The contribution of (FDI) in the growth of economy has been one of the most important aspects in most countries especially the developing countries. Through the increase in financial constraints in most economies around the world, FDI has been one key element which has considerably boosted and sustained most of the economies today (Wang and Wong, 2009). On the other hand, as compared to other Southeast Asian Nations, Malaysia economic growth has continued to flourish in the past decade where its Gross Domestic Product (GDP) was highest in the region.
Despite this, like in most developing nations Malaysia economic development has been greatly boosted by FDI inflow (Anwar and Sun, 2011). Through this, my research proposal will be focusing on researching the link between the economic development of a recipient state, i.e. Malaysia, and the impact FDI. In this part, I will focus on reviewing the background study of Malaysia Foreign Direct Investment history flow, changes, and challenges.
Research Background
The topic of the relationship between major countries growth and the impact and/or contribution of FDI in continuous development growth has been one of the overwhelmed topics in economy today. With increased awareness on the topic, policymakers have also continued to improve on methods of which would enhance FDI in various sector example such as tax incentives and export processing zone (Meyer and Sinani, 2009). On the other hand, FDI determinants in various countries always tend to differ in various aspects, therefore, it also causes different effect and challenges in various economy approaches.
Example, during the 2007 economic crisis, Malaysia economy was reported to be the 29th leading economy around the globe with a GDP of approximately 357.9 billion dollars. This, therefore, explains Malaysia strength on commodities downturn in sectors such as the oil and electronics has a very limited impact on the entire economy sustainability. Majorly, the continuous FDI improvement in Malaysia has been widely contributed by the policy reform in the enhancement of FDI determinants e.g. “Export Incentives with Open Policy in the 1980s” (Zhang and Daly, 2011).
The main FDI component in Malaysia include disposal of equity capital, reinvestment earnings, and others. Over the years, FDI growth in Malaysia has incredibly increased where between the 1970s and 1990s after the implementation of policy reform, the estimated FDI was about 94 billion dollars in total. However, during the 1990s, there was a fluctuation in the FDI rate after the significant decrease of Taiwan and Japanese investors in the country.
Also in the 2007 financial crisis, the FDI percentage was significantly affected by most of the blame focused on the government inability to attract and sustain investors in the economy (Jensen, 2008). Through the continuous increase in competition in the region, Malaysia has lost a considerable large number of investors to neighboring countries such as India and China who provide more interesting offers like the availability of cheap and ready labor. In the past decade, the FDI has not been performing well where currently in the second quarter of 2018 it has reduced MYR 11.98 billion to MYR 2.84 billion.
Today, FDI is considered one of the vital elements towards the aspect of continuous modernization in industrialization and the improvement of economy in most nations. The FDI has been characterized to contribute a lot to the economic sector in areas such as employment creation and enhanced remuneration, foreign exchange earnings, and improvement in industry skills. Countries such as China and India are some of the major nations which have significantly utilized FDI as the main source of economy and society development (Alfaro and Johnson, 2012). The research analysis will, therefore, concentrate on reviewing and understanding prospects and preconditions fostering and inhibiting FDI performance in the country with also an approach of improving the current poor situation.
Research Questions
The research will be based under several research questions which I intend to be answered at the end of the report findings. Therefore, the main research questions include;
Research Objectives and Framework
The main objectives of the research generally include;
Literature Review
Literature Review on Foreign Direct Investment (FDI)
FDI has been characterized as one the leading contributor in the economic development of major host nations. This is through improvement of employment opportunities, source of income, and majorly diffusion of technology in the host countries. (Wang and Wong, 2009). In the research analysis, there various means of analyzing the relationship of growth between economy and FDI determinants of the host countries.
Through the use of OLS regression and cross-section data, countries which have applied import substitution strategy have reported poor performance in FDI as compared to other countries which have opted to use export promoting strategy (Meyer and Sinani, 2009). According to cross-sectional data, the bureaucratic efficiency and degree of property right protection of the host countries can be directly correlated to the level of host country capability where the two factors have very large significance in the improvement of FDI. Example, through the increase of industry competition in China, the issue of property right protection has been one of the key issues which have affected investors in the country (Yu and Walsh, 2010).
In a comparison of developed and developing industry sectors, FDI has been observed to play a very essential part in the dispersion of infrastructure and technology development in the host countries. Also, the research also identified that countries which have chosen to increase emphasis infrastructure and technology development also had increasingly positive improvement in FDI especially with the availability of human capital (Azman-Saini, Baharumshah, and Law, 2010). Causality test is another one of the majorly used methods in studying the connection between economic development and dependence with FDI.
