Determinants of foreign direct investment in Malaysia

Abstract

By using annual time series data spanning 1995 to 2021, this study examines the key factors that influence foreign direct investment (FDI) inflows to Malaysia. This study employed the conventional determinants of FDI and incorporated an under-studied corruption variable to capture the political impact on FDI inflows to Malaysia. The ARDL bounds test results identified short- and long-run positive relationships between FDI inflows and two tested variables: market size and education. A positive long-run relationship was also found between inflation rates and FDI inflows. By contrast, infrastructure facilities were found to be negatively related to FDI inflows in the long run. More importantly, the results ascertained that higher corruption levels hamper FDI inflows to Malaysia in the long term. Moreover, the Granger causality test revealed that market size, inflation rate, and infrastructure facilities are critical causal factors that explain the fluctuations in FDI inflows to Malaysia. In light of the results obtained, some policy recommendations are highlighted to help enhance the attractiveness of FDI, thereby stimulating economic growth in Malaysia.