Determinants Of Domestic Direct Investment In Malaysia Economics Essay

Domestic Direct Investment is one of the subscribers in Malaysia economic growing. The intent of this paper is to look into what find the domestic direct investing in Malaysia by utilizing clip series informations from twelvemonth 1980 until 2007 ( 28 observation ) based on the OLS arrested development which is Linear Log Multiple arrested development method and causality proving. Many survey shows that the fiscal factor is the most of import determiner to domestic direct investing. But the consequence shows that merely recognition to private sector is react positively to domestic direct investing. Nonfinancial besides affect domestic direct investing except rising prices variable. By uniting the full variable, it shows the strong relationship between them. This determination implies that recognition both fiscal and nonfinancial can excite higher investing in Malaysia.

Keyword: Domestic Investment, Malaysian economic system, Financial and nonfinancial factor, Ordinary Least Square ( OLS ) , Granger Causality Test.

1 Introduction

Investing is a sort of activities that require non merely money but something that have value. In term of economic or in economic position, it is connected with both salvaging ingestion. The primary motivation behind the investing is merely to do net income. In general position, investing means the investor use some of their money in trusting to acquire or doing more money in the hereafter.

For many states, whether they are developed or less develops states, they depend on the investing made by the investors both from interior and outside of the state. They depend on the Foreign Direct Investment to mensurate their economic growing. Harmonizing to Blomstom, Lipsey, and Zejan ( 1994 ) in their survey among developing states, they found a positive relationship between economic growing and ration of Foreign Direct Investment influx to GDP. But, late, some state confronting a job with a downward sloping ( negative ) in foreign direct investing, for illustration Malaysia.

So, the Prime Minister, Dr Mahathir, in the Malayan Insider paper about “ Dr M wants revenue enhancement vacation for domestic direct investing ” suggests the state to concentrate more on the Domestic Direct Investment so that the wealth is merely flow within the state. As both foreign and domestic investing is of import to economic growing, therefore, there is a demand to analyze and analyse the domestic direct investing part to economic growing and what find the domestic direct investing. The chief aim of this survey is to analyze and analyse the determiners of domestic direct investing that contribute to economic growing in Malaysia. The specific aims of this survey include I ) to find the relationship between domestic direct investing and independent variable which is domestic recognition to private sector, M3, recognition provided by the bank sector, GDP per capita, gross domestic economy, gross domestic merchandise deflator growing rate, and the involvement rate charge by bank on loans ii ) to analyze the farmer causality among the variable and three ) to find what factors should we concentrate more.

To accomplish this aim, this survey used 28 observations for analysis intents which cover the informations for a certain period from 1980 to 2007. Malaysia is one of the members of developing state was used in this survey. The informations used are domestic recognition to private sector, entire liquidness liability of fiscal mediators ( M3 ) , recognition provided by the bank sector, gross domestic merchandise per capita, gross domestic economy, gross domestic merchandise deflator growing rate, and the involvement rate charge by bank on loans.

This survey will utilize the additive log multiple arrested development theoretical account which is the ordinary least square method to find and analyze the relationship between the dependant and independent variable. To mensurate the causality between them, the Granger Causality trial attack will be use. The restriction of this survey is most of the old survey is utilizing the dynamic panel informations analysis and the OLS is said give inconsistent consequence [ Hsiao 1986 ] because the survey involve many state. Since this survey is merely focal point on one state which is Malaysia, OLS attack which is additive log multiple arrested development method and the Granger causality trial applied to accomplish the aim of this survey.

2 Literature Review

Other than the foreign direct investing, the domestic direct investing besides contributes to the economic growing in Malaysia. There are so many factors that can find the domestic direct investing that can take to economic growing in a state. The determiners are like domestic recognition to private sector, entire liquidness liability of fiscal mediators as a placeholder of M3, domestic recognition provided by bank, gross domestic merchandise per capita, growing rate of gross domestic merchandise deflator, gross domestic economy, and involvement rate charge on loans by utilizing the loaning rate.

