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1、The Determinants of Foreign Direct Investment (FDI) in Malaysia2011CHAPTER 1 : INTRODUCTION1.0 INTRODUCTIONThis section includes details of overview of foreign direct investment(FDI), background of the study, problem statement, research objectives, scope of study and hypothesis or research questions
2、.1.1 AN OVERVIEW OF FOREIGN DIRECT INVESTMENT According to Wikipedia, foreign direct investment (FDI) or foreign investment can be defined as long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. Mor
3、e specifically, foreign direct investment is a cross-border corporate governance mechanism through which a company obtains productive assets in another country. FDI is different from other major forms of foreign investment in that it is motivated largely by the long-term profit prospects in producti
4、on activities that investor directly control (Wong,2005).Most of the developing and least developed countries worldwide equally participated in the process of direct investment activities . Over a long period of time, foreign direct investment (FDI) forms a major part of investment in most industria
5、l and some developing countries. In the last 2 decades, foreign direct investment (FDI) flows have grown rapidly all over the world. This is because many countries and especially developing countries see FDI as an important element in their strategy for economic development (Adams,2009). According t
6、o Wikipedia, the United States is the worlds largest recipient of FDI. More than $325.3 billion in FDI flowed into the United States in 2008, which is a 37 percent increase from 2007. Some FDI is intended to utilize local natural resources. Sometimes it is to employ relatively cheap labour, and some
7、times to produce goods near to markets.Besides, foreign direct investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Furthermore, it would be
8、difficult to generate this capital through domestic savings, and even if it were not, it would still be difficult to import the necessary technology from abroad, since the transfer of technology to firms with no previous experience of using it is difficult, risky, and expensive. If FDI has a positiv
9、e impact on economic growth, then a host country should encourage FDI flows by offering tax incentives, infrastructure subsidies, import duty exemptions and other measures to attract FDI ( Katerina, John and Athanasios,2004)Many of the East Asian tigers such as China, South Korea, Malaysia, and Sing
10、apore benefited from investment abroad. The rise of the four Asian small dragons (Hong Kong, Taiwan, Singapore and Korea) in the 1960s-1970s and rapid growth of China and India in recent years all benefits from the vast inflows of FDI (Tian and Lin,2009). At the time the government has recognised th
11、e importance of liberalisation and openness to FDI , effective measures are designed to attract the capital and management expertise to transform inefficient state-dominated economies, at the same time easing the burden of this transformation on the public budget and assumed to positively affect loc
12、al economic development.1.2 BACKGROUND OF THE STUDY1.2.1 Foreign Direct Investment In MalaysiaMalaysia is a nation on the move and has become an economy driven by exports, technology, capital-intensive, and knowledge-based business. Malaysia has been an encouraging economy to foreign investors throu
13、gh Malaysias strengths which include well-developed infrastructure, industrious workforce and also a politically stable nation witha good legal system and provides attractive incentives for investors.Foreign Direct Investment (FDI) in Malaysia is set up following the holding of at least 10% of the t
14、otal equity in a resident company by a non-resident investor.Foreign direct investment (FDI) has been seen as a key driver underlying the strong growth performance experienced by the Malaysian economy .To attract a larger inflow of FDI, the government introduced more liberal incentives including all
15、owing a larger percentage of foreign equity ownership in enterprise under the Promotion of Investment Act (PIA), 1986 ( Mohammad Sharif and Zulkornain ,2009). Today, its market-oriented economy, combined with an educated multilingual workforce and a well-developed infrastructure, has made Malaysia o
16、ne of the largest regional and global recipients of FDI (Hooi ,2008).Besides, the rapid industrialisation of the country is attributed in part to the inflow of foreign direct investment to the manufacturing sector. Many manufacturers have taken advantage of the countrys capabilities by outsourcing t
17、heir manufacturing activities to Malaysian companies or setting up their own operations in Malaysia. The massive influx of foreign investments into the manufacturing sector was pivotal in its transformation from an agricultural economy to an industrialized economy (Azmi Shahrin).The inflow of FDI wa
18、s only US$94 million in the early 1970s but increased dramatically in 1996 with US$7,297 million. It dropped to US$2,714 million in 1998 due to the 1997 financial crisis but recovered strongly with the highest FDI inflows of US$8,403 million in 2003 as Malaysia was able to maintain its attractivenes
19、s as a FDI location (Nursuhaili,Zarinah and Nurulhuda).Malaysias foreign direct investment flows continued to contract in 2009 as a result of the global financial crisis and economic downturn. The sharp decline reflected falling profits and reduced financial capabilities of companies, impacted by th