In accordance with causal effects analysis, the development of economic growth and FDI should be treated individually. Unlike in the view of economic development dependence to FDI for consistent growth, the causal effects show that FDI is more dependent on sustainable economic growth. If the economy of the host country fails or performs poorly, the FDI will also be significantly affected prior to the expected correlation between the two. On the study, there is less supporting data to show FDI as the main boost in economic growth but the results showed that it has also direct impact in the development of the recipient country economy (Tiwari and Mutascu, 2011).
On the other hand, bilateral causality test has been proven the topic to be a very diversified in understanding the relationship of the two variables and the major determinants. The variation of the two variable is majorly characterized by the different time period and the country’s economic environment (Omri and Kahouli, 2014). Most countries face a different kind of issues and challenges which result to diferent kind of effects on the economy of the host country. Example, in the research study done on Malaysia, Chile, and Thailand, they all exhibited different determinants of FDI which included different policy regimes, growth patterns, and macroeconomic episodes (Karimi and Yusop, 2009).
The study concluded that FDI improvement in Chile was basically related to the country GDP while Thailand and Malaysia portrayed a very strong correlation between economic growth and the direct impact it had to the improvement of FDI. Malaysia economy also showed that causality in the country system basically “moves from economic growth to FDI” which is unlike to the case of Chile where “causality moves from GDP to FDI”.
As stated earlier, host country stability has a very important role on the FDI development. For a better understanding of the determinants of FDI, Hufbauer (1966) product cycle hypothesis in relation to trade theory is one of the best means of understanding trade theory and investment theory (Demirhan and Masca, 2008). The theory focuses on investigation both export and import products of the host country. Majorly, the researchers state that competition prices are of the key features which attract investors to invest in any host country. Currently, one of the main cost advantages which influence foreign investors in most countries is the issue of labor cost.
Through this, factors such as innovation have also been characterized to attract FDI which also directly correlates to the improvement of the economy. By use of econometric methodology, critical values such as “human capital development, environmental conditions, and financial development”, are some of the elements which drive the economic growth in Malaysia and, therefore, the encouraging FDI inflow (Pao and Tsai, 2011).
Literature Review on Economic Growth in Malaysia
Export growth is considered as one of the common determinant elements of FDI in most of the recipient countries. Through the increase in export, the host country is considered to benefit in some of the various ways which include an increase in capital efficiency, non-export production of goods, ability to handle external shocks, income, and other external challenges (Büthe, and Milner, 2008). With this in mind, export has been considered as one of the best strategies for improving the economic development and most particularly in emerging market sectors.
However, through the use of ‘data series from 1966 until 1988, export was found as not the only major determinant factor in the economic growth and increase in FDI (Lau, Choong, and Eng, 2014). The four major countries which were part of the data series, i.e. Malaysia, Thailand, Singapore, and the Philippines, showed in the report that both export and economic growth depend on host country policies. The report also stated that economic development is the major boost in export growth unlike the other way round.
Through the empirical analysis prepared by cross-country data “1975 to 1995”, it was identified that FDI has a vital role in the change of the economic growth of more than 70 nations which were considered as a part of the study. The research stated that countries with good and sustainable financial stand had more advantage in the utilization of available FDI. One of the main factors which have been considered as direct impact to FDI in most of the countries was labor cost (Anwar and Sun, 2011).
Developing countries are one of the majorly attractive destinations to most of the investors due to the availability of human capital which is a significantly contributes to the improvement of the economy. Countries with a lack of technical knowledge are considered as one of the negatively affected in the FDI inflow. The developed countries with enough technology and information resources have been described for effective utilization of FDI in the countries. Therefore, the capability of the recipient nation to utilize the advantage of the FDI can be majorly characterized to be limited to local environmental factors such as infrastructure and education (Giuliano and Ruiz-Arranz, 2009).
Through the analysis done to investigate the long-term and Short-term economy effects from FDI showed that it has a direct impact on GDP and an indirect impact on exports. The two variables can also be considered to be bilateral causal. Example, countries which can be able to take advantage of the FDI are considered to have more overall growth in the entire economy (Alfaro and Johnson, 2012). In the case of Malaysia, through the use of “annual time series data” research from 1960 to 2005, it was concluded that GDP growth was one of the factors which led to the improvement FDI inflow. Over the past years, the generation of income in Malaysia has been widely increased with increase in FDI inflow where over 10% of the total 2017 revenue was contributed by FDI.
According to Ang (2008), with the increase in globalization and competition among countries, financial development channel is considered as one of the key features which attract growth in a country. Through technology change, the recipient countries are also able to enjoy benefits which are a result of technological spillover. Financial development channels are therefore considered very important in the technology spillover since it’s considered that without stable or minimum threshold in the financial background of the host country, technology spillover cannot occur (Tang and Tan, 2014). The more effective the system is, the better the host country will be able to manage the investment. Financial systems can also be considered as determinant tools in the analysis of innovation in the country and rate of technology spillover (Holmes Jr, Miller, Hitt, and Salmador, 2013). Therefore, FDI and financial development can be considered as dependent unlike in the case between FDI and human capital which are independent of one another.
