Evaluate The Contribution of Fdi in Industrial Sector in Malaysia

EVALUATE THE CONTRIBUTION OF FDI IN INDUSTRIAL SECTOR IN MALAYSIA
P a g e 1 | 30

Contents
1. INTRODUCTION ................................................................................................................................ 2
GLOBALIZATION OF FDI (AFTA) ....................................................................................................... 4
GLOBALIZATION OF FDI (NAFTA) .................................................................................................... 5
GLOBALIZATION OF FDI (WTO) ........................................................................................................ 6
2. FACTOR INFLUENCING FDI TO MALAYSIA ............................................................................... 7
3. CONTRIBUTION OF FDI IN MALAYSIA ...................................................................................... 11
3.1 FDI CONTRIBUTION TOWARDS INVESTMENT ................................................................ 14
3.2 FDI CONTRIBUTION TOWARDS CURRENCY .................................................................... 17
3.3 FDI CONTRIBUTION TOWARDS UNEMPLOYMENT .............................................................. 20
3.4 FDI CONTRIBUTION TOWARDS ECONOMIC GROWTH ........................................................ 23
3.5 FDI CONTRIBUTION TOWARDS STABILITY ........................................................................... 24
4. CONCLUSION ................................................................................................................................... 26
5. REFERENCES ........................................................................................................................................ 28

P a g e 2 | 30

1. INTRODUCTION

FDI is the direct investment reflects the objective of obtaining a lasting
interest by a resident entity of the economy (direct investor) in the enterprise
resident in another economy. "The importance of sustainable" implies the existence
of a long-term relationship between the direct investor and the direct investment
enterprise and a significant degree of influence on the management of both.
Investment involves both the initial transaction establishing the relationship between
investors and companies and all subsequent capital transactions between them and
among affiliated enterprises, incorporated and unincorporated. It should be noted that
capital transactions that do not pose such a solution, such as a stock exchange, bonds,
capital investment and others. As we known in class, FDI plays a major role in our
economic contribution and what it is?
One of the primary benefits is that it allows money to freely go to whatever
business has the best prospects for growth anywhere in the world. That's because
investors aggressively seek the best return for their money with the least risk. This
motive is color-blind, doesn't care about religion or form of government. This can be
proven by Adam Smith theory of perfect competition, you try to imagine two
countries, Malaysia and China where Malaysia has a high skill in the production of
rubber and China have expertise in the manufacture of iron in terms of quantity and
price of manufacturing. Between the occurrences of the effect of FDI is to get items at
a lower cost and give benefit to all. go back to the example if Malaysia wants to
produce iron source because it will detrimental Malaysia does not have the
P a g e 3 | 30

technology, skilled manpower and other factors to make steel, as well as China if you
want to produce rubber. In perfect competition there thats goes to another theory is
competitive advantage where Malaysia can export rubber to marginal cost is more
Efficient to China and China can supply iron to Malaysia cost efficient and could
benefit being on both sides.
FDI also can bring the economic balance through the globalization.
Globalization is not a single concept that can be defined and encompassed within a
set time frame, nor is it a process that can be defined clearly with a beginning and an
end. Furthermore, it cannot be expounded upon with certainty and be applicable to all
people and in all situations. Globalization involves economic integration; the transfer
of policies across borders; the transmission of knowledge, cultural stability, the
reproduction, relations, and discourses of power, it is a global process, a concept, a
revolution, and an establishment of the global market free from sociopolitical
control. Globalization encompasses all of these things. It is a concept that has been
defined variously over the years, with some connotations referring to progress,
development and stability, integration and cooperation, and others referring to
regression, colonialism, and destabilization. Despite these challenges, this term brings
with it a multitude of hidden agendas. An individuals political ideology, geographic
location, social status, cultural background, and ethnic and religious affiliation
provide the background that determines how globalization is interpreted. But how
generally we can see the GLOBALIZATION through the FDI??

