Fdi Inflow, Current Account Balance, Inflation and Interest Rate: How Do They Impact the Malaysian Economy?

Topics: Macroeconomics, Inflation, Current account Pages: 34 (8700 words) Published: August 25, 2011
Masters of Science (Banking)


FDI Inflow, Current Account Balance, Inflation And Interest Rate: How Do They Impact The Malaysian Economy?


Siva Kumar Kandiah (Matric No: 89306)



This article seeks to find which of the macroeconomic variables among FDI inflow, current account balance, inflation and interest rate play a significant role in economic growth in Malaysia using the SPSS Regression method for a time period of 14 years from 1995 to 2008 (Oct). The results of the research indicated that FDI and inflation are not significantly related to economic growth in Malaysia during the period of study. However, CA balance and BLR are significant determinants of economic growth of Malaysia during the period of study. Inflation was noted to have a negative relationship while FDI, CA Balance and BLR were all positively related to economic growth in Malaysia.

JEL Classification: F41, C35

Keywords: FDI, Current Account, Inflation, Interest Rate
Table of contents

1. Introduction1
1. Background1
2. Problem Definition5
3. Objective and Justification6
2. Literature Review7
3. Thereotical Framework11
4. Methodology12
1. Research Design12
2. Data Source12
5. Findings And Discussion14
1. Descriptive Statistics14
2. Trend Analysis16
1. FDI and GDP16
2. CA Balance and GDP18
3. Inflation and GDP20
4. BLR and GDP22
3. Regression Analysis24
6. Limitations28
7. Conclusion28
Appendix I : Summary of Literature Review32
Appendix II: Regression Analysis Results37


Malaysia achieved sustained economic growth over the three decades from 1970 to 2000 with an average annual growth of about 7 per cent. However, there were several temporary economic downturns when growth was significantly below the average. There was the first oil crisis in 1973–4; the second oil crisis in 1978–9; the global downturn in the demand for electronics and primary commodities in 1985–6, and the Asian financial crisis in 1997. Standards of living of the majority of the population were transformed over the 30-year period, with levels of real gross domestic product (GDP) per capita in 2000 being about four times the levels reached in 1970.

On the whole, Malaysia’s economy accelerated to 6.4% in 2007 from 5.8% in 2006. Following the strong performance in 2007, growth is projected to ease slightly in 2008-2009, due to the less supportive global economy. The worse-than-expected US economy, due to the fallout from the sub-prime turmoil, could negatively affect Malaysia’s exports, as the US market absorbs 20% of the country’s exports. It is expected that the external balance will continue to make a negative contribution to the real GDP growth.

In view of the weakening global economic outlook, Malaysia’s real exports are envisaged to contract by 5.0% in 2009, compared with +4.9% estimated for 2008. Nevertheless, with inflation threat easing considerably in most countries, central banks around the globe have been able to deliver sweeping interest rate cuts, which coupled with aggressive economic stimulus packages will likely prevent the global economy from falling into a protracted downturn. Indeed, with Europe’s interest rates falling to 2.0-2.5% (there is room for it to fall further) and the US and Japan’s key interest rates at low levels of 1.0% and 0.3%, respectively, the global economy will likely be flushed with cheap liquidity in 2009. This, together with the stimulus packages, will gradually restore consumer and business confidence and set a...

References: Bank Negara Malaysia, 2008, Economic And Financial Developments In Malaysia In The Third Quarter Of 2008, Bank Negara Malaysia Ref. No.: 11/08/07
Bank Negara Malaysia, 2005, The Malaysian Economy in 2004
Mohd. Haflah Piei & Tiangchye Tan, 1999, An Insight into Macroeconomic Policy Management and Developments in Malaysia, Malaysian Institute of Economic Research
Dazhou Chen, 2008, Country Report Malaysia, Economic Research Department, Rabobank
Economic Performance And Prospects, 2006/2007, Economic Report
Girijasankar Mallik & Anis Chowdhury, 2001, Inflation and Economic Growth: Evidence From Four South Asian Countries, Asia-Pacific Development Journal Vol
International Monetary Fund, 2008, 2008 World Economic Outlook
Imad A
| |Luhrmann (2008) |International Portfolio Flows: A Global|Account Balances, net inflows in equity securities and net |in debt instruments and current account deficits. Better |
| | |Perspective |outflows in debt instruments
| |(2007) | |2) FDI has negative long-run impact on GDP in 1 country (3.6%).|single country where a positive uni-directional long-term |
| | | |3) FDI has positive short-run impact on growth in 18% of the |effect from FDI to GDP is found to exist
| |(2005) |investment: |exports as a percentage of GDP, telephone lines per 1000 of the|developed countries with large economies, a high degree of |
| | |An extreme bounds analysis |population and country risk
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