Could Inward FDI Offset the Substitution Effect of Outward FDI on Domestic Investment? Evidence from Malaysia

Abstract

It is well documented in the literature that Malaysia has become an emerging source of outward foreign direct investment (OFDI) in the region. The drastic increase in its OFDI has raised concerns as to whether the outbound direct investment activities from the country would detract from domestic investment activities, which have been sluggish since the aftermath of the Asian Currency Crisis. Using the autoregressive distrusted lag (ARDL) modelling approach to cointegration, the findings show that there is a long-run equilibrium relationship involving the four variables, i.e. between domestic investment and its determinants such as FDI outflows, FDI inflows and domestic savings. Moreover, this study reveals that the effect on domestic investment by FDI outflows is substitutional and inelastic, while that by FDI inflows is complementary and elastic, implying that the latter can overcome the substitution effect caused by the former if the Malaysian government could formulate pragmatic policies in attracting FDI inflows.