P a g e 4 | 30

GLOBALIZATION OF FDI (AFTA)

FDI plays an important role in the rapid economic development of the newly
industrializing and developing economies of Southeast Asia. Among the components
of resource flows to the ASEAN countries, FDI constitutes a considerable share,
indicating the importance of FDI as a major source of finance for economic
development. Between 1990 and 1997, FDI represented an annual average of 40% of
the net resource flows to the ASEAN countries, with Malaysia, Myanmar and
Vietnam having more than 50% FDI composition (United Nations, 2001a). A high
percentage of FDI to net private capital flows in the 1990s is almost the norm for
many developing countries, and this is true for ASEAN. This suggests the increasing
importance of net private capital flows, particularly FDI, to official flows for
development finance. The ASEAN region is a leading recipient of FDI flows in the
developing world, with five ASEAN countries in the top 20 developing-countries
recipients of long-term global capital flows from 1997 to 1998. Between 1993 and
1998, ASEAN received about 17.4% of the US$760 billion in cumulative global net
FDI flows to developing countries. Over the same period, ASEAN received an annual
average of US$22 billion in net FDI flows, compared with an annual average of
US$7.8 billion in the period between 1986 and 1991. FDI flows in ASEAN increased
on average by about 14% annually from 1996 to 1998, while FDI stock in ASEAN
grew tenfold from US$23.8 billion in 1980 to US$233.8 billion in 1998

P a g e 5 | 30

Despite the region's successes in attracting sizeable FDI flows, the countries
in the region continue to undertake collective as well as individual measures to
further liberalize their investment regimes and to provide competitive and attractive
investment environments. Further policy measures have been introduced to attract
greater FDI flows as a means to helping the countries recover from the economic
crisis.

GLOBALIZATION OF FDI (NAFTA)
(FDI) in Mexico and Canada has surged in the wake of NAFTA and the recent
depreciations of the Mexican peso and Canadian dollar. In 1994 the year NAFTA
took effect FDI in Mexico increased by 150%. It has remained strong ever since,
despite the economic problems caused by the peso crisis. FDI in Canada has more
than doubled since 1993, increasing 44% in 1998 alone. Canada and Mexico have
absorbed more than $116 billion in FDI from all sources since 1993.
Inflows of FDI, along with bank loans and other types of foreign financing,
have funded the construction of thousands of Mexican and Canadian factories
producing goods for export to the United States. The growth of U.S. imports from
these factories is a major factor contributing to the United States growing trade
deficit, resulting in the loss of 440,172 high-paying U.S. jobs in the manufacturing,
hi-tech, automotive, and apparel sectors since 1994.
Moreover, the recent growth of the U.S. trade deficit with its North American
neighbors shows no sign of slowing. Whereas the total U.S. trade deficit with the
P a g e 6 | 30

world increased by 39% in the first half of 1999 (relative to the same period in 1998),
the U.S. deficit with Mexico increased by 72% and the deficit with Canada more than
doubled (121%) in this same period.

GLOBALIZATION OF FDI (WTO)
The General Agreement on Tariffs and Trade (GATT) and its successor,
the World Trade Organization (WTO), are under debate. Andrew Rose has claimed
that there is no compelling evidence that the GATT/WTO system has been effective
in increasing aggregate bilateral trade or liberalizing trade policy (Rose, 2004a, b).
Critics of Rose have argued that the GATT/WTO does promote trade, when taking
into account: a impact of accession on the investment decisions of multinational
enterprises (MNEs) complicates the interpretation of reduced-form estimates of the
effect of accession on aggregate trade. In fact, when accession affects the extensive
margin of FDI, the multilateral tariff reductions associated with GATT/WTO
accession cannot be identified with the aggregate trade measures. Since roughly two
thirds of world trade is administered by MNEs. To illustrate this, the GATT/WTO
principles require a reduction in the import tariffs that the accession country imposes
against incumbent countries - as well as a reduction of the incumbent countries
tariffs used against the accession country. With lower incumbent tariffs, MNEs will
more frequently invest in affiliates which are used as an export platform to supply
incumbent countries from the accession country. More numerous and more export-
oriented foreign affiliates will then increase the aggregate exports in the host country
after accession.
P a g e 7 | 30

