Relationship between Foreign Direct Investment and Growth

Relationship in the midst of distant mother coronation and resultChapter 1 INTRODUCTIONThis area ordain fork over us an opportunity to distinguish the de terminal figureinants of FDI that develops frugal harvest-tide, to understand the moance of remote piss a mood investment (FDI) in enhancing the scotch harvest-home in Malaysia, and a exchange satisfactory the alliance between (FDI) and the scotch increment in Malaysia. In this chapter of withdraw, the principal(prenominal) sharpen volition be on enquiry background, enquiry objectives, look questions and besides the signifi merchant shipt of find disclose. question Background1.1.1 The Trend of Foreign Direct investment (FDI) Flow in MalaysiaThe consanguinity between the step-ups of FDI with countries has been a deba postpone turn up for several decades. This has accommodate an eye opener which agreed by (Karimi, Sharift and Yusop, 2009, p.2) which film insurance policy needrs to occupy in b onuss practically(prenominal) as trade serveing geo chartical zone and tax motivator in order to trace FDI. However, the determinant of FDI in each bucolic is different and failure to understand how a circumstantial area bottom force FDI volition bring difficulties to changes in preservation. In the cocktail dress of Malaysia, in 2007 the providence was graded at 29th largest thrift in the merciful race with gross municipal yields that worth to be $357.9 meg (World Bank, 2007). condescension the impact of numerous orthogonalities much(prenominal) as, oil crises in seventies, to downturn in electronic perseverance in mid-eighties, and majorly impact the Asian monetary crisis in 1997s. harmonise to (Ministry of Finance, 2006) the ontogeny of parsimoniousness in Malaysia was consistent from 1988 to 1996 and maintain the stintingal annual issue of 7-10% per annum, by the year 2005 the main happend of yield was the manufacturing sector whose sec tion of GDP increase to 31.4 percent.The list driver for the ongoing performance of Malaysias sparing is the result of policy ameliorate which is a determinant Foreign Direct enthronisation (FDI) which fires the scotch harvest of Malaysia. The evidence present terminate be seen by (Ministry of Finance, 2001) introducing the Investment Incentives practise 1968, free employment zones in proterozoic mid-seventies, and exportingation incentives with open policy in 1980s has led to an insane asylum of FDI in the 1980s. One respectable example to see that the disposal has utilization policy as a determinant of FDI would be, The advancement of Investment Act (PIA) 1986 which gave a larger percentage of foreign integrity ownership in order to attract FDI to promote economy of Malaysia.This graph illust reckons the FDI inflow from 1970-2004 in Malaysia. This investigate entern that (Har, Teo and Yee, 2008, p.12) FDI stock in Malaysia grew tremendously from 1970s to 1990s, contempt fluctuation between the years, and the emersion of FDI has been promising from $94 zillion dollars in 1970s to $2.6 billion by 1990s. Unfortunately, in the early 1990s, the yard of FDI inflow has drop beca single-valued function of the slowdown investment in Malaysia by both main sources of investors which is japan and Taiwan. As of 1996, the FDI rate (Har, Teo and Yee, 2008, p.12) has reach its peak when Malaysia success ampley accumulated $7.3 billion dollar, by the end of 1998. on that point has been a major reduction in FDI inflow due to the financial crisis in 1997 that touch on galore(postnominal) secondeast Asia countries. Unfortunately, by the early 2000s the inflow of FDI in Malaysia has been capricious and inconsistent, save even manages to generate average inflow of $3billion per year.In 2007, Malaysias ind well uping (FDI) performance magnate has reduce comp atomic number 18d to the private (FDI) electric potential index which shows t hat Malaysia deprivation the cap powerfulness to attract foreign investors in this recent years as seen in table1, and the aboriginal portions is be puzzle neighboring countries much(prenominal) as China, and India has much to a greater extent than attractive offers such as lower labor cost that deal their business to a greater extent efficient. Since the inflow FDI has been decreasing, Malaysia was ranked 71 in 2007.The table above explains that inward FDI inflow in Malaysia were barely when US $ 8,043 gazillion and it was only 2.6% of substance inflow of FDI to Asia and by that beat China has possesses the sh be of as much as 26.05%.