Inderscience Publishers

Does Foreign Direct Investment (FDI) accelerate growth? Evidence from Malaysia

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This paper investigates the role of Foreign Direct Investment (FDI) in economic development in Malaysia for the period 1970–2007. More specifically, the study investigates the direct impact of FDI on economic growth in Malaysia and the FDI determinants in an endogenous economic growth framework. Data is analysed using three-stage least squares. The results reveal that contrary to the held view of the direct importance of FDI in Malaysia, the impact is small but positive, implying that the effect may be indirect. In addition, the study finds that openness defined in the narrow sense of FDI does affect FDI but not growth, suggesting an indirect effect. In conclusion, the study finds that the most important growth drivers in Malaysia are domestic capital, human capital, macroeconomic management and infrastructure. Financial development and macroeconomic management are the main determinants of FDI.

Keywords: Malaysia, foreign direct investment, FDI, endogenous economic growth, economic development, three-stage least squares analysis, indirect effects, growth drivers, domestic capital, human capital, macroeconomic management, infrastructure, financial development, liability, scientific enquiry

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