Abstract
This study examines the effect of inflation towards the foreign direct investment in Malaysia and Iran. The testing period for this study are ranges from year 1986 to 2016. The Augmented-Dickey Fuller (ADF) unit root test was used to test the stationary of variables, the exist of cointegration variables was tested by Johansen and Juselius test, Granger causality based on VECM framework was used to test the short run and long run relationship between variables and lastly the variance decomposition was conducted to test the variable are exogenous or endogenous. From the empirical results, it has shown the foreign direct investment has effects on gross domestic product in short run in Malaysia meanwhile in Iran there are no causality relation among the variables in short run.
Highlights
Foreign direct investment (FDI) plays an important role which able to affect the economic growth of a country, especially for those developing countries as the inflow of foreign direct investment (FDI) can stimulate the economic with the capital, technology, and skilled labor gained from abroad countries
The findings show that real exchange rate, gross domestic product and infrastructure have positively effect on FDI flow, exports has negatively impact on FDI flows in long run
Unit Root Test – Augmented-Dickey Fuller (ADF) test It is essential for the Augmented Dickey Fuller (ADF) test to test the stationary of variables and it is compulsory to pass the test in order to proceed to the Johansen and Juselius cointegration test
Summary
Foreign direct investment (FDI) plays an important role which able to affect the economic growth of a country, especially for those developing countries as the inflow of FDI can stimulate the economic with the capital, technology, and skilled labor gained from abroad countries. A high level of inflation rate affects the capital preservation of foreign investment, can caused the confidence of abroad investor decrease, and it will decrease the net inflow of FDI. Malaysia and Iran which both are developing country but have different level of inflation rate, and reason behind for choosing these two countries is to investigate how the level of inflation rate will affect to the net inflow of FDI. The inflation rate of Iran exceedingly higher than the inflation rate of Malaysia, it is able to compare which level of inflation is more attractive for the inflow of FDI
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