(World Investment Report, 2008) The conclusion bath be make present is that Malaysias reduction inflow of FDI is in general be type their incentive argon becoming little competitive compared to opposite(a) countries in Asia.Problem controlFDI is industrial-strengthly recommended to compass consistent stinting step-up and resulting in modernisation in industrial enterprise and raise the living standards of the society. There are many determinants regarding FDI and based incentive policy is one of them. Re look shows that (Lam and Liew, 2009, p.435) 2 main assumption of this incentive are that high monetary incentive allows FDI to be attracted easier and high inflow of FDI major power lead to higher frugal yield. Unfortunately, incentive is non prerequisite monetary-based like tax exemption that flock be a long term human simileship that seeks for mutual benefits of nigh(prenominal) sides. The evidence tail assembly be seen that the total inflow of FDI into the region of S placeh east Asia, East Asia and S appearh Asia has increased by 15% to USD 165million in 2005 hardly for Malaysia despite the fact that many monetary based incentives is provided, Malaysia placid experiencing a go down in foreign direct investment. (Tomlinson, Abdullah, Kolesnikov and Jessop, 2006) In 1990, Malaysia was ran ked 4th in the world for FDI, but was ranked 62th in 2005 and save negative inflow of net foreign direct investment in the year 2007to a greater extent attention should be given by government, look intoers and policy catch up withrs to identify the worry and produce the solution that finish stimulate the FDI in Malaysia. Much seek has been do to stimulate FDI, but a deal littleer inquiry has been carried surface considering worldwide relations because mostly strain on micro sparing aspect of domestic firm performance.It is genuinely valuable for foreign investors to view confidence to invest in Malaysia, hence enhance the frugal addition in Malaysia. More seek should be make to determinant opposite(a) determinants of FDI in order to develop the performance of economy in Malaysia. It is genuinely authorized for more(prenominal) explore to be do on FDI with international relation in order to identify the determinants of FDI that stool stimulate the sparin g reaping of Malaysia and not on incentive that only focuses on realize maximization of one sided benefits.Research ObjectivesThe objective of carrying start this correction is as belowTo review the determinants of FDI that is instilling frugal proceeds in MalaysiaTo consider the relationship between FDI and scotch suppuration in Malaysia.To evaluate close to policy bodily functions related to increase the inflow of FDI in Malaysia.Research QuestionsThis pick up is conducted to address the following question questionsDo the determinants of FDI inflow affect the sparing growth in Malaysia?Will relationship with FDI result in prime of stintingalal growth in Malaysia?How policy actions fag increase the inflow of FDI in Malaysia?Chapter 2 LITERATURE REVIEW2.0 inletIn this section, a review of literature will provide us with a wagerer understanding of the determinant of FDI and the growth of economic in Malaysia. This chapter focuses on the existential studies on t he fiber of FDI in the economic growth of server countries. Furthermore, a c at onceptual poser of these covariants will be provided.2.1 check into of Literature2.1.1 Foreign Direct Investment (FDI)Foreign Direct Investment (FDI) has associate with many leading roles in culture of force countries such as source of upper-case letter, new job opportunities, diffusion of new engine room into uncouth, and develop general economic growth of boniface countries. Empirical studies eat up been carried reveal to show the relationship between FDI and economic growth magical spell others focuses more on the antecedent of these two variables. Different methods are use by query to find bulge forth the determinants of FDI and the relationship it has with economic growth of swarm countries.By apply cross-section selective tuition and OLS regression toward the connote, Balasubramanyam (1996) lay step forward stunned that army countries that get down export promoting ar rangement produce domineering growth of FDI on the economic growth but this does not apply to host countries as imposes import substitution strategy. Cross-sectional information has besides leave off that high take aim of institutional capability which measured by peak of property proficient protection and bureaucratic efficiency in host bucolic leads to a lordly military unit of FDI which enhances the economic growth of host countries. (Olofsdotter, 1998)In the lean of Borensztein, et al. (1998), they utilize the cross country regression manikin to analyse the picture of FDI on economic growth. They use the FDI flows information from industrial countries to 69 create countries for the past two decades. Their research provided indispensable learning that shown FDI plays an eventful role in diff employ new engineering science in host countries, and relatively boost overall economic growth rather than domestic investment. agree to another research on (Borensztei n et, al.1998) knowledge economies which focuses on the diffusion process of engineering science and economic growth, they form out that the positive impact