The Nexus Between Foreign Direct Investment and Economic Growth in Malaysia
Abstract
In recent decades, Foreign Direct Investment (FDI) has become a significant factor in promoting economic growth. Recent years have witnessed significant discourse regarding the relationship between foreign direct investment and economic growth. This research employed the Autoregressive Distributed Lag (ARDL) methodology to analyze the long-run and short-run relationships between foreign direct investment and economic growth in Malaysia over the period from 1990 to 2022. The findings indicate that foreign direct investment has a positive impact on economic growth in both the short and long term. This aligns with the fundamental principles of endogenous growth theory, which posits that foreign direct investment enhances the transfer of skills that enrich the knowledge base of the host country in both the short and long term. The study provides policymakers with insights regarding the relationship between economic growth and foreign direct investment (FDI).
Downloads
References
Abidin, M. (2010). Moving up: Key strategies and challenges to successfully expand ASEAN business. Malaysia: Institute of Strategic and International Studies (ISIS) Malaysia.
Ajibola, A., Isiaka, M., Ogunleye, O., & Adeyemi, O. (2018). Foreign direct investment and economic growth in Nigeria revisited: A sector level analysis. Nile Journal of Business and Economics, 10, 69-85.
Al Naseer, O. (2010). How does foreign direct investment affect economic growth? The role of local conditions. Latin American Business Review, 11, 111-139. DOI: https://doi.org/10.1080/10978526.2010.486715
Alzaidy, G., Naseem, M., & Lacheheb, Z. (2017). The impact of foreign direct investment on economic growth in Malaysia: The role of financial development. International Journal of Economics and Financial Issues, 7(3), 382-388.
Amyra, N., & Siti, A. (2022). Nexus of foreign direct investment, domestic investment, trade on economic growth: A cointegration analysis. Journal of Accounting and Finance in Emerging Economies, 8(3), 399-412. DOI: https://doi.org/10.26710/jafee.v8i3.2422
Azam, M., Khan, A., & Bakhtyar, B. (2017). Surveying sources of economic growth: Empirical evidence from Malaysia. Problems and Perspective in Management, 15(4), 114-123. DOI: https://doi.org/10.21511/ppm.15(4).2017.10
Borensztein, E., Gregorio, J., & Lee, J. (1998). How does foreign direct investment affect economic growth? Journal of International Economics, 45, 115-135. DOI: https://doi.org/10.1016/S0022-1996(97)00033-0
Cahyadin, M., & Sarmidi, T. (2019). The impact of foreign direct investment, labor force, and external debt on economic growth in Indonesia and Malaysia. Jurnal Ekonomi Malaysia, 53(1), 171-185. DOI: https://doi.org/10.17576/JEM-2019-5301-14
Carkovic, M., & Levine, R. (2002). Does Foreign Direct Investment Accelerate Economic Growth? University of Minnesota Department of Finance Working Paper. DOI: https://doi.org/10.2139/ssrn.314924
De Jager, J. (2004). Exogenous and endogenous growth. University of Pretoria ETD.
De Mello, L. (1999). Foreign direct investment-led growth: Evidence from time series and panel data. Oxford Economic Papers, 51, 133-151. DOI: https://doi.org/10.1093/oep/51.1.133
Edress, H. (2017). The effect of FDI and other foreign capital inflows on growth and investment in developing economies.
Elboiashi, H. (2011). The effect of FDI and other foreign capital inflows on growth and investment in developing countries. PhD thesis, Department of Economics, University of Glasgow.
Etale, E., & Etale, L. (2016). The relationship between exports, foreign direct investment and economic growth in Malaysia. International Journal of Business Management and Economic Research (IJBMER), 7(2), 572-578.
Fosu, E., & Mangus, F. (2006). Bounds testing approach to cointegration: An examination of foreign direct investment, trade and growth relationship. Journal of American Applied Science, 3(11), 2079-2085. DOI: https://doi.org/10.3844/ajassp.2006.2079.2085
Gokmenoglu, K., Sehnaz, Z., & Taspinar, N. (2015). The export-led growth: A case study of Costa Rica. Procedia Economics and Finance, 471-477. DOI: https://doi.org/10.1016/S2212-5671(15)00759-5
Halizam, M., Ridzuan, A., Shaari, M., Hayati, N., & Idham, M. (2021). Revisiting the impact of foreign direct investment on Malaysia's economic growth. International Journal of Academic Research in Business and Social Sciences, 11 (5), 814-826. DOI: https://doi.org/10.6007/IJARBSS/v11-i5/9755
Hansen, H., & Rand, J. (2004). On the causal link between FDI and growth in developing countries. Institute of Economies University of Copenhagen.
Haseeb, M., Hartani, N. H., Bakar, N. A., & Hassan, M. S. (2014). Exports, foreign direct investment and economic growth: Empirical Evidence from Malaysia (1971-2013). American Journal of Applied Sciences, 11(6), 1010-1015. DOI: https://doi.org/10.3844/ajassp.2014.1010.1015
Herzer, D., Klasen, S., & Nowak-Lehmann, D. (2008). In search of FDI-led growth in developing countries: the way forward. Economic Modelling, 25(5), P. 793-810. DOI: https://doi.org/10.1016/j.econmod.2007.11.005
Hsu, Y. (2017). Population aging, labor force participation, and economic growth. Journal of Business & Economic Policy, 4(1), 119-129.
Ibrahim, M. A. (2022). Malaysia's trade and economy transition between the era of Tunku Abdul Rahman and Tun Mahathir, 1960s-1990s. Journal of History Department, University of Malaya, 31(1), 125-139. Retrieved from https://doi.org/10.22452/sejarah.vol31no1.7 DOI: https://doi.org/10.22452/sejarah.vol31no1.7
Ikram, S., & Norimah, R. (2018). Impact of export, import and growth: Evidence using econometric analysis in Malaysia. International Journal of Accounting, Finance and Business, 12-19.