2. FACTOR INFLUENCING FDI TO MALAYSIA

Foreign direct investment is the key driver underlying the string growth
performances experienced by the Malaysian economy. The presence of a well-
functioning financial system and sustained economic growth had made Malaysia an
attractive country for FDI. Other than that, the government policy reforms such as the
introduction of establishment of free trade zones in the early 1970 and the provision
of export incentives alongside the acceleration of open policy in the 1980s has
attracted a large amount of FDI inflow in the late 1980s (Ang, 2008). The sharp
increase in FDI of Malaysia was due to the coincidence of the foreign investment
regime which was further liberalized as part of the structural adjustment reforms
implemented in response to the macroeconomics crisis in the mid-1980. The move by
firms from Japan, South Korea, United States and Taiwan in relocating their
production bases to low cost countries due to the rising wages in the domestic
countries also plays a part in the increment of FDI in Malaysia (Athukorala&Wagle,
2011).
According to Karimi, Yusop, and Law (2010), based on the result of TOPSIS
method which is used in ranking ASEAN countries in term of attraction and capacity
for FDI in 2005, Malaysia was at the second place where the first ranking is
Singapore. This shows that Malaysia is the most attractive country for FDI among the
P a g e 8 | 30

ASEAN countries right after Singapore. FDI plays several crucial roles in Malaysia
economy. One of the roles is to promote export growth. Investing in firms which have
its own product reputation and brand image in the international market reduces the
need for domestic firms to spend resources and time to penetrate and acquire foreign
markets.

Market size or market attractiveness can be assessed or measured by
examining host countrys GDP, population, growth of GDP and even GDP per capita.
Empirical evidence investigating market size and attractiveness in the host country as
a variable influencing FDI has shown mixed results although most findings support
the theoretical view that large markets attract FDI. In the internalization of hotels, the
size and rate of growth of the tourism sector in the host country was found to be an
important determinant of FDI in the travel business (Dunning & McQueen 1981).
They found the size of domestic markets to be positively related to FDI inflow.
Hasan (2004) in his empirical investigation on FDI in the Malaysian
manufacturing sector found exports a crucial determinant in attracting investment. He
found that a 1% rise in export is likely to increase FDI inflow by around RM120
million. He further reiterates that FDI tends to boost exports from home country and
imports from host country to home country. In this case, the market size may not be
so important for manufacturing multinational companies (MNC) as compared to
service MNCs.
P a g e 9 | 30

Malaysia is one of the fastest growing economies in the South East Asian
region after Singapore. The service sectors share of GDP in Malaysia is currently
close to 57%. Therefore, Malaysia has the potential to attract FDI into the service
sector. Most service MNCs are commercially present and are not export oriented
which they cater and serve the growing domestic market. This factor is likely to
enhance the future growth of service MNCs.

Workforce factors refer to variables such as cost of labour-wages, education
level and also skill level. In the Malaysian scenario, some service industries such as
banking, insurance, information technologies, telecommunication and BPO are
capital and knowledge intensive. These industries depend on semi-skilled and
educated labour. Malaysia is able to supply such workforce at relatively lower cost
compared to established service economies such as Singapore. Furthermore, factors
such as availability of high quality English speaking, educated work force which
highly important in the sector. For example, a report by Bernama (2004) said that
Shells success in Malaysia was largely due to the availability of cheap, highly
talented, highly trainable and capable Information Technology (IT) workforce.
Theoretically, the degree of interaction between customers and producers are
normally high and the quality of the companys human resources becomes a critical
or key factor in their ability to deliver the services.
Additionally, government factor does an important influence for Malaysia.
Variables that will come under government factors are government incentives,
economic policies, political environment and government promotions towards FDI.
P a g e 10 | 30

The Malaysian government has provided numerous incentives to attract FDI over the
years. However, most of our competitors have also provided similar incentives.
Vietnam, Thailand, Indonesia and Philippines have been successful in pulling FDIs
away from Malaysia by coming up with similar incentive packages. So, it is worth
examining whether tax incentives and government policies are significant factors in
attracting FDI.
Another important development in Malaysia is the establishment of the
Multimedia Super Corridor (MSC) in 1995. Malaysia was the first country in the
region to create the MSC. The MSC has attracted world class MNCs both in the
services sector and manufacturing sectors. Numerous incentives such as tax
exemptions, government grants were provided to attract foreign firms especially in
the information technology field to set up their offices in the MSC. According to
Ramasamy (n.d) the success of MSC is yet to be seen since the level of investment
flowing into the MSC is not substantial enough.
Moreover, the level of infrastructure in the host country refers to the quality of
roads, railroad, dependable energy and telecommunication, availability, credit and
banking facilities and other financial, legal and transport systems (Wilhelms, 1998;
Griffin & Pustay, 1999). Malaysia has one of the most developed infrastructures in
this region after Singapore. It has developed high quality infrastructure in the
financial, telecommunication and transportation sector. An efficient and developed
infrastructure can reduce cost of doing business not only in the services sector but
also manufacturing sector. Therefore, good quality infrastructure is necessary to lure
FDI.
P a g e 11 | 30