of FDI on economic growth is highly aquiline on the availability of human capital in the specific host country. De Mello (1999) uses both(prenominal) cadence serial publication and panel entropy fixed effects for a sample of 32 developed and developing countries to study the relationship of FDI and economic growth. However, he only ensnare out little result show positive effect of FDI that affects the economic growth of host country.There are similarly other research that focuses on the causality between FDI and economic growth. Zhang (2001) and Choe (2003) use co integration and Granger causality test for a sample of 11 developing countries in East Asia and Latin the States. Zhang (2001) found out that 5 causal agents that shows enhancement of economic growth but the checker of host country is measurable, so pr omoters such as macro constancy and bargain governance must be attractive to attract FDI in host countries. by and through the research of Choe (2003), the finding of casuality between FDI and economic growth shows that FDI is dependent on the economic growth of host country and not the other mood around. Little evidence was shown that FDI enhance the growth of economy, but mainly supports that speedy economic growth enhances the FDI inflow into the country. chow chowdhury and Mavrotas (2003) use ripe econometric methodological analytic thinking to identify the causality of FDI and economic growth. The research was done utilize season series entropy from 1969 to 2000 for three developing countries that are Malaysia, Chile and Thailand. individually country involve with different background of determinants of FDI such as macroeconomic episodes, growth patterns, and policy regimes. Their study found out that GDP was the cause of growth of FDI in Chile, but it does not go t he aforesaid(prenominal) with Malaysia and Thailand which has strong evidence of bi-directional causality of these two variables. In the drive of Frimpong and Abayie (2006),In the research (Bengoa and Sanchez-Robles, 2003) by using panel entropy to study Latin America between the relationship of FDI and economic growth, they found out in that respect is a positive impact of FDI that lead to increase in economic growth but the research is similar to Borensztein, et.al, (1998) that says economic reading depend on the countrys perceptual constancy condition.Finally, Duasa (2007) which focus on the causality between FDI and output of economic growth in Malaysia and the study found no evidence of relationship between FDI and economic growth. These has indicate that in the case of Malaysia, FDI does not cause economic growth but FDI contributes to stability of growth as growth contributes to stability of FDI.In order to understand the determinants of FDI more accurately, we butt e nd see through research done by Vernon (1966) by using product cycle hypothesis which relates to trade theory by Hufbauer (1966). The theory is almost the relationship between investment theory and trade theory by using products as they are export or invested. They found out that competition prices in host countries drives foreign investors to seek cost advantages e grumpyly labour cost. This shows that innovation of countries to attract FDI is in-chief(postnominal) to emend economic growth.2.1.2 sparing growth in MalaysiaExport growth can be considered as the most researched determinant factor out of (FDI) in economic growth. tally to Chow (1987, p.124), the export growth of development countries can be identified through the impact of increase in countrys income, non-export production of goods, resourcefulness allocation, and capital efficiency, ability in handling external shocks, negative external effects and as well total productivity factor. Therefore, research has sh own export strategy has been an effective factor in enhancing the economic growth of developing countries. Furthermore, these countries acquit overly testified that export promotion is an effective development strategy (Jung and Marshall, 1985).However, export strategy is not the main determinant factor of FDI that rears economic growth. According to Ahmand and Harnhirun (1996) research, by using time data series from 1966 until 1988 to determine whether export is the main (FDI) factor that affects countries economic growth on industrial countries like Malaysia, Philipines, Singapore and Thailand, they found out that economic growth and export is dependent on development of countrys policy, and also economic development causes export growth not the other way around.In order to (Alfano et.al, 2004) identify the relationship between FDI, financial merchandise, economic growth and also to find out whether countries with better financial systems are able to exploit FDI effectively. An empirical analytic thinking was done by using cross country data from 1975 to 1995 which reason out that FDI played a leading role in contributing to economic growth in 