The Impact of Public Capital Expenditure on the Performance of Private Capital Expenditure in the Selected Economic Sectors in Malaysia

Abstract

Economists have argued that public capital is one of the important business stimuli to the performance of private capital expenditure. This argument is considered as the main essence in the theory Public Capital Hypothesis (PCH) that proposed by Aschauer. PCH postulates that a positive relationship exists between private capital and public capital. However, this hypothesis remains a controversy as there has been no consensus, particularly in terms of empirical evidence. Therefore, the objective of this study is to prove the validity of the PCH by using a panel time series analysis on the four sectors of the Malaysian economy. Panel cointegration analysis is used to prove the hypothesis by using panel data for the period of 1976-2006. In this analysis, four sectors were chosen: agriculture, industry and trade, transportation and communication, and construction. Private capital expenditure for each sector is chosen as a dependent variable. Meanwhile independent variables used in the analysis are represented by public capital expenditure, gross domestic product, domestic credit ratio, and fiscal deficit. Findings of the study indicate that public capital expenditure has positive effect on private investment in all the sectors, except agriculture.