Ledhem, M., & Mekidiche, M. (2021). Islamic finance and economic growth nexus: An empirical evidence from Southeast Asia using dynamic panel one-step system GMM analysis. Journal of Islamic Accounting and Business Research, 12(8), 1165-1180. doi:10.1108/JIABR-03-2021-0107 DOI: https://doi.org/10.1108/JIABR-03-2021-0107
Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688-726.
Lucas Jr, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 3-42. DOI: https://doi.org/10.1016/0304-3932(88)90168-7
Malik, A., & Sah, A. (2024). Does FDI impact the economic growth of BRICS economies? Evidence from Bayesian VAR. Journal of Risk and Financial Management, 17(10). doi:https://doi.org/10.3390/jrfm17010010 DOI: https://doi.org/10.3390/jrfm17010010
Masturah, M., & Siti, S. (2020). The impact of foreign direct investment on economic growth in Malaysia. Advances in Business Research International Journal, 6(1), 25-34. DOI: https://doi.org/10.24191/abrij.v6i1.9937
Meivitawanli, B. (2021). Research on the relationship between provincial foreign direct investment and economic growth: An empirical study in Indonesia. Journal of International Studies, 14(1), 241-257. doi:10.14254/2071-8330.2021/14-1/17 DOI: https://doi.org/10.14254/2071-8330.2021/14-1/17
Meyer, D., & Sanusi, K. (2019). A causality analysis of the relationship between gross fixed capital formation, economic growth and employment in South Africa. Studia Universitatis Babes-Bolyai Oeconomica, 64(1), 33-44. doi:10.2478/subboec2019-0003 DOI: https://doi.org/10.2478/subboec-2019-0003
Mohamed, M., Singh, K., & Liew, C.-Y. (2013). Impact of foreign direct investment & domestic investment on the economic growth of Malaysia. Malaysian Journal of Economic Studies, 50(1), 21-35.
Mustafa, T., Hassan, N., Hassan, N., & Zainudin, F. (2021). The effect of FDI on GDP growth in Malaysia. Paper presented at the e-Proceedings of International Conference on Language, Education, Humanities & Social Sciences (i-LEdHS2021).
Nair-Reichert, U., & Weinhold, D. (2001). Causality tests for cross-country panels: A new look at FDI and economic growth in developing countries. Oxford Bulletin of Economics and Statistics, 63(2), 153-171. DOI: https://doi.org/10.1111/1468-0084.00214
Norsilawati, M., Fadhilah, M., Suriati, N., & Mustafa, T. (2021). The effect of FDI on GDP growth in Malaysia. International Conference on Language, Education, Humanities and Social Sciences, 196-205.
OECD. (2002). Foreign direct investment for development: Maximising benefits, minimizing costs.
Pesaran, M., Shin, Y., & Smith, R. (2001). Bounds testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16 (3), 289-326. DOI: https://doi.org/10.1002/jae.616
Quaicoe, A., Aboagye, A., & Bokpin, G. (2017). Assessing the impact of export processing zones on economic growth in Ghana. DOI: https://doi.org/10.1016/j.ribaf.2017.07.052
Rambeli, N., Hashim, E., & Affizah, D. A. (2016). Relationship between education expenditure, capital, labor force and economic growth in Malaysia. Internal Journal of Academic Research in Business and Social Science, 6(12), 459-468. DOI: https://doi.org/10.6007/IJARBSS/v6-i12/2510
Rasiah, R., Asirvathan, J., & Adamu, I. (2017). Foreign direct investment, GDP growth and trade liberalization: evidence from pioneering ASEAN members. Journal of Economic Cooperation and Development, 38(1), 97-126.
Romer, P. (1986). Increasing returns and long-run growth. Journal of Political Economics, 94 (5), 1002-1037. DOI: https://doi.org/10.1086/261420
Romer, P. (1990). Endogenous technological change. Journal of Political Economy, 98, S71-S102. DOI: https://doi.org/10.1086/261725
Romer, P. (1994). The origins of endogenous growth. Journal of Economic Perspectives, 3-22. DOI: https://doi.org/10.1257/jep.8.1.3
Sharma, S., Kaur, M., Sharma, P., & Sandhu, S. (2020). A study of the relationship and impact of foreign direct investment on the economic growth rate of India. International Journal of Economics and Financial Issues, 10(5). doi:10.32479/ijefi.10463 DOI: https://doi.org/10.32479/ijefi.10463
Sunde, T. (2017). Foreign direct investment, exports and economic growth: ARDL and causality analysis for South Africa. Research in International Business and Finance, 434-444. DOI: https://doi.org/10.1016/j.ribaf.2017.04.035
Vlatka, B. (2019). Foreign direct investment and economic growth relationship in Croatia. UTMS Journal of Economics, 175-187.
William, C. (1991). Comparative Malaysian leadership: Tunku Abdul Rahman and Mahathir Mohamad. Asian Survey, 31(5). DOI: https://doi.org/10.2307/2645018
Yousaf, U., Nasir, A., Naqvi, F., Haider, A., & Bhutta, N. (2011). Impact of foreign direct investment on the economic growth of Pakistan. Journal of European Economics, Finance and Administrative Science, 32(1), 96-100.
Copyright (c) 2024 Chong Siew Huay, Najaa Aqilah Arabi, Chuah Soo Cheng
This work is licensed under a Creative Commons Attribution 4.0 International License.
Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of revised paper in the light of suggestions of the reviewers, the editorial team edits and formats manuscripts to bring uniformity and standardization in published material.
This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.