20、e global crisis. But, Malaysia FDI inflows are expected to recover gradually in 2010 and will be able to sustain its FDI in 2011. According to International Trade and Industry Minister, Datuk Seri Mustapa Mohamed, FDIs in Malaysia leaped to RM17.1 billion for the period from January to September 201
21、0 compared to just RM5 billion recorded for the whole of last year.1.3 PROBLEM STATEMENTTheoretically, there are factors that influence the choice of foreign direct investment locations. For developing countries whose future growth depends upon successful participation in the world economy, it is im
22、portant that they understand the selection criteria that multina-tional corporations (MNCs) apply when investing abroad (Kahai). The FDIs usually goes to the country where it is possible to combine the ownership advantages with the location specific advantages of the host countries through internali
23、zation advantages of foreign investment (UNCTAD,1998).According to Kahai , there are three categories of determinants of FDI. The first category includes traditional economic factors, such as, market size of the host country, growth potential, purchasing power, cost of production, geographic locatio
24、n, and natural resources. The second category includes factors that are related to the political, social, and cultural environment of the host countries. The third category measures factors that are related to the magnitude of trans-action costs in the host countries.Based on previous studies on det
25、erminants of foreign direct investment, it has shown that various factors have been found as determinants of foreign direct investment for different countries . The determinants may affect differently in different countries. Financial development, wage rates, income, economic growth, government spen
26、ding on infrastructure, openness, exchange rate, inflation rate and corporate tax are among the variables commonly analyzed in the FDI dynamic (Nursuhaili,Zarinah and Nurulhuda).One of the most important determinants of foreign direct investment is the size as well as the growth prospects of the eco
27、nomy of the country where the foreign direct investment is being made. According to Yong and Tuck (2009), basically, the exchange rate is a variable in the process that can either benefit or worse the chances of a host country to be chosen but, in general, most of the literature has focused on analy
28、zing how ER and the ER variability affect the decision of carrying FDI into a country. Besides, infrastructural factors like the status of telecommunications, railways and airport play an important part in having the foreign direct investors come into a particular country.Over the recent years, most
29、 of the countries over the world have made their business environment investment friendly for absorbing global opportunities by attracting more foreign investable funds to the country. Malaysia is no exception in the implementation of these measures. Recently, government of Malaysia is serious in tr
30、ansforming the economy and will continue to undertake proactive measures to further promote FDIs to ensure that Malaysia meets the target in the 10th Malaysia Plan. In order to make 10th Malaysia Plan successful, the government should know the most important determinant of foreign direct investment
31、in Malaysia to ensure that there is no mis-step in attracting FDIs to come into Malaysia.Thus, the main problem statement in this research is “to investigate the determinant of foreign direct investment in Malaysia.”. Hence, the problem here is to determine whether those variables involve which are
32、infrastructure, exchange rate and market size can be classified as important instrumental in attracting and maintaining the interest of foreign direct invesor to put their money in Malaysia.1.4 SCOPE OF STUDYThe research is about “The study on the relationship between foreign direct investment and i
33、nfrastructure, exchange rate and market size”. This study aims to analyse whether the three independent variables, which are infrastructure, exchange rate and market size have positive effect towards inflow of foreign direct investment. This study focuses on foreign direct investment in Malaysia.The
34、 infrastructure is measured by government development expenditure on transportation,communication and public utilities. While for exchange rate, exchange rate RM/US$ is used as a proxy and market size is measured by Gross Domestic Product (GDP) per capita. The dependent variable of foreign direct in
35、vestment is measured by net inflow of foreign direct investment(FDI). The study of this research covers 20 years commencing from the year 1990 to 2009. The data collection of the study is based on secondary data. All data of variables are collected from United Nation Conference on Trade and Developm
36、ent(UNCTAD) Statistics, Department of Statistics, Ministry of Finance Malaysia, Economic Report, Bank Negara Malaysia and Datastream. 1.5 RESEARCH OBJECTIVESThe research study should have objective because it is essential in guiding the researcher to achieve the purpose of doing the research. The ob
37、jective should be specific, measurable and realistic. The goal of this study is to investigate what factors can be considered as important determinant of foreign direct investment in Malaysia. There are several objectives that have been pointed out in identifying the determinant of FDIs in Malaysia.
