Fdi Infow Malaysia

1. INTRODUCTION

It is generally accepted that Foreign Direct Investment (FDI)  is a key driver in promoting long-term economic growth, particularly in a developing countries, that have experienced a shortage of capital accumulation for their development. Developing countries are highly dependent on FDI as a mechanism of economic growth and have been trying to attract foreign investors, particularly Multinational Enterprises (MNE’s), by reducing barriers to FDI and offering various tax incentives and subsidies.

Malaysia is one of the countries in Asia that has benefited from strong FDI inflow. 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 in the past decades.

FDI enables the investing firm to utilize their specific assets such as technologies and managerial know-how. Thus, FDI brings benefits in various aspects, which are source of funds in term of capital stock; increase in employment, income and growth, as well as in skills and technology.

This paper identifies some of the main factors that contribute significantly to attracting FDI in Malaysia. This is crucial because private investment has been given a leading role to bring the economy to higher growth and sustainable economy.

1. FACTORS THAT AFFECT MALAYSIA’S FOREIGN DIRECT INVESTMENT INFLOWS  

Past studies show that here is an importance of foreign capital in expanding the economic growth of a country. Although there are many factors that affect the FDI inflow of Malaysia, this paper will focus on four determinants that are most significant. The four determinants are the market size, trade openness, economic growth and inflation rate of the host country

1. Market Size

Market size measured by gross domestic product plays an important role in this study because it indicates how well a country‟s population demand for the output. It is important for foreign investor to determine whether to invest or not from the view of market opportunity.

A larger market size will attract investors with ease. A large market size means the resources of the country will be utilized more efficiently and exploitation of economies of scale. Hence, it is the key for investors who aim for long term investment.

The importance of the market size has been confirmed in many past literatures as the host market size represents the host country’s economic condition and the potential demand for their output. Previous researchers like Quer and Claver (2007), concluded that the market demand and market size, indicated by the variable of gross domestic product (GDP) is significant and positively affects Malaysia foreign direct investment inflows. This proves that Malaysia FDI inflows will increase given the level of gross domestic product increase.