Lastly, according to Grunbaugh (1987) and Culem (1988), large firms are
more likely than small firms to be foreign investors. In the case of Malaysia, variables
such as reputation, experience effect, brand image and size of firm are considered to
be important for MNCs. For example in the banking sectors, some of the foreign
banks in Malaysia such as HSBC and Standard Chartered have been here for more
than a century and also have presence all over the world. Their reputation, experience
and size may definitely give them an edge over new players in the industry but might
not be true for new and small service MNCs because it will take time for them to
establish themselves internationally. They may have certain managerial expertise that
others do not have which gives an edge over the rivals.

3. CONTRIBUTION OF FDI IN MALAYSIA
Traditionally, we often think one of the factor influence and giving impact
on Gross Domestic Product (GDP) is the international trade and Foreign Direct
Investment (FDI) also the factors that influence the level of productivity growth. For
some country, the development of technology and the open economy policy can be
measure by how the international trade to promote the economy growth and
encourage the FDI inflows. Economy growth sometimes affected particularly for
developing countries by international linkages or technology transfer. In Malaysia,
according to research by Taylor (2002), the international trade trend over economy
growth is vary across country and changed over time.
P a g e 12 | 30

Malaysia has a lot abundant in nature resources such as palm oil, tin, rubber
and so on which still not being fully utillized. Years back, In 2007, Malaysia
economy of was third largest economy in South East Asia. Malaysia is an upper-
middle income economy with a gross national income of USD 8,770 per capita
(2011). Currently, it is a highly open economy (exports comprise over 100 percent of
GDP) and a leading exporter of electrical appliances, electronic parts and
components, palm oil, and natural gas (World Bank, 2013). Malaysia is expected to
register real GDP growth of 5.1 percent in 2012, 5.0 percent in 2013, 5.0-5.5 percent
in 2014. Propelled by domestic demand, Malaysias economy is likely to weather a
weak global environment. High and sustained economic growth, typically in
conjunction with more opening up to international trade, is a central objective of
economic movement policy. Involving in international trade is important to increase
productivity through maximum utilization of scale economies.
Based on my study in ECO 546 on factor influence GDP with numerical
regression of GDP=345.848 + 0.340G + 2.210FDI - 0.0000004809CN - 0.003E
shows that, increase in 1 dollar of Foreign Direct Investment will increase GDP by
$2.210 million. The purpose of this paper was to test the Impact and causality
correlation between government spending, FDI, consumption and export in Malaysia.
By done this paper the results shows that GDP had positive correlation with
government spending and FDI where have proven by perform the OLS estimator.
Besides that, there is no significance evidence to prove that growth rate last period of
FDI, import and export does not affect current GDP. Malaysia GDP does not react to
the changes of international trade or FDI. This paper also found that Malaysian
P a g e 13 | 30

economic growth strong domestically and not much depends on globally inflow. This
is supported by the plenty of resources such as oil palm, cruel oil, rubber and other
comparative advantage product. Beside that Malaysia economic can conclude as
strong sustainability in term of economics. Remark U.S financial rescission 2008 and
Greece debt financial crisis where most of country aware but Malaysia one of country
that not effected much. This results support the general findings of Darrat (1986) for
the Gang of Four Countries of Asia Export, Import and FDI has no influence on
growth in GDP of Malaysia. The results shows that when Government of Malaysia
implements fiscal policy by changing the amount of export or through spending for
FDI facilities in order to encourage more investment inflow to Malaysia, the
economic growth will not change thereby ensuring that no effects of fiscal policy are
used to change the growth rate in Malaysia.