Actually, these factor determiners domestic direct investings can be divided into two groups as stated by Ndikumana, L. ( 2000 ) in his paper fiscal determiners of domestic investing in Sub-Saharan Africa: grounds from panel informations, which is fiscal determiners and the macroeconomic determiners. The three factor which are domestic recognition to private sector, entire liquidness liability of fiscal mediators ( M3 ) , and the recognition provided by Bankss autumn under fiscal determiners, while the other factor autumn under the macroeconomic determiner.

The fiscal determiners with the “ recognition ” statement is said to be the most of import determiners on investing [ Schumpeter ( 1932 ) , Keynes, 1937, 1973 ] . This thought is supported by Gurley and Shaw ( 1955 ) . They relate the fiscal development with the economic growing for a state. Fisher ( 1933 ) besides province that the ailing fiscal market public presentation can ensue in economic downswing. Financial mediator is besides one of the of import factors under the fiscal determiners. The fiscal mediators give better liquidness to the rescuers at the same clip reduces the liquidness hazard [ Levine, 1997 ; Pagano, 1993 ; Gertler, 1988 ] . Liquidity is the ability of plus to be converted into money or hard currency. When people want to put, they need to do certain that their investing has high liquidness.

The nonfinancial determiners or the macroeconomic index besides give impact on the domestic direct investing in a state. They are the GDP per capita, growing rate of GDP deflator, gross domestic economy, and involvement rate charge on loans by utilizing the loaning rate. Harmonizing to Fielding, 1997, 1993 ; Greene & A ; Villanueva, 1991 ; Wai & A ; Wong, 1982, the investing rate is high when the end product growing is besides high.

For the gross domestic salvaging relationship with the domestic investing, Bayoumi ( 1990 ) ; Dooley, Frankel & A ; Mathieson ( 1987 ) ; Feldstein & A ; Horioka ( 1980 ) found there is positive relationship between salvaging and investing. The lower the domestic economy, the lower the domestic investing in a state.

3 Data and Methodology

To look into the relationship between the variables and the causality between them, there are many empirical surveies have been done on the impact of domestic direct investing on economic growing in a state. Many of the research workers apply the dynamic panel informations analysis to analyze such high impact economic activities. But, there are some other research workers that use Ordinary Least Square method ( OLS ) to analyze the relationship and the Granger causality trial to mensurate the causing between the variables. Previous survey has been done by utilizing the dynamic panel informations analysis to analyze the fiscal and non fiscal factor that determines the domestic investing. There is besides some survey conducted by utilizing causality trial and cointegration trial. Hsiao 1986 province that the appraisal utilizing OLS is inconsistent. By utilizing panel informations, fiscal index is said to be react positively with the domestic investing [ Ndikumana L, ( 2000 ) ] .

Unit Root Test

Before the arrested development, the unit root trial should be done to mensurate the stationary and the order of integrating of each of the information. This trial besides used by Chan, Tze-Haw and Baharumshah, Ahmad Z. [ 2003 ] in their paper mensurating capital mobility in the Asia Pacific Rim. The unit root trial they used are Augmented Dickey-Fuller ( ADF ) trial ( Dickey & A ; Fuller, 1981 ) and the Phillips-Perron ( PP ) unit root trial [ Phillips ( 1987 ) and Phillips and Perron ( 1988 ) ] . The trial of degree of stationary is at degree, foremost different, and the 2nd different. After the unit root trial are taking, so the available and suited testing will conducted. The ADF trial gauging the undermentioned illustration arrested development:

a?†Yt = I?1 + I?2t + I?Yt-1 + ( 1 )

Beginning: Basic Econometricss by Gujarati D N. and Porter D C.

The unit root trial is conducted merely to find the degree of stationary of the information whether it is stationary at degree, foremost different, 2nd different or non stationary. It is to see whether the informations can be use in arrested development or non.