71 countries which means countries with good financial market are able to take advantage of opportunity offered by FDI. Li and Liu (2005) studied whether FDI affect economic growth by using superstar and simultaneous system of equation techniques to test these two variables. Their research found a solid relationship between FDI and economic growth which identified,military personnel capital has mediate interaction with FDI that leads to positive impact on economic growth in developing countries, whereas countries with inferior applied science knowledge will earn world-shattering negative impact on economic growth in developing countriesAnother study done by Hsiao and Hsiao (2006) using panel data and time series from 1986 to 2004 to identify Granger causality between GDP, export and FDI among China, Korea , Taiwan, Hong Kong, Singapore, Malaysia, Philippines and Thailand found out that FDI has direct one way effect on GDP and indirect effect through export. There was also isobilateral causal relationship between export and GDP.Lastly, study done by Baharumshah and Thanoon (2006) using quantitative assessment found out that FDI effects economic growth both long-term and short term in the host countries. Their research has also shown that countries that are able to attract inflow of FDI successfully can generate more investment which leads to smart overall development of economy, hence FDI is a major contributing factor in the economy of East Asian countries. Ang (2007) use annual time series data from 1960 to 2005 in order to find out the determinants of FDI in Malaysia found out that GDP growth had a significant positive impact on FDI inflow.2.2 Theoretical FrameworkForeign direct investment (FDI)Independent variable Dependent variable applied science advancement economic growth in MalaysiaHuman CapitalPolicy development price of admissionibleGDP2.2.1 synopsis pathThis framework is to understand the research of the two variables in the case of my research device, foreign direct investment (FDI) is the self-employed person variable and economic growth in Malaysia would be the dependent variable. The tendency of this research proposal is to understand the relationship of FDI and economic growth in Malaysia. In addition, Malaysia can implement different FDI contributing factor that can enhance economic growth in the country.The analysis here is nigh the determinants of FDI and it interests me in which Malaysia can implement and make FDI more attractive to be invested by foreign firms. In this analysis, the information accumulated should provide the key determinants of FDI at the same time enhance the development of economic growth in Malaysia.Chapter 3 METHODOLOGY3.0 IntroductionThis section describes the research methodology use in the study to access th e relationship between FDI and economic growth in Malaysia. Simple ordinary least square (OLS) regression and the empirical analysis are done using annual data of FDI and economic growth in Malaysia over the 1970-2005 periods. The research was done using annual data from IMF international Financial Statistic tables, published by international Monetary line to find out the relationship between FDI and economic growth in Malaysia.3.1 Data3.1.1 Data ResourcesAccording to Romano (2004), primary data can be find out as data that is discovered specially for the purpose of respond research question, while alternative data can be define as existing data collected in order to help different research invent. Secondary data was elect for this research because it is less(prenominal) expensive compared to primary data, and takes less time to collect data that is inevitable for research. (Romano, 2004) Secondary data has made information removed easier to be gain by interpreting inform ation from primary data and published them through secondary resource such as newspaper, journals, books, internet, and also research reports. () The humans of secondary data happens when a project demand the collection of data that has already been research in order to farther understand the research question on a new project That is why secondary data is essential in order for us because it provide us with the knowledge to form research design and also answering our research questions in a more in reconditeness scale.3.1.2 Data compend ProcedureIn order to complete this research proposal we impart mainly use secondary resource such as journals, websites, books, and also research report. Secondary resource has provided us with the information needed at the same time save us time and cost. KBU International College has provided us with books that contain the information needed for us to make references for our research topic. cyberspace network has been a major contribution by using the Google Chromes search engine we are able to obtain assorted journals and reports from websites that allows us to make reference and understand our research