P a g e 14 | 30

3.1 FDI CONTRIBUTION TOWARDS INVESTMENT

Historically, in 2012, New Straits Times reported that Malaysia attracted
RM32.9 billion FDI in 2011 which the highest amount ever recorded, announce by
the International Trade and Industry Minister Datuk Seri Mustapa Mohamed. The
biggest industry that contribute is the manufacturing sector which increased by 12 %
from RM29.3 billion in 2010. 72% of the FDIs came from Asian countries and for the
countrys total trade was the highest ever accounted at RM1.269 trillion which was
underpinned by inter-Asian trade. Resulted from this, Malaysia had done reasonably
well, considering the challenging external environment, and had exceeded its
investment target. For the first time, Malaysia Investment Trade Authority (MIDAs )
statistics captured the total investments approved in the manufacturing, services and
primary sectors, which showed a 40.7 per cent rise to RM105.6 billion from 4,368
projects. The primary sector, comprising agriculture, mining and plantation, and
commodities sub-sectors were previously not included in Midas total investment
figures. It also indicates that Malaysia is on track to attaining the investment targets
set under the Economic Transformation Programmed by 2020.
P a g e 15 | 30

Currently domestic investors played an important role and were as active as
their foreign counter parts in private investments. The manufacturing sector continued
to be a significant source of growth. The total investments approved for the sector
RM34.2 billion=61%, were by foreign investments in new projects. Domestic
investments accounted for 55.4% of total approved investments. On the performance
of the states in terms of the number of projects approved, Selangor, Johor and
Penang topped the list with 156 projects, 133 projects and 81 projects. By value of
investments, Johor was first with RM 10,590516, 187 followed by Sarawak with
RM65, 600,433,204, and Selangor with RM3, 872,034,409 in 2013. Infrastructure
development in Malaysia especially to Penang are having great times because of done
ell not only for the past two years but strong enough for the last 30 years, due to the
P a g e 16 | 30

strong support of the Federal Government which continues to spend money to
improve its infrastructure with a new bridge and airport.
For the international country contribution, Japan led the pack of foreign
investors with investments totaling RM10.1 billion, followed by South Korea by
RM5.2 billion, the United States by RM2.5 billion, Singapore by RM2.5 billion and
Saudi Arabia by RM2.2 billion. By the regional area which not left behind,
government has distribute by the regional program, such as The Northern Corridor
Economic Region registered the largest number of investments in projects with
RM15.3 billion of approved manufacturing licenses, followed by Sarawak Corridor of
Renewable Energy (RM8.2 billion), Iskandar Malaysia (RM5.7 billion), East Coast
Economic Region (RM4.6 billion) and Sabah Development Corridor (RM900
million).
As the conclusion, by generating FDI at the same time will generate our GDP
so this will accounted to our economic growth and development. This revenue can be
used in upgrading our country facilities, opportunity toward the citizens and the
country revenue itself as it has many positive effects like encourage foreign direct
business relationships give rise to multinational corporations.

P a g e 17 | 30

3.2 FDI CONTRIBUTION TOWARDS CURRENCY

Malaysia is applying floating/flexible exchange rate system, therefore leading
a Currency fluctuations, a natural outcome. The exchange rate of one currency versus
the other is influenced by numerous fundamental and technical factors. These include
relative supply and demand of the two currencies, economic performance and so on.
According to the classical economic thought system, in case that any country
specializes in the fields, in which it will have its respective comparable superiority,
and makes a trade in the international exchange rate, it will record an increase in its
real incomes, and the country will get richer. In the classical economic thought
system, the first thinkers emphasizing the importance of trade are A. Smith and D.
Ricardo. Especially, A. Smith concentrated on the relationships between trade, market
size, and economic growth.
Asias economic fundamentals currently are much stronger than in prior crisis
periods (1997/98 and 2008/09) which Malaysia have the ability to handle it and are
backed by a more stable and better regulated financial sector and economists believe
that some countries in the region will be able to withstand the effects because of
strong fundamentals. Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz,
said the country has the strength and capability to manage the current volatility for
one, has over the week assuaged concerns over the effects of destabilising capital
flows on Malaysia. Currently Malaysia, is the third-largest economy in South-East
Asia has not been immune to the recent capital outflows, as evident in the movement
P a g e 18 | 30

