Nexus of Foreign Direct Investment, Domestic Investment, Trade on Economic Growth: A Cointegration Analysis

Abstract

Objective: As Malaysia is an upper-middle-income country since 1992, it aspires to achieve high-income nation status by 2028. This paper aims to examine the interrelation of foreign direct investment inflows (FDI), domestic investment (GFCF), trade openness (TO), and economic growth (GDP) in Malaysia from 1979 to 2019. Methodology: The econometric model and techniques applied are unit root test, Johansen-Juselius co-integration analysis, and vector error correction mechanism. The unit root test result indicated the stationarity of all series at the first difference. Findings: Subsequently, co-integration analysis depicted a presence of one co-integration among the series at 5% level of significance, thus VECM is an appropriate technique to apply. In the long run, VECM findings indicated 1% increase in FDI caused a decline in GDP by 0.1338%, while 1% increase in GFCF will increase GDP by 0.8136%. Also, GDP has a weak unilateral effect on FDI in the short run based on VECM causality findings. Implications: This paper certainly provides new literature and evidence for the Malaysian context through advanced techniques applied.