According to the above literature review, the relationship between the two variables growth can be ‘perceived’ in the various perspective of the economy. Majorly, the correlation of FDI with most of the determinants is considered as indirect and independent of the factors such as labor which is also a significant competitive advantage (Denisia, 2010). Through the interactive and time series models, the body of the literature has critically analyzed the relationship between the two variables of the recipient countries. Analysis of major determinants of FDI such as financial development, human capital, and other environmental factors has also shown their importance in promoting FDI inflow in Malaysia which is also has a significant impact on the country economic development. This also concludes that the situation of a country can significantly affect FDI inflow thus in line affecting economic growth (Sbia, Shahbaz, and Hamdi, 2014).
Research Methodology and Design
Data Resources
The main distinction point between primary data is that it’s the information that is collected to answer specific research questions while secondary data is a collection of previously recorded data used to answer research questions. According to this research, secondary data has been chosen as the main research data due to a number of reasons. This includes that secondary data is more widely available, it’s cheap and easy to access, unlike primary data which also consumes a lot of human labor. Through the interpreted information, gathering information for research was more easy and efficient. This was a majorly very effective in-depth analysis of Malaysia FDI history and in regards to also quality data for even current situations. Some of the major secondary sources that were used include books, articles, newspaper, journals, articles, and internet.
Data Analysis Method
As stated earlier, the data used during the research was secondary data which saved a lot of cost and time. Through the school library and e-learning provision, the availability of data was widely available which was also more convenient in the limitation of space and time. The internet was also another important part of the research where sources such as journals and articles were in abundant. The school websites access has also played a major in the research where one can be able to access a variety of information without any challenges. The analysis and collection of data were mainly done through reading, comparing data, and writing notes. The only challenge encountered was the use of library textbook which had limited information content answering the research questions.
Hypothesis
Null Hypothesis
H1: FDI does not have a vital role in the technology distribution in the recipient country
Alternate hypothesis
H2: FDI has a vital role in the technology distribution in the recipient country
Technology growth is considered as one of the main aspects of economic growth in most of the developed and developing countries. Through the technology advancement, other sectors of the economy such as health, education, transportation can be significantly boosted in various ways which generally involve innovation and improved capability in research (Ang, 2008). The diffusion of technology is considered to take place in presence of four major features which include the availability of human capital, foreign technology adoption, high technology imports, and new innovation and ideas. Therefore, the diffusion of technology into the host countries will highly depend on the above key features which also describes the economy level of recipient countries. In the literature review, human capital has a very significant positive impact in FDI inflow where through technology a lot of economy aspect of the recipient countries can be enhanced (Liu, 2008).
Null Hypothesis
H1: Economic growth does not impact any positive attraction of FDI.
Alternate hypothesis
H2: Economic growth has a great impact on any positive attraction of FDI.
Currently, economic growth and development is one of the priorities in most of the countries today. A stable economy of country portrays a very important and good image to other countries which in turn attracts a lot of foreign investors who with their investment also generate income for the host nation, therefore, boosting its economy (Alfaro and Charlton, 2009). The economy determinants such as domestic consumption, government expenditures, exports, and exchange rates should be keenly reviewed in the approach of FDI enhancement. The main determinants in Malaysia economy include domestic consumption and exports. Therefore, the economic growth of the recipient country has a very important role in the attraction and increase of FDI.
Limitations
One of the main challenges that were encountered during the research was the lack of enough reading materials regarding the research topic in the school academic library. Also, some of the sources used did not have a clear dataset as compared to other data which caused a lot of challenge during the analysis. The research on Malaysia determinants was not effectively covered in most of the resources and in ways which they affected FDI inflow into the country. Most of the theoretical models used by various researchers in measuring the two variable were perceived to be very obsolete in comparison to the recent data analysis techniques. However, the analysis of the research question was not fully covered as it should be since the research proposal still requires teacher opinion.
Ethical Considerations
Some of the main ethical considerations included the ability to maintain respectful space and making sure there is no violation of human rights. This is through providing the required details which include the aim of the study and mainly their will to participate in the research. The individuals on the research have also the permission to withdraw from the research participants and that their personal details are completely protected. Also, the issue of work ethic was majorly utilized during the secondary data research. To avoid this issue, the use of proper citation of the entire research was effectively carried out.