of the ringgit, yet policymakers and economists alike believe that the country could
be able to hold its ground.
. Malaysia has strong and sound financial intermediaries operating in a well-
developed market also countrys robust foreign exchange reserves level, which stood
at US$137.9bil (RM456.5bil) as at Aug 15,2013 and low levels of foreign-currency
debt at around 1% to 2% of the countrys gross domestic product (GDP) should also
serve to protect Malaysia from the impact of disruptive capital flows as well as the
financial stability also to achieve a more developed foreign exchange market. The
movement of the ringgit remained orderly and driven by two-way flows of funds,
with the currency recording a mixed performance against major and regional
currencies last. The annual report revealed that Malaysia continued to experience
two-way capital flows last year, with foreign fund inflows registering RM59.2bil,
mainly attracted to the country's resilient growth in 2012.
In the long-term, a persistent fall in FDI may have an impact on the stock
market and the ringgit because if a country is able to attract investments this will lead
to the reflection of competitiveness. Besides, FDI also has been considered as one of
the major factors underlying the economic growth experienced by many developing
countries. In Malaysia, FDI has played an important role not only in stimulating
economic growth, but also contributed significantly to the growth of the industrial
sector and the transformation of the Malaysian economic structure from agricultural
into major producer and exporter of manufactured goods. (Idris Jajri, 2003)
The establishment of an enterprise by a foreigner are helping which more
specifically, foreign direct investment is a cross-border corporate governance
P a g e 19 | 30

mechanism through which a company obtains productive assets in another country.
Its definition can be extended to include investments made to acquire lasting interest
in enterprises operating outside of the economy of the investor.
Meanwhile, low interest rate in the home country relatively will lead to higher
tendency of outward FDI. Indeed abroad investments require sound financially
support and capital abundance in term of low interest rate enable firms to access to
capital market. Therefore, firms can obtain necessary funding to finance their abroad
investment. In related to that, exchange rate also has significant impacts towards the
outward FDI. Although countries with stronger currencies in relative to firms from
countries with weak currencies, will discourage exports, however this will lead to
higher propensity to perform abroad investment due to appreciation of the currencies.

P a g e 20 | 30

3.3 FDI CONTRIBUTION TOWARDS UNEMPLOYMENT
In the early years, the economic growth was focused on agriculture and
mining sector which occurring in rural area. Somehow, the intense competition of
globalization has caused the transformation from agriculture and mining sector to
manufacturing and service sectors. From the statistic given by
Tradingeconomics.com, Unemployment rate in Malaysia increases 3.30% in October
2013 from 3.10% in September 2013 reported by the Department of Statistic
Malaysia. Unemployment rate in Malaysia averaged about 3.31% from 1998 until
2013, reaching all time high of 4.50% in March 1999 and a record low of 2.70% in
August 2012. In Malaysia, the unemployment rate measures the number of people
actively looking for a job percentage of the labor force.

Table 1: Unemployment rate from January 2012-July 2013.
In Asia region, the economy growth trend and labor market outcomes
normally similar because labor market development is one of the most important
components of economic transition. Rural and urban areas is the aim of the labor
P a g e 21 | 30

market development Malaysia's unemployment rate decreased notably in June to the
lowest level in ten months, data released by the Department of Statistics.
In (2012) recorded the unadjusted unemployment rate dropped to 2.8 percent
in June from 3.3 percent in May. A lower figure was last recorded in August 2012,
when the jobless rate stood at 2.7 percent. At the same time, the number of persons in
employment grew by around 430,000 month-on-month to about 13.47 million in
June. This is because employment was driven by the sectors of manufacturing,
construction, agriculture, forestry and fishing. However, it were around 392,700
unemployed persons in Malaysia at the end of June, lower by about 46,700 than in the
previous month which June's improvement in the job market reflected a rise in the
labor force participation rate, which advanced to 67.8% from May's 66%.
Since the last few decades since its independence in 1957 to achieve the
present status of an industrializing economy. Malaysia is now host to more than 5000
foreign companies, including multinational corporations due to the rapid
industrialization of the country is attributed in part to the inflow of FDI in
manufacturing sector. Increasing manufacturers use our countrys capabilities by
outsourcing their manufacturing activities to Malaysian companies also by setting up
their own operations in Malaysia. Environment and market in Malaysia has giving
them such a large opportunity to make profit also can lead to increasing our country
revenues.
Due to the rapid industrialization Malaysia continues to be one of the largest
producers and exporters of top quality, and now has emerged as the worlds largest
natural latex consumer and fifth in natural rubber uptake which can lead to the
P a g e 22 | 30