Logarithm Transformation of The Data

Since the information is non in the same unit, there is a demand to carry on logarithm transmutation of the information. The logarithm of informations besides used by Chan, Tze-Haw and Baharumshah, Ahmad Z. ( 2003 ) before the unit root trial is done. It is of import so that the informations and besides the consequence are non biased and easy to gauge the information subsequently. Logarithm transmutation is use in the nonlinearities relationship between variables. The importance of this method is the snap coefficient can be gain straight from the arrested development as said by Ndikumana, L. , ( 2000 ) in his paper of fiscal determiners of domestic investing in Sub-Saharan Africa: grounds from panel informations. In this survey, the informations that non in per centum will be transform into log to do it in the signifier of per centum and equal as the other signifier of informations. The information transformed in this survey are GDP and M3.

Diagnostic Testing

Diagnostic testing is of import measure to find whether there is an mistake or residuary occur in the informations being probe. The mistakes that may be happening are such as heteroscedasticity, multicollinearity, or autocorrelation. There is some hypothesis develop under this survey whether the mistake appraisal occurred.

Hypothesis 1:

H0: There are autocorrelation between the observations

H1: There is no autocorrelation between the observations

Hypothesis 2:

H0: There is multicollinearity between the observations

H1: There is no multicollinearity between the observations

OLS Estimating

After the unit root trial is applied, so the ordinary least square method is conducted to cognize the relationship between the dependant and independent variables. This survey is use the additive log multiple variable arrested developments because the dependant variable which is domestic direct investing may be influence by more than one factor of economic such as are domestic recognition to private sector ( CPS ) , entire liquidness liability of fiscal mediators ( M3 ) , recognition provided by the bank sector ( CPBS ) , gross domestic merchandise per capita ( GDP ) , gross domestic economy ( GDS ) , gross domestic merchandise deflator growing rate ( INF ) , and the involvement rate charge by Bankss on loans ( INT ) . The dependent variable is in additive signifier and all the independent variables were transforming into log. The OLS test the undermentioned arrested development:

DDI = I± + I?1LNCPS + I?2LNCPBS + I?3LNM3 + I?4LNGDP + I?5LNGDS + I?6LNINF + I?7LNINT +a„°i

Beginning: Basic Econometricss by Gujarati DN. and Porter D C.

The DDI is the dependent variable and the other variables are the independent variable. The error term there means that there is other factors that may be impact the variables [ Gujarati, D.N and Porter, D.C ( 2009 ) ]

Granger Causality Test

Although the arrested development shows there is relationship between dependant and independent variable, it is non necessary that they imply any causality or the way of influence. Granger causality trial is adopted to find the causality between variable. It is applied to analyze whether the variable Ten causes the variable Y, whether the variable Y causes the variable Ten, or both of them affect each other.

To analyze the causality, some research worker has done this trial. Harmonizing to Engle and Granger ( 1987 ) , there is causal relationship between variable X and variable Yttrium if they are cointegrated. If Ten cause Y it means unidirectional map. If the X and Y is affected each other it means there is bidirectional map.

4 Empirical Consequences

The consequence and grounds from the trial or arrested development will be luxuriant in this subdivision.

Stationary Trial

The being of the unit root in each clip series informations, both of the Augmented Dickey Fuller ( ADF ) and Phillips – Perron ( PP ) tests is conducted in this survey. Both trials have given about the same consequence. The consequence shows in table 1 below.

Table 1: Stationary Trial

variables

ADF trial ( intercept )

PP trial ( intercept )

Hertz

-4.035146 ( 0.0047 ) ***

-4.034534 ( 0.0047 ) ***

CPBS

-4.573188 ( 0.0013 ) ***

-4.575517 ( 0.0013 ) ***

LNM3

-2.645653 ( 0.0971 ) *

-2.645653 ( A 0.0971 ) *

LNGDP

-3.871691 ( 0.0069 ) ***

-3.748933 ( A 0.0092 ) ***

Soman

-5.198757 ( 0.0003 ) ***

-5.246528 ( 0.0002 ) ***

INF

-5.743415 ( 0.0001 ) ***

-5.737964 ( 0.0001 ) ***

INT

-5.340167 ( 0.0002 ) ***

-5.341039 ( 0.0002 ) ***

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Notes:

The figure within parentheses indicates the p-value. All variable except INF is stationary at first different.

important degree

*significant at degree 0.1

***significant at degree 0.01

The consequence shows that merely M3 is important at degree 0.1 by utilizing both ADF and Phillips-Perron trial statistic and the other variable important at degree 0.01. For the stationary trial to find whether there is unit root trial in the clip series, the CPS, CPBS, LNGDP, GDS, LNM3 and INT is stationary at the first different which means lagged one clip period. The INF is stationary at degree which means no lagged of clip period is needed.

