Determinants of Foreign Direct Investment in Malaysia: New Evidence From Cointegration and Error Correction Model

Foreign direct investment (FDI) has contributed significantly to the transformation of the Malaysian economy, as reflected by the changing composition of its exports and the rising share of FDI in gross fixed capital formation (GFCF). By the late 1990s, Malaysia ranked third after Singapore and Hong Kong (among the East Asian countries) in terms of attracting FDI. Despite this, studies on the determinants of FDI in Malaysia are scarce. This paper aims to meet this gap through a systematic econometric investigation using the cointegration and error correction model. Results suggest that openness and the quality of labor force have been the influential factors in attracting FDI to Malaysia in the long-run, while in the short-run it is quality of infrastructure that has been instrumental. These findings point to the importance of policy reforms aimed at openning up the economy, and improving the quality of labor force as well as physical infrastructure for arrtracting foreing investment in developing countries like Malaysia.