increasing growth and economic development of Malaysia. Our rubber is world-class
manufacturer of the highest quality rubber products that conform to world
specifications and standards which also becoming a competitive source of raw
materials including natural rubber, and chemical suppliers. Moreover, mostly small
and medium-scale enterprises of rubber products industry is made up of more than
300 manufacturers, producing a vast range of latex products, tyres, industrial and
general rubber products, footwear and footwear components. Obviously in 2002,
Malaysia manage to employs more than 60,000 workers and recorded sales worth
RM6.9 billion (US$1.8 billion) in the industry. It is expected that there will be a
significant growth in the industrial and general rubber goods sub-sector due to greater
usage of rubber for the manufacture of components for the automobile industry and
construction industries.
Besides becoming a dynamic economy and ranked the 17th largest trading
nation in the world, Malaysias economic growth exceeded nine percent per annum
over the last decade and the main impetus to this growth continues to come from the
manufacturing sector. In terms of world competitiveness, Malaysia has been ranked
fourth amongst countries with over 20 million people, based on criteria such as
economic performance, government efficiency, business efficiency and infrastructure.

P a g e 23 | 30

3.4 FDI CONTRIBUTION TOWARDS ECONOMIC GROWTH

For the past decade Malaysia has been in the state of increasing level of
development which also factor by the elasticity of the estimated production function
of FDI was found to be significant in explaining the economic growth of. Estimated
foreign capital elasticity was contributed into growth in the case of Malaysia so it can
be conclude that both FDI and imports had a significant impact on growth. many
studies on the role of FDI in host countries suggests that FDI: is an important source
of capital, complements domestic private investment which is usually associated with
new job opportunities; enhances both technology transfer and spillover and human
capital (knowledge and skill) enhancement boosts overall economic growth in host
countries. Concerning developing countries, macro-empirical work on the FDI-
growth relationship has shown that the trade regime, the human capital base in the
host country, financial market regulations, banking system and the degree of
openness in the economy FDI has a positive impact for the economic growth. As the
many job opportunities provided it can lead to the decreasing unemployment
growth.in the matter of fact, this may lead to the decreasing of social economic cost
such as fraud, thief and other socials activities. Technologies transfer and the
spillover of knowledge can helps improving our very own workers which then lead it
benefit our country movement of growth if being fully utilized. Foreign direct
investment (FDI) has been seen as a key driver underlying the strong growth
performance experienced by the Malaysian economy. 5% IN 2011 (central tendency
P a g e 24 | 30

of 4.5%) after a 5.1% expansion in 2011. Again, domestic demand is expected to
remain the key pillar that holds the economy against headwinds from the external
sector. In this regard, MARCs GDP growth projection for 2012 is just a shade lower
than BNMs projection (2012: 4.4%) while our forecast for 2013 stands at 5%. Major
economic challenges in 2012 are very much related to the weakening export sector
following a downdraft in regional external trade.

3.5 FDI CONTRIBUTION TOWARDS STABILITY
Political stability- despite other country, Malaysia enjoys a politically stable
environment, led by a democratically-elected coalition Government committed to the
development of its economy. Through measures such as the Economic
Transformation Programmed (ETP), the Government has also pledged to implement
the appropriate policies and provide its support for the creation of a conducive
environment for business and investment. This allows investors to rest assured of a
Government that is firm yet flexible enough to accommodate their needs. Increasing
more FDI has lead our political stability at a safety level and vice versa.