OLS Estimation

The additive log multiple arrested development shows that, the dependant variable, DDI, peers to domestic recognition to private sector ( CPS ) , entire liquidness liability of fiscal mediators ( M3 ) , recognition provided by the bank sector ( CPBS ) , gross domestic merchandise per capita ( GDP ) , gross domestic economy ( GDS ) , gross domestic merchandise deflator growing rate ( INF ) , and the involvement rate charge by Bankss on loans ( INT ) . The arrested development is done with the lagged clip and the consequence show in table 2 below.

Table 2: Ordinary Least Square ( OLS ) gauging

Variable

Consequence

DDI ( changeless )

t-stat

p-value

131.8437

2.103347

( 0.6562 )

LNCPS ( t-1 )

t-stat

p-value

82.86427

5.632050

( 0.0002 ) ***

LNCPBS ( t-1 )

t-stat

p-value

-56.57944

-6.658117

( 0.0000 ) ***

LNGDP ( t-1 )

t-stat

p-value

38.34651

5.098421

( 0.0003 ) ***

LNGDS ( t-1 )

t-stat

p-value

17.89063

0.602438

( 0.5591 )

LNINF

t-stat

p-value

-1.837128

-2.139562

( 0.0556 ) **

LNINT ( t-1 )

t-stat

p-value

-39.18221

-3.562907

( 0.0045 ) ***

LNM3 ( t-1 )

t-stat

p-value

-40.98774

-5.545882

( 0.0002 ) ***

R-squared

0.94

Adjusted R-squared

0.90

F-stat

25.63

Durbin Watson

2.45

observation

28

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Notes:

Figures in the parentheses indicate the p-value.

important degree

**significant at 0.05

***significant at 0.01

Based on the consequence, all independent variable are important except one independent which is gross domestic economy is non important. All the LNCPS, LNCPBS, LNGDP, LNINT, and the LNM3 are important at 0.01 degrees. The LNINF is important at 0.05 degrees and the LNGDS is non important at any degree. There are three variables that give a positive impact on the DDI. The LNCPS, LNGDP, and LNGDS have a positive relationship with the DDI. The other four react negatively with the DDI which is LNCPBS, LNINF, LNINT and LNM3. The R-square is besides high which means there is strong relationship between dependant and independent variables.

Diagnostic Consequence

The consequence on mistake term shows below utilizing the developed hypothesis which is hypothesis 1 and hypothesis 2. For autocorrelation, the trial is utilizing the Chi-Square. For multicollinearity, the trial is utilizing the Variance Inflation Factor ( VIF ) to analyze whether there is multicollinearity occur.

Hypothesis 1

To prove the autocorrelation occurring, since the Chi-Square is non important which is 0.1299, the void hypothesis can non be acceptable which means there is no autocorrelation occurred.

Hypothesis 2

To prove whether the multicollinearity occurred or non, we look at the VIF. The consequence shows that there is multicollinearity for the CPS at 29.79821, GDS at 29.35209, GDP at 15.95545, INT at 14.20043 and M3 at 78.24159. It is because the VIF consequence is more than 10. But for the CPBS at 8.678442, and INF at 2.217933, there is no multicollinearity because the VIF is less than 10. So, we can non reject the void hypothesis of there is no multicollenarity between the observations. The consequence of multicollinearity proving presented in table 3 below.

Table 3: Residual Diagnostic for Multicollinearity job: Discrepancy Inflation Factor

Variable

Centered VIF

LNCPBS ( -1 )

A A 8.678442

LNCPS ( -1 )

A 29.79821

LNGDS ( -1 )

A A 29.35209

LNINF

A 2.217933

LNINT ( -1 )

A 14.20043

LNGDP ( -1 )

A A 15.95545

LNM3 ( -1 )

A A 78.24159

C

A NA

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Notes: The centered VIF shows whether the variable have multicollinearity job or non. If the VIF is bigger than 10, it means there is a multicollinearity job.

