Introduction
Nowadays, Malaysia seems to be one of the most successful countries in Asian that can attract Foreign Direct Investment (FDI). There are lots of determinants for foreign direct investment in Malaysia. The strategies to attract more foreign direct investment are by improving the present determinant. There are three parts of income in FDI. There are reinvented earnings, dividends and interests. Interests are income on loans and debt securities. Dividends are distributed earnings allocated to shares and the equity of incorporated private enterprises, public corporations and cooperatives.
Firstly, FDI flows provide an important window through which firms can avoid rapid increasing production costs at home and find attractive markets abroad. Secondly, since FDI are non-debt creating financial commitments, so this instrument are more likely to be applied to financing external current account deficits particularly in developing countries (Demekas et a.2005). Thirdly, FDI flows affect growth positively by decreasing the costs of research and development (R&D) through stimulating innovation in the host country (Lensinky and Morrissey 2001; Graham and Wada 2001; Sanchez-Robles and Calvo 2003). Borensztein et al.(1998) considered FDI to be an important vehicle for transfer of technology, contributing to growth more than domestic investment. FDI can be an important channel for bringing knowledge and integration into global production chains which are badly needed for successful exports strategy by developing countries. Yussof and Ismail (2002) found that inward FDI has been an important source of knowledge transfer in technology, management skills and international linkages for Malaysia, Indonesia, Philippines and Thailand. Furthermore, Aron (1999) argued that through training of workers and hands-on learning, FDI raises the skills of local manpower, thereby increasing their productivity level. Slaughter (2002) reported a strong positive correlation between skill upgrading and the presence of local affiliates of U.S MNCS.
Foreign Direct Investment is important because it can boost the economy growth in Malaysia. Policy reforms, including the introduction of the Investment Incentives Act 1968, the establishment of free trade zones in the early 1970s and the provision of export incentives is accelerate of open policy in the 1980s are led to a surge of FDI in the late 1980s. The other factor is believed that sound macroeconomic management, sustained economic growth, and the presence of a well functioning financial system have made Malaysia an attractive prospect for FDI.
The main objective of this study is to investigate the domestic short run and long run determinants of foreign direct investment (FDI) in Malaysia using annual data between the periods of 1980-2006. To achieve the objective, the study employs the Johansen cointegration and error-correction model (Johansen, 1988; Johansen and Juselius 1990; Johansen 1991). The study is to determine the important macroeconomic factors that can affect foreign direct investment in both short run and long run that policymakers can influence in Malaysia. Johansen cointegration and error-correction model distinguishes the relationship among the variables into short run and long run relationship.
Firstly and prior to testing for cointegration, the properties of individual time series are investigated by applying the Augmented Dickey-Fuller (ADF) and the Phillip-Perron (PP) tests. Secondly, assuming that the series are stationary, Johansen maximum likelihood method will be applied to examine the question of cointegration among the variables in multivariate setting. Thirdly, if the variables are found to be integrated, the error-correction model will be estimated by including the error-correction term (ECT) lagged by one year, derived from long-run relationships, as independent explanatory variables are cointegrated, then tests involving differenced variables are mis-specified and some important information lost unless a lagged error-correction term is included.
Definition of Foreign Direct Investment
- Foreign direct investment is investment of the foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. It refers to long term participation by country A into country B. For example, Toyota company from Japan making a physical investment into a car manufacturing factory in Malaysia. It usually involves participation in management, joint-venture, transfer of technology and expertise. More specifically, foreign direct investment is a cross-border corporate governance mechanism through which a company obtains productive assets in another country.
There are three types of FDI:
Inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative)
Stock of foreign direct investment, which is the cumulative number for a given period.
Iii) Direct investment excludes investment through purchase of shares.
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
Individual
Group of related individuals
Incorporated or unincorporated entity
Public company or private company
Government
Societal organization
Foreign Direct Investment in Manufacturing Sector
Major Determinant of Foreign Direct Investment
-Gross Domestic Product (GDP) per capita
-Exchange Rate
-GDP growth rate
-Tariff and Non-tariff barriers
-Infrastructure facilities
-Political stability
-Inflation rate
Problem Statement
Importance of Study
Objective
General Objective
-To identify the determinant of foreign direct investment in Malaysia
Specific Objective
-To determine whether interest rate is determinant of FDI
-To examine the effect of exchange rates to FDI
-To investigate whether inflation can affects FDI
