Abstract
This study has examined the causal relationships between trade openness and foreign direct investment (FDI) in Malaysia using annual time series data. Throughout this study, the exchange rate and economic growth acted as the control variables. Data were collected from 1977 to 2015 and were analysed using the unit root test and the Granger causality test. The autoregressive model was employed to remove autocorrelation from rising in this model. The result of the Granger causality test indicated that there was a unidirectional causality between trade openness and FDI. It also showed that trade openness has a positive and significant impact on the FDI. All independent variables, namely, exchange rate, economic growth and trade openness, were significant in explaining FDI inflows in Malaysia. Therefore, this study has concluded that a good combination of these independent variables would attract more inflows of FDI into Malaysia. In addition, the Malaysian government has to implement policies that favour trade openness, such as reducing trade barriers, to encourage more FDI inflows into Malaysia to promote higher economic growth.
Highlights
Foreign direct investment (FDI) in Malaysia has registered a net inflow of RM43.4 billion in 2015 compared to RM35.3 billion in 2014
Throughout this study, the exchange rate and economic growth acted as the control variables, for investigating the relationships between exchange rate and economic growth towards foreign direct investment (FDI) in Malaysia
This finding is consistent with the study conducted by Kakar and Khilji (2011) who investigated the growth rate in Pakistan and Malaysia
Summary
Foreign direct investment (FDI) in Malaysia has registered a net inflow of RM43.4 billion in 2015 compared to RM35.3 billion in 2014. Of all the states in Malaysia, Penang attracted the highest amount of FDI in 2015. According to MIDF Research chief economist Dr Kamaruddin Mohd Nor, Malaysia will be able to attract high-quality FDI in the years to come since we have strong economics foundations, infrastructure, and Economic Transformation Programmes (Supriya, 2016). The income from FDI in 2015 was mainly generated from equity and investment fund shares (Department of Statistics, 2015). The top investing countries were Singapore, Japan, China and Hong Kong, Netherlands, and United States. The sectors of interest include manufacturing, mining and quarrying, construction, wholesale and retail, information and communication, and finance and shared services (MIDA, 2016)
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