Academic journal article International Journal of Business and Society

Outward Fdi and Economic Growth in Malaysia: An Empirical Study

Academic journal article International Journal of Business and Society

Outward Fdi and Economic Growth in Malaysia: An Empirical Study

Article excerpt

ABSTRACT

This paper attempts to explore the causality relationship between outward foreign direct investment (OFDI) and home country economic growth using Malaysia as a case. The main findings do not advocate the OFDI-led growth hypothesis. In order to promote OFDI-led growth, the home government should prepare the private sector for increasing competition in the era of globalization so that linkages can be forged with Malaysian multinationals, and to facilitate home sourcing for OFDI activities. However, the study reveals the evidence of growth-led OFDI, which conforms to the investment development path theory, can potentially internationalize business activities of Malaysian firms abroad that could raise the economic activity and social well-being of the nation.

Keywords: Outward FDI, multinationals, Malaysia

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

It is well documented that foreign direct investment (FDI) inflows have played an instrumental role in promoting economic growth and development of the Malaysian economy as a result of the adoption of a series of industrialization initiatives.2 The literature review of a number of empirical studies advocated the inward FDI-led growth hypothesis can shed some light on the link between FDI inflows and economic growth for Malaysia. By and large, these findings suggested that FDI inflows could encourage economic growth in Malaysia through channels like spillover effects (Bende-Nabende et al. (2001)), openness (Marwah and Tavakoli (2004)), and developing the financial sector (Tang, 2003; Choong et al., 2005). Moreover, Wong and Tang (2007) also found the important causal link from FDI inflows to Malaysian semiconductor exports that could potentially enhance the economic growth in the host economy because semiconductors were the largest export earner in the electronics industry and also, the industry happened to be one of the major recipients of FDI. Empirical literature studying the economic growth effects of inward FDI for other host countries can be found from Balasubramanyam et al. (1996, 1999), De Mello (1997; 1999), Bende-Nabende and Ford (1998); Borensztein et al. (1998), Alguacil et al. (2002), Chakraborty and Basu (2002), Liu et al. (2002) and Baharumshah and Thanoon (2006), to name a few. On the other hand, according to Ang's study (2008), apart from both financial and infrastructure developments, and trade openness, Malaysia's economic growth had a positive impact on its FDI inflows. Choong and Lam (2010) also provided similar findings that in addition to degree of openness and literacy rate, there was a unidirectional causality that ran from Malaysia's real GDP to FDI inflows.

However, recently, Malaysia as a host country suffered a massive decline in FDI inflows whilst it also experienced a substantial increase in FDI outflows especially after 2007 (see Figure 1). These were attributed to the higher cost of labour in the home country (Tham, 2005) as well as the emergence of more attractive destinations for FDI such as People's Republic of China (PRC), India and transitional economies from Indochina, due mainly to their relative lower labour cost (see Hussain and Radelet, 2000) and larger market size. For instance, Goh and Wong (2011) found that foreign market size was one of the key determinants of OFDI from Malaysia using multivariate cointegration and error-correction modelling approach.3 Besides, other macroeconomic determinants like income, real effective exchange rate and trade openness were also positively related to Malaysia's OFDI in short and long run (Kueh, Puah, and Apoi (2008)). Besides, it was also found that interest rate had a positive impact on OFDI from Malaysia in the long run only (Kueh, Puah, and Mansor (2009)). Since 2007, the outflows of FDI exceeded its inflows, and this trend continued in 2008 (UNCTAD, 2008, 2009; refer to Fig. 1). In the literature, there are two economic views put forward pertaining to the possible impacts of outward foreign direct investment (OFDI) on the home country economic growth. …

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