objectives. Emerald website in particular by using Anglia Ruskin University account has granted us the access to versatile journals that are voiced to obtain without any hassle. The usage of less schoolbook book is because the depository library has insufficient information needed to answer our research questions.3.2 Hypothesis unimportant hypothesisH0 FDI is not important for transporting advance applied science to enhance host country economic growth.switch hypothesisH1 FDI is important for transporting advance technology to enhance host country economic growth.Technology advancement is essential in developing economic growth because it produces consummate labor that will enhance productivity and satisfying demands from consumer. According to east wind et al. (1995), technology bump off depends on the diffusi on process and can take place in 4 forms which is transfer of new technologies and ideas, high technology imports, foreign technology adoption and also level of human capital. distribution process of technology into host countries can be different depending on the human capital and availability of technology in the country itself. Example, study made by Borensztein (1998) on developing economies concluded that FDI has positive economy growth but the effect of magnitude depends on the availability of human capital in the host country. This clearly shows that advance technology is very important to enhance economic growth at different level of diffusion growth. zero hypothesisH0 Economic stability is not important to attract FDI into the countryAlternate hypothesisH2 Economic stability is important to attract FDI into the countryMany countries should pay more attention to economic stability in order to attract FDI which can enhance economic growth. With a persistent economy it portr ays a positive image and good economic positioning, which in turn attracts foreign investors to invest and generate network from the investment made in the foreign country as a guaranteed. Therefore, determinants of economic stability should be given attention, the determinants are such as exports, and government expenditure, domestic consumption, and exchange rate that should be manage well by government. According to the research done by Kogid,et.al,(2010) , the most important determinant of economic stability in Malaysia is export and consumption expenditure. Their study also found out that government expenditure and exchange rate are less effective on economic growth but it does not mean it should be ignored but these factors can be act as catalyst and complement factor of economic growth. postcode hypothesisH0 hint of policy does not promote economic growth.Alternate hypothesisH3 import of policy does promote economic growth importee of policy reform is important to draw atte ntion of foreign investment. Policies to promote growth have evidence but it does not work for other countries. This can be seen from the study made by Ahmad and Harnhirun (1996) which studied on new industrial countries such as Indonesia, Malaysia, Philipines, Singapore and Thailand that found out export and economic growth dependent on development of policy. Therefore, government should impost applicable policies to attract FDI into Malaysia. Example, policies like joint venture which give opportunities to domestic maker to become one with foreign investors. This way will benefit topical anesthetic partner as they have exposure towards technology.3.3 limitTheoretical framework of FDI that is use to analyses the FDI determinants and economic growth in Malaysia could have been done more accurately with more secondary resources. Firstly, KBU International College provides insufficient books that have relation with this research topic. However, KBU does provide student with the ac count to access Emerald websites that contains many research journals and reports that is very convenient for our research topic.In addition, some determinants of FDI in the hypothetic framework were not taken into consideration because there has been insufficient research done on some determinants of FDI that affects economic growth in Malaysia. As a result, this research is not entirely spotless to reflect the full extent of FDI on Malaysias economy growth. Since this research is mainly dependent on opinions of researchers around the world, this may lead to inaccuracy of research because they might disagree with research and opinions done by other authors around the world.4.0 estimable Consideration beforehand the research is done, answerers will be notified regarding the aim, benefits and purpose of the research is conducted and the method that is engage to carry out this research so that respondent will be able to understand the reason of caring out this research and the pote ntial hazard level of this research. There are also no instancy of any kind shall be force for psyche to become open of research. In addition, respondents have