The Wealthy World's Open-Economy from FDI Inflow Is a Real Thing: Malaysia's Experience

Abstract

Fiscal policy is one of the popular instruments used by government to provide balance to growth in the national economy and market. In Malaysia’s context, fiscal policy is implemented using such as the annual budgets, Malaysia Plans, and multiple stimulus packages aimed at boosting Malaysia’s economy especially during the recent lock down which has threatened to cause an economic crisis due to the Covid-19 pandemic. Additionally, one of the Malaysian Government’s biggest spending using fiscal policy is its development expenditure, and tax is one of the largest contributions used to support this development expenditure. In order to attract investors to Malaysia, critical features such as benefits, facilities, and social welfare have been designed by decision-makers in each formulated policy. Initiatives such as inter-governmental forums, trade agreements and discussions are platforms that can be used to share and respond to economic problems. However, the existence of competition and foreign policy have become major challenges to the country’s efforts to attract investors. Therefore, the aim of this study is to investigate the relationship between Malaysia’s federal government development expenditure with foreign direct investment (FDI) inflow, as well as the country’s openness towards investment. The two dimensions of asymmetric FDI inflow were analysed to see how they react to government expenditure from 1970 until 2019 using the Linear and Nonlinear Autoregressive Distributed Lag method. Findings from the Nonlinear Autoregressive Distributed Lag Model (NARDL) model indicated that FDI has a positively significant effect on fiscal accumulation for development expenditure. In conclusion, increases in government expenditure increase FDI inflow into Malaysia in both the short- and long-run. Hence, government development expenditure behaviour represents accelerating economic growth in the Malaysian context, and it is proven to have a significant impact towards economic growth in the long-run. This study contributes to empirical literature on the relationship between federal government development expenditure and FDI inflow, particularly the effect of openness to investment into a developing country towards economic growth in the long- run.