Atif Awad

College of Business Administration, Department of Finance & Economics, University of Sharjah, Sharjah, United Arab Emirates, UAE

aawoad@sharjah.ac.ae

Foreign direct investment inflows to Malaysia: Do macroeconomic policies matter?

Abstract. Malaysia plans to become a high-income economy in the coming years via what is called the ETP (Economic Transformation Program). To achieve this, Malaysia requires a sufficient level of foreign capital and thus is implementing appropriate investment initiatives to stimulate economic activity. So far, Malaysia has only been able to attract a small number of foreign investors. With a relatively small amount of FDI flowing into the country, the expectations of the Economic Transformation Program (ETP) that heavily rely on FDI may be challenged. The current paper analyses how selected macroeconomic factors might impact the flow of FDI into Malaysia. The ARDL (Auto-Regressive Distributed Lag) technique was used together with the VAR (Vector Autoregressive Model) on annual data (1970-2017). The study has found that over time, appreciation of the local currency, openness, inflation and labour cost had a significant negative impact on the inward flow of FDI. Conversely, over the longer term, real interest rate and GDP growth produced substantial positive effects on FDI. The findings suggest that when aiming to create an attractive for FDI environment, it is necessary for governments to closely consider macroeconomic policies that lower both production and transaction costs of multinational enterprises.

Received: August, 2019

1st Revision: November, 2019

Accepted: February, 2020

DOI: 10.14254/2071-8330.2020/13-1/13

JEL Classification: F21, F4, F41

Keywords: foreign direct investment, openness, exchange rate, Malaysia