Foreign Direct Investment and Manufacturing Growth: The Malaysian Experience

V G R Chandran,Gopi Krishnan

doi:10.5539/ibr.v1n3p83

Abstract

This paper examines the short and long run dynamics of Foreign Direct Investment (FDI) over the manufacturing growth in a developing country – Malaysia for the period of 1970-2003. Due to the small sample size, we used a fairly new cointegration method known as

Highlights

It has been noted that Malaysia has emerged as one of the new dynamic Asian economies, which has become more competitive across a broad range of manufactured goods and managed to switch to higher value-added manufacturing products (Wilson, 2000)
The mixed results concerning the linkages may have been the consequence of using different sample size, methodologies and partly due to the degree of aggregation where most of the studies were relating Foreign Direct Investment (FDI) to total economy activities e.g. to the growth of the nation measured by gross domestic product (GDP)
There is a strong indication that fixed capital stock, labor and FDI serves as the long run forcing variables in explaining the growth of the manufacturing value added output in Malaysia

Summary

Introduction

Malaysian gross domestic product (GDP) grew at an average rate of 6.7% during 1971-1990 (Malaysia, 1971 & 1990) while during 1990-1999 Malaysia had the highest growth rate averaging 8.1% per annum outperforming other ASEAN economies (Azmat, 2002) One of the notable strategies of the government to spur its growth is by attracting foreign direct investment (FDI). With the promotion of the Investment Act in 1986, Malaysia experienced a huge influx of FDI in the manufacturing sector. We used a more robust method known as the “bounds test” to examine the cointegration between the dependent variable namely manufacturing value added output and its determinants. Few of the model specification problems mentioned by Carkovic & Levine (2002), which would lead to inaccurate estimation, were solved by adapting the ARDL model This method controls the deficiency of other studies by considering the inclusion of lagged dependent variables in examining the short run dynamics of FDI. This paper contributes to the existing literature by providing new empirical evidence concerning the FDI-led growth hypothesis within the manufacturing sectors.

Literature Review

Model Specification

Data Sources

Empirical Results

Policy Implications

Conclusion