Measuring the Benefits and Costs of Foreign Direct Investment – With Reference to Malaysia

Abstract

The effects of foreign direct investment in developing countries can be studied by using the with/without investment scenario. Many of the effects are quantifiable and can be measured using cost benefit technique. A sample of foreign projects was analysed in this paper. Important benefits of foreign direct investment to a home country are income tax payments by foreign specialists, corporate tax on the project after the tax holiday period, cheaper high quality locally manufactured import substitutes and the backward linkages to domestic industries. These positive benefits are measured using the Little‐Mirrlees method, and are weighted against the negative ones, including losses suffered by the local entrepreneurs because of greater competition for labour and potential increased market concentration. The research concluded that the positive benefits of foreign direct investment are far higher than the negative ones, and similar investment should be strongly encouraged.