Malaysia is one of the countries in Asia that has benefited from strong foreign direct investment inflow. FDI was a major source of growth for manufacturing development in Malaysia that mainly targeted for the export market. The economy relied on the foreign fund as a major source of capital, modern technology and technical skills. Globalization, international financial integration and expansion of global production have intensified FDI.
Financial development, wage rates, income, economic growth, government spending on infrastructure, openness, exchange rate, inflation rate and corporate tax are among the variables commonly analyze in the FDI dynamic. In Malaysia, study by Ang (2008) detects the significant effect of the variables in five models that that takes turn excluding some of the variables via 2SLS estimation. Thus, the aim of this paper is to investigate the determinants of FDI in Malaysia during the period 1970-2008 using an autoregressive distributed lag (ARDL) technique.
Methodology and Data
Autoregressive distributed lag (ARDL)
An autoregressive distributed lag model allows cointegration at different orders of integration and is a robust estimation in a small sample data. Failure to model appropriately the relationship may not give accurate results of the relationship and this is crucial especially when it involves with policy recommendations. The existence of long-run relationship between FDI and selected macroeconomics variable is modeled as follows.
Lfdi = f ( Lm2, Lgdp, gro , Ldev ,open, Lexc, tax, infl, crisis )
Where L refers to variable in logarithmic form, fdi is the foreign direct investment inflows (RM million), m2 is the money supply, a proxy for financial market development, gdp represents the market size of the economy (RM million) and gro is the growth rate of gross domestic product (%). Government infrastructure expenditure (RM million) is represented by variable dev, open is the ratio of import and export over GDP which measures economic openness, exc is the exchange rate (RM/USD), tax is the corporate tax (%), infl is inflation rate (%) and crisis is a dummy variable represents the effect of Asian financial crisis (1998=0 and otherwise=0). The hypothesized sign of Lm2, Lgdp, gro , Ldev ,open, Lexc is positive and negative for tax, infl, crisis variables. (1)
The econometrics model of the causality of FDI and its key determinants is as follows:
Lfdi t α 0
| β 1 Lm 2 t
| β 2 Lgdp
| t β 3 gro
| β 4 Ldev
| β 5 open t
| β 6 Lexc
| t β 7 tax t
| β 8 inf
| β 9 crisis
Data spanning from 1970-2008 are obtained from various sources of publications. Data on FDI, rate of growth, openness, and government development expenditure are taken from various issues of Bank Negara Malaysia Reports. International Financial Statistics provides data on exchange rate, money supply, and inflation rate. Statutory corporate tax data is taken from the Department of Inland Revenue Annual Reports.
3. Theoretical Framework
* Financial development
* Wage rates
* Economic growth
* Government spending on infrastructure,
* Exchange rate
* Inflation rate
* Corporate tax
Foreign Direct Investment
The dependent variable is determinant of FDI in Malaysia which is variable of primary interest. There are seven independent variables which are financial development, wage rate, income, and government spending on infrastructure, openness, exchange rates and corporate tax.
Financial development is measures and analyses the factors enabling the development of financial systems in a number of economies around the world. It aims to provide a comprehensive means for countries to benchmark various aspects of their financial systems and establish priorities for improvement. It is published annually...
Please join StudyMode to read the full document