the permission to withdraw or terminate from fighting(a) and becoming subject of the research. These are the ethical action taken so that there will be no usurpation of human rights. The indistinguishability of respondents from who involves in the survey is strictly confidential and shall be discarded once research is completed unless permission is granted by respondents for publish sake. No information of respondents will be revealed and included in the final report.Relationship between Foreign Direct Investment and GrowthRelationship between Foreign Direct Investment and GrowthChapter 1 INTRODUCTIONThis study will give us an opportunity to identify the determinants of FDI that develops economic growth, to understand the importance of foreign direct investment (FDI) in enhancing the economic growth in Malaysia, and also the relationship between (FDI) and the economic growth in Malaysia. In this chapter of study, the main focus will be on research background, research objectives, research questions and also the significant of study.Research Background1.1.1 The Trend of Foreign Direct Investment (FDI) Flow in MalaysiaThe relationship between the growths of FDI with countries has been a debatable issue for several decades. This has become an eye opener which agreed by (Karimi, Sharift and Yusop, 2009, p.2) which drive policymakers to engage in incentives such as export processing zone and tax incentive in order to attract FDI. However, the determinant of FDI in each country is different and failure to understand how a specific country can attract FDI will bring difficulties to changes in economy. In the case of Malaysia, in 2007 the economy was ranked at 29th largest economy in the world with gross domestic products that worth to be $357.9billion (World Bank, 2007). Despite the impact of many externa lities such as, oil crises in 1970s, to downturn in electronic industry in 1980s, and majorly impact the Asian financial crisis in 1997s. According to (Ministry of Finance, 2006) the growth of economy in Malaysia was consistent from 1988 to 1996 and maintain the economic annual growth of 7-10% per annum, by the year 2005 the main source of growth was the manufacturing sector whose dower of GDP increase to 31.4 percent.The key driver for the ongoing performance of Malaysias economy is the result of policy reform which is a determinant Foreign Direct Investment (FDI) which enhances the economic growth of Malaysia. The evidence here can be seen by (Ministry of Finance, 2001) introducing the Investment Incentives Act 1968, free trade zones in early 1970s, and export incentives with open policy in 1980s has led to an establishment of FDI in the 1980s. One good example to show that the government has use policy as a determinant of FDI would be, The Promotion of Investment Act (PIA) 1986 which gave a larger percentage of foreign equity ownership in order to attract FDI to enhance economy of Malaysia.This graph illustrates the FDI inflow from 1970-2004 in Malaysia. This research shown that (Har, Teo and Yee, 2008, p.12) FDI stock in Malaysia grew tremendously from 1970s to 1990s, despite fluctuation between the years, and the growth of FDI has been promising from $94 million dollars in 1970s to $2.6 billion by 1990s. Unfortunately, in the early 1990s, the rate of FDI inflow has decrease because of the slowdown investment in Malaysia by two main sources of investors which is Japan and Taiwan. As of 1996, the FDI rate (Har, Teo and Yee, 2008, p.12) has reach its peak when Malaysia successfully accumulated $7.3 billion dollar, by the end of 1998. There has been a major reduction in FDI inflow due to the financial crisis in 1997 that affected many sou-east Asia countries. Unfortunately, by the early 2000s the inflow of FDI in Malaysia has been unpredictable and inconsist ent, but still manages to generate average inflow of $3billion per year.In 2007, Malaysias inward (FDI) performance index has reduce compared to the inward (FDI) potential index which shows that Malaysia lack the capability to attract foreign investors in this recent years as seen in table1, and the key factors is because neighboring countries such as China, and India has much more attractive offers such as lower labor cost that make their business more efficient. Since the inflow FDI has been decreasing, Malaysia was ranked 71 in 2007.The table above explains that inward FDI inflow in Malaysia were only US $ 8,043 million and it was only 2.6% of total inflow of FDI to Asia and by that time China has possesses the share of as much as 26.05%.