38、 Those objectives are: 1) To determine the growth of FDI.2) To investigate the relationship between infrastructure and foreign direct investment in Malaysia.3) To identify the effect of exchange rate towards foreign direct investment in Malaysia.4) To examine to what extent market size can influence
39、 foreign direct investment in Malaysia.1.6 RESEARCH QUESTIONS1) Is there any growth of FDI?2) Is there any significant relationship between infrastructure and foreign direct investment in Malaysia?3) Is there any significant effect of exchange rate towards foreign direct investment in Malaysia?4) Is
40、 there any correlation between market size and foreign direct investment in Malaysia?1.7 HYPOTHESISFrom the research questions above there are 3 hypotheses developed for this research. Hypothesis 1H0: There is no relationship between infrastructure and foreign direct investment in Malaysia.H1: There
41、 is a relationship between infrastructure and foreign direct investment in Malaysia.Hypothesis 2H0: There is no relationship between exchange rate and foreign direct investment in Malaysia.H1: There is a relationship between exchange rate and foreign direct investment in Malaysia.Hypothesis 3H0: The
42、re is no relationship between market size and foreign direct investment in Malaysia.H1: There is a relationship between market size and foreign direct investment in Malaysia.1.8 LIMITATIONS OF THE STUDYIn order to complete this research, there are some problems and limitations faced by the researche
43、r.1.8.1TIME CONSTRAINTThe time frame to complete the research is 5 months. Due to the limited time, the researcher needs to struggle to complete the study as the time spent must be divided between the tasks given by the company where the practical training is held as well as the time to complete the
44、 research. 1.8.2LACK OF EXPERIENCEThe researcher faces some difficulty to conduct a research due to lack of experience and it is totally a new experience in doing a research on Foreign Direct Investment. So, it takes times to find and gather the information needed.1.8.3AVAILABILITY OF DATA AND INFOR
45、MATIONThe researcher also identifying that some information for the literature review is hard to find due to the limited resources. In completing the study, its hard to find the previous journal, annual reports, books and magazines. Some of the data and information may be absolute and outdated. Thus
46、, the researcher only covers the research for 20 years even though it should at least cover 30 years.1.9 TERM DEFINITION1.9.1 FOREIGN DIRECT INVESTMENT(FDI)Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 perce
47、nt or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint
48、-venture, transfer of technology and expertise.1.9.2 INFRASTRUCTUREInfrastructure is the basic physical and organizational structures needed for the operation of a society or enterprise, or the services and facilities necessary for an economy to function. The term typically refers to the technical s
49、tructures that support a society, such as roads, water supply, sewers, power grids, telecommunications, and so forth . Viewed functionally, infrastructure facilitates the production of goods and services; for example, roads enable the transport of raw materials to a factory, and also for the distrib
50、ution of finished products to markets.1.9.3 EXCHANGE RATERate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreig
51、n exchange market.1.9.4 MARKET SIZEThe number of buyers and sellers in a particular market. This is especially important for companies that wish to launch a new product or service, since small markets are less likely to be able to support a high volume of goods. In other words, it can be defined as
52、the size of a group of consumers with shared needs and their buying power.1.9.5 GROSS DOMESTIC PRODUCTGross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. It is often considered an indicator of a countrys standard of liv
53、ing. Thegross domestic product (GDP) is onethe primaryindicators used to gauge the health of a countrys economy45CHAPTER 2 : LITERATURE REVIEW2.0 INTRODUCTIONIn this chapter, some of the determinants and their relations to FDI will be explained in the light of earlier studies.2.1 FDI IN MALAYSIAAcco
54、rding to Nursuhaili, Zarinah and Nurulhuda, Malaysia is one of the countries in Asia that has benefited from strong foreign direct investment inflow. They noted that FDI was a major source of growth for manufacturing development in Malaysia that mainly targeted for the export market. Hooi (2008) has
55、 supported this view as he stated there is no denying the role that foreign investments has played in economic growth as it has been a significant factor in Malaysias growing economy and Malaysia will increasingly adopt a more focused approach in its measures to attract more FDI.As referred to the D
56、epartment of Statistics (2011), FDI in Malaysia rose steadily from RM129.1 billion in 2001 to RM270.0 billion in 2009, a growth of 109.1 per cent. While year-on-year, FDI increased by RM16.2 billion or 6.4 per cent. FDI experience similar circumstances as DIA whereby equity capital & reinvested earn
57、ings component formed the largest portion amounted to RM250.8 billion.As reported by Bank Negara Malaysia Annual Report (2009), on the financial account, gross inflows of foreign direct investment (FDI) are anticipated to increase in 2010 amid improving global growth prospects and corporate profitab
58、ility. As global FDI inflows are expected to recover only moderately in 2010, the improvement in FDI in Malaysia is thus projected to be moderate with inflows mainly into the manufacturing, services and oil and gas sector.2.2 INFRASTRUCTURE According to Zunaidah and D.Agus (2005), their study has supported the view that infrastructure is always associated with foreign direct investment. According to them, Malaysia is making successful efforts to upgrade the level of infrastructure and the development of telecommunication, which are very important elements in attracting more for
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