a.2005 ) . Third, FDI flows affect growing positively by diminishing the costs of research and development ( R & A ; D ) through exciting invention in the host state ( Lensinky and Morrissey 2001 ; Graham and Wada 2001 ; Sanchez-Robles and Calvo 2003 ) . Borensztein et Al. ( 1998 ) considered FDI to be an of import vehicle for transportation of engineering, lending to growing more than domestic investing. FDI can be an of import channel for conveying cognition and integrating into planetary production ironss which are severely needed for successful exports scheme by developing states. Yussof and Ismail ( 2002 ) found that inward FDI has been an of import beginning of cognition transportation in engineering, direction accomplishments and international linkages for Malaysia, Indonesia, Philippines and Thailand. Furthermore, Aron ( 1999 ) argued that through preparation of workers and hands-on acquisition, FDI raises the accomplishments of local work force, thereby increasing their productiveness degree. Slaughter ( 2002 ) reported a strong positive correlativity between accomplishment upgrading and the presence of local affiliates of U.S MNCS.

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Foreign Direct Investment is of import because it can hike the economic system growing in Malaysia. Policy reforms, including the debut of the Investment Incentives Act 1968, the constitution of free trade zones in the early 1970s and the proviso of export inducements is accelerate of unfastened policy in the 1980s are led to a rush of FDI in the late eightiess. The other factor is believed that sound macroeconomic direction, sustained economic growing, and the presence of a well working fiscal system have made Malaysia an attractive chance for FDI.

The chief aim of this survey is to look into the domestic short tally and long tally determiners of foreign direct investing ( FDI ) in Malaysia utilizing one-year informations between the periods of 1980-2006. To accomplish the aim, the survey employs the Johansen cointegration and error-correction theoretical account ( Johansen, 1988 ; Johansen and Juselius 1990 ; Johansen 1991 ) . The survey is to find the of import macroeconomic factors that can impact foreign direct investing in both short tally and long tally that policymakers can act upon in Malaysia. Johansen cointegration and error-correction theoretical account distinguishes the relationship among the variables into short tally and long tally relationship.

First and prior to proving for cointegration, the belongingss of single clip series are investigated by using the Augmented Dickey-Fuller ( ADF ) and the Phillip-Perron ( PP ) trials. Second, presuming that the series are stationary, Johansen maximum likelihood method will be applied to analyze the inquiry of cointegration among the variables in multivariate scene. Third, if the variables are found to be integrated, the error-correction theoretical account will be estimated by including the error-correction term ( ECT ) lagged by one twelvemonth, derived from long-term relationships, as independent explanatory variables are cointegrated, so tests affecting differenced variables are mis-specified and some of import information lost unless a lagged error-correction term is included.

Definition of Foreign Direct Investment

– Foreign direct investing is investing of the foreign assets into domestic constructions, equipment, and organisations. It does non include foreign investing into the stock markets. It refers to long term engagement by state A into state B. For illustration, ToyotaAA company from Japan doing a physical investing into a auto fabrication mill in Malaysia.AA It normally involves engagement in direction, joint-venture, transportation of engineering and expertness. More specifically, foreign direct investing is a cross-border corporate administration mechanism through which a company obtains productive assets in another state.

There are three types of FDI:

Inward foreign direct investing and outward foreign direct investing, ensuing in a net FDI influx ( positive or negative )

Stock of foreign direct investing, which is the cumulative figure for a given period.

Iii ) Direct investing excludes investing through purchase of portions.

A foreign direct investor may be classified in any sector of the economic system and could be any one of the followers:


Group of related persons

Incorporated or unincorporated entity

Public company or private company


Social organisation

Foreign Direct Investment in Manufacturing Sector

Major Determinant of Foreign Direct Investment

-Gross Domestic Product ( GDP ) per capita

-Exchange Rate

-GDP growing rate

-Tariff and Non-tariff barriers

-Infrastructure installations

-Political stableness

-Inflation rate

Problem Statement

Importance of Study


General Objective

-To place the determiner of foreign direct investing in Malaysia

Specific Objective

-To determine whether involvement rate is deciding of FDI

-To analyze the consequence of exchange rates to FDI

-To investigate whether rising prices can impact FDI


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