Granger Causality Test

The consequence of causality trial shows that there is merely unidirectional map occurred between DI and CPS and GDP. The tabular array 4 below show that the void hypothesis of DI does non granger cause CPS is rejected where DI is granger cause CPS but the void hypothesis on CPS does non granger cause DI is acceptable. For GDP, the void hypothesis on GDP does non granger cause DI is non acceptable because consequence shows that GDP does do DI but the hypothesis on DI does non do GDP is acceptable. The void hypothesis of DI does non granger cause INF is besides non acceptable because the consequence shows that DI really cause the INF. DI is granger cause to INT which means that the void hypothesis of DI does non granger cause INT is non acceptable. Meanwhile, the other variable does non connote causing to each other.

Table 4: Pairwise Granger Causality Tests with slowdowns 2

Null hypothesis

F-Statistic

Prob.

LNCPBS does non Granger Cause DI

1.03345

0.3732

DI does non Granger Cause LNCPBS

1.17515

0.3283

LNCPS does non Granger Cause DI

0.59206

0.5622

DI does non Granger Cause LNCPS

3.70010

0.0420

LNGDP does non Granger Cause DI

3.44332

0.0509

DI does non Granger Cause LNGDP

1.36662

0.2767

LNGDS does non Granger Cause DI

0.41730

0.6642

DI does non Granger Cause LNGDS

1.60712

0.2242

LNINF does non Granger Cause DI

0.27698

0.7621

DI does non Granger Cause LNINF

12.6583

0.0007

LNINT does non Granger cause DI

0.83573

0.4541

DI does non Granger Cause LNINT

14.1109

0.0004

LNM3 does non Granger Cause DI

0.61312

0.5511

DI does non Granger Cause LNM3

0.61193

0.5517

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Notes: The word in bold shows that the void hypothesis of farmer cause is non acceptable.

5 Decisions

The chief aim of this paper is to analyse the determiners of domestic direct investing in Malaysia by utilizing the OLS arrested development and Granger causality trial. The informations are collected from the World Bank Data which focal point in Malaysia. The observation clip series is from 1980 to 2007. The econometrics attacks used are ADF and Phillip-Perron, OLS and the Granger causality trial. The grounds in this paper shows that the consequence support the old that the fiscal index or factor are of import determiners to domestic investing in Malaysia. The consequence shows that the CPBS, CPS, and M3 have important at 0.01 degree and merely CPS has positive relationship with domestic investing. For nonfinancial factor ( macroeconomic ) , non all variable is significantly finding the domestic investing in Malaysia. The gross domestic economy factor is non important in this grounds. The domestic investing is strongly determined by its independent variable based on the R-square ( 94 % ) . There is no autocorrelation job occurred with its arrested development consequence on mistake appraisal by proving utilizing the residuary diagnostic on autocorrelation that show the Chi-square is 0.1299 which reject the void hypothesis. The Multicollinearity does happen between the variables ( show in table 4 ) . To find who cause to whom, the farmer causality trial is applied. The consequence shows that the domestic investing influences the recognition to private sector. The GDP besides influence the domestic investing. The GDP represent the growing and as the economic system turning the investing besides increase. DI gives influence to INF because in existent state of affairs, as the rising prices rate addition, the domestic investing is less. Equally good as the DI that causes INT where if the involvement rate charge by bank on loans is high, the people who want to do loan is less and the investing besides less. Overall, both fiscal and nonfinancial factor is of import but most of import is fiscal factor. So, Malaysia should concentrate both fiscal and nonfinancial but more on the fiscal to increase their investing.

Appendix

Notes on variables:

M3 = entire liquidness liability of fiscal mediators

CPS = domestic recognition to private sector

CPBS = recognition provided by the bank sector

GDP = gross domestic merchandise per capita

GDS = gross domestic economy

INF = gross domestic merchandise deflator growing rate

INT = involvement rate charge by Bankss on loans

DDI = domestic direct investing