Economic Stability- Foreign direct investment (FDI) has been an important source of
economic growth for Malaysia, bringing in capital investment, technology and
management knowledge needed for economic growth. Thus, this paper aims to study
the relationship between FDI and economic growth in Malaysia for the period 1970-
P a g e 25 | 30

2005 using time series data. The paper used annual data from IMF International
Financial Statistics tables, published by International Monetary Fund to find out the
relationship between FDI and economic growth in Malaysia case series. There is
sufficient evidence to show that there are significant relationship between economic
growth and foreign direct investment inflows (FDI) in Malaysia. FDI has direct
positive impact on RGDP, which FDI rate increase will lead to the growth rate
increase Furthermore, FDI also has direct positive impact on RGNI because when
FDI rate increase, this will lead the growth to increase

P a g e 26 | 30

4. CONCLUSION

Malaysia was one of the most open countries in the developing world to
foreign investment. Malaysia has also once been regarded as one of the newly
industrializing economies. Considering the importance of FDI, Malaysian
government should emphasize on diffusion aspect in formulating FDI policies.
Policies directed towards attracting FDI should go hand in hand. With, not precede,
policies that aims at promoting financial market developments as suggested by
Azman-Saini et al. (2010) in their study. The review of the literature and findings
from the past studies also indicate that the continent needs a targeted approach to
FDI, increase absorption capacity of local firms, and cooperation between
government and firms or companies to promote their mutual benefit. These issues
also have been raised by Adams (2009) in his study.
Generally the relationship between FDI and economic growth has been
studied by examining the determinants of economic growth, determinants of FDI,
long-run integration or relationship, and the direction or causality pattern. Though
there is much on the relationship between FDI and economic growth, there are still
P a g e 27 | 30

unclear evidences concerning the long-run integration relationship as well as the
direction or causality pattern between FDI and economic growth.
In summary, A causal effect exists running from FDI to economic growth
implying that FDI influences economic growth. As a result the importance of the FDI
as a paramount factor to accelerate the economic development of a country especially
in Malaysia and could be taken as one of the key factors to stimulate the economy and
for future economic development policy. This perhaps could enlighten the direction
of future study on the essential relationship between FDI and economic growth while
considering the possibilities of other factors that could together stimulate and sustain
economic growth via FDI.

P a g e 28 | 30

5. REFERENCES

Anand, I. & Kogut, B. (1997). Technological capabilities of countries, firm and rivalry and
FDI, Journal of International Business Studies, 28(3), 445-467
Ang, J. B. (2008). Determinants of foreign direct investment in Malaysia. Journal of Policy
Modeling 30: 185-189
Ariff, M. (1991). The Changing Role of FDI in Malaysia, in Yokohama, H. and Tamin, M
(eds), The Malaysian Economy in Transition, Institute of Developing Economies,
Tokyo.
Borensztein, E. & De Gregorio, J. & J.W. Lee. (1998). How does foreign investment affect
growth? Journal of International Economics, 45.
Brewer, T.L. (1993). Government policies, market imperfections and Fdi. Journal of
International Business Studies, 24(1), 101-121
Charette, D. E. (2006). Malaysian in the Global Economy: Crisis, Recovery, and the road
ahead, New England Journal of Public Policy
Grunbaugh, S. G. (1987). Determinants of foreign direct investment. Review of Economics &
Statistics, 69 (1), 149-152
Jorge, R. (1985). Towards the theory of foreign direct investment. Oxford Economic Papers
37: 282-291
P a g e 29 | 30

Kozo, K. & Urata, S. (2004). Exchange rate, exchange rate volatility and foreign direct
investment. The World Economy 27 (10): 15011536
Madevan, R. (2002). A DEA approach to understanding the productivity growth of
Malaysias manufacturing industries, Asia Pacific Journal of Management, 19, 587-
600
Mohd, N. I. (2001). Foreign direct investment and development: The Malaysian electronics
sector. WP 2001:4. Chr.Michelsen Institute Development Studies and Human Rights.
Poon, Wai Ling. (2004). The Development of the Malaysian Economy, Kuala Lumpur:
Prentice Hall
Tham, S. Y. (1997). Determinants of productivity growth in the Malaysian manufacturing
sector, ASEAN Economics Bulletin, 13, 333-430

http://www.tarrc.co.uk/pages/fdi.htm
http://www.mida.gov.my/env3/index.php?page=projects-approved-by-major-location
http://www.nst.com.my/top-news/highest-ever-fdi-for-malaysia-1.50269

P a g e 30 | 30

Evaluate The Contribution of Fdi in Industrial Sector in Malaysia

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Evaluate The Contribution of Fdi in Industrial Sector in Malaysia

Uploaded by

Copyright:

Available Formats

EVALUATE THE CONTRIBUTION OF FDI IN INDUSTRIAL SECTOR IN MALAYSIA

You might also like