Expected Outcomes
The research proposal is based on understanding Foreign Direct Investment and its significance in the economic development of major host countries i.e. Malaysia as the focus of the research. Through the continuous changes in internationalization and political capability of different countries, the economic growth and impact of FDI have been characterized to be affected by various factors (Almfraji and Almsafir, 2014). In this, the main expected outcome of the study is the significant influence of the government action in the promotion of economy and FDI improvement. With the significance of Malaysia economic stability, there are various advantages in the country which can be utilized to promote FDI inflow in Malaysia.
References
Alfaro, L. and Charlton, A., 2009. Intra-industry foreign direct investment. American Economic Review, 99(5), pp.2096-2119.
Alfaro, L. and Johnson, M.S., 2012. Foreign direct investment and growth. In The evidence and impact of financial globalization (pp. 299-309).
Almfraji, M.A. and Almsafir, M.K., 2014. Foreign direct investment and economic growth literature review from 1994 to 2012. Procedia-Social and Behavioral Sciences, 129, pp.206-213.
Ang, J.B., 2008. What are the mechanisms linking financial development and economic growth in Malaysia?. Economic Modelling, 25(1), pp.38-53.
Anwar, S. and Sun, S., 2011. Financial development, foreign investment and economic growth in Malaysia. Journal of Asian Economics, 22(4), pp.335-342.
Azman-Saini, W.N.W., Baharumshah, A.Z. and Law, S.H., 2010. Foreign direct investment, economic freedom, and economic growth: International evidence. Economic Modelling, 27(5), pp.1079-1089.
Büthe, T. and Milner, H.V., 2008. The politics of foreign direct investment into developing countries: increasing FDI through international trade agreements?. American journal of political science, 52(4), pp.741-762.
Demirhan, E. and Masca, M., 2008. Determinants of foreign direct investment flow to developing countries: a cross-sectional analysis. Prague economic papers, 4(4), pp.356-369.
Denisia, V., 2010. Foreign direct investment theories: An overview of the main FDI theories.
Giuliano, P. and Ruiz-Arranz, M., 2009. Remittances, financial development, and growth. Journal of Development Economics, 90(1), pp.144-152.
Holmes Jr, R.M., Miller, T., Hitt, M.A. and Salmador, M.P., 2013. The interrelationships among informal institutions, formal institutions, and inward foreign direct investment. Journal of Management, 39(2), pp.531-566.
Jensen, N., 2008. Political risk, democratic institutions, and foreign direct investment. The Journal of Politics, 70(4), pp.1040-1052.
Karimi, M.S., and Yusop, Z., 2009. FDI and economic growth in Malaysia.
Lau, L.S., Choong, C.K. and Eng, Y.K., 2014. Investigation of the environmental Kuznets curve for carbon emissions in Malaysia: do foreign direct investment and trade matter?. Energy Policy, 68, pp.490-497.
Liu, Z., 2008. Foreign direct investment and technology spillovers: Theory and evidence. Journal of Development Economics, 85(1-2), pp.176-193.
Meyer, K.E. and Sinani, E., 2009. When and where does foreign direct investment generate positive spillovers? A meta-analysis. Journal of International Business Studies, 40(7), pp.1075-1094.
Omri, A. and Kahouli, B., 2014. Causal relationships between energy consumption, foreign direct investment, and economic growth: Fresh evidence from dynamic simultaneous-equations models. Energy Policy, 67, pp.913-922.
Pao, H.T. and Tsai, C.M., 2011. Multivariate Granger causality between CO2 emissions, energy consumption, FDI (foreign direct investment) and GDP (gross domestic product): evidence from a panel of BRIC (Brazil, Russian Federation, India, and China) countries. Energy, 36(1), pp.685-693.
Sbia, R., Shahbaz, M. and Hamdi, H., 2014. A contribution of foreign direct investment, clean energy, trade openness, carbon emissions and economic growth to energy demand in UAE. Economic Modelling, 36, pp.191-197.
Tang, C.F. and Tan, B.W., 2014. The linkages among energy consumption, economic growth, relative price, foreign direct investment, and financial development in Malaysia. Quality & Quantity, 48(2), pp.781-797.
Tiwari, A.K. and Mutascu, M., 2011. Economic growth and FDI in Asia: A panel-data approach. Economic analysis and policy, 41(2), pp.173-187.
Wang, M. and Wong, M.S., 2009. Foreign direct investment and economic growth: The growth accounting perspective. Economic Inquiry, 47(4), pp.701-710.
Yu, J. and Walsh, M.J.P., 2010. Determinants of foreign direct investment: A sectoral and institutional approach (No. 10-187). International Monetary Fund.
Zhang, X. and Daly, K., 2011. The determinants of China’s outward foreign direct investment. Emerging markets review, 12(4), pp.389-398.
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