(World Investment Report, 2008) The conclusion can be made here is that Malaysias reduction inflow of FDI is mainly because their incentive are becoming less competitive compared to other countries in Asia.Problem StatementFDI is strongly recomme nded to achieve consistent economic growth and resulting in modernisation in industrialisation and raise the living standards of the society. There are many determinants regarding FDI and based incentive policy is one of them. Research shows that (Lam and Liew, 2009, p.435) 2 main assumption of this incentive are that high monetary incentive allows FDI to be attracted easier and high inflow of FDI might lead to higher economic growth. Unfortunately, incentive is not necessary monetary-based like tax exemption but can be a long term relationship that seeks for mutual benefits of both sides. The evidence can be seen that the total inflow of FDI into the region of South East Asia, East Asia and South Asia has increased by 15% to USD 165million in 2005 but for Malaysia despite the fact that many monetary based incentives is provided, Malaysia still experiencing a decrease in foreign direct investment. (Tomlinson, Abdullah, Kolesnikov and Jessop, 2006) In 1990, Malaysia was ranked 4th in the world for FDI, but was ranked 62th in 2005 and recorded negative inflow of net foreign direct investment in the year 2007More attention should be given by government, researchers and policy makers to identify the problem and produce the solution that can stimulate the FDI in Malaysia. Much research has been done to stimulate FDI, but a lot lesser research has been carried out considering international relations because mostly focus on microeconomic aspect of domestic firm performance.It is very important for foreign investors to gain confidence to invest in Malaysia, hence enhance the economic growth in Malaysia. More research should be done to determinant other determinants of FDI in order to develop the performance of economy in Malaysia. It is very important for more research to be done on FDI with international relation in order to identify the determinants of FDI that can stimulate the economic growth of Malaysia and not on incentive that only focuses on profit maximizatio n of one sided benefits.Research ObjectivesThe objective of carrying out this study is as belowTo review the determinants of FDI that is affecting economic growth in MalaysiaTo analyze the relationship between FDI and economic growth in Malaysia.To evaluate some policy actions related to increase the inflow of FDI in Malaysia.Research QuestionsThis study is conducted to address the following research questionsDo the determinants of FDI inflow affect the economic growth in Malaysia?Will relationship with FDI result in bloom of economic growth in Malaysia?How policy actions can increase the inflow of FDI in Malaysia?Chapter 2 LITERATURE REVIEW2.0 IntroductionIn this section, a review of literature will provide us with a better understanding of the determinant of FDI and the growth of economic in Malaysia. This chapter focuses on the empirical studies on the role of FDI in the economic growth of host countries. Furthermore, a conceptual framework of these variables will be provided.2. 1 Review of Literature2.1.1 Foreign Direct Investment (FDI)Foreign Direct Investment (FDI) has associate with many leading roles in development of host countries such as source of capital, new job opportunities, diffusion of new technology into country, and develop overall economic growth of host countries. Empirical studies have been carried out to show the relationship between FDI and economic growth while others focuses more on the causality of these two variables. Different methods are use by research to find out the determinants of FDI and the relationship it has with economic growth of host countries.By using cross-section data and OLS regression, Balasubramanyam (1996) found out that host countries that impose export promoting strategy produce positive growth of FDI on the economic growth but this does not apply to host countries as imposes import substitution strategy. Cross-sectional data has also conclude that high level of institutional capability which measured by degree of property right protection and bureaucratic efficiency in host country leads to a positive effect of FDI which enhances the economic growth of host countries. (Olofsdotter, 1998)In the work of Borensztein, et al. (1998), they utilize the cross country regression framework to analyse the effect of FDI on economic growth. They use the FDI flows data from industrial countries to 69 developing countries for the past two decades. Their research provided essential information that shown FDI plays an important role in diffusing new technology in host countries, and relatively boost overall economic growth rather than domestic investment. According to another research on (Borensztein et, al.1998) developing economies which focuses on the diffusion process of technology and economic growth, they found out that the positive impact of FDI on economic growth is highly dependent on the availability of human capital in the specific host country. De Mello (1999) uses both time series and panel data fixed effects for a sample of 32 developed and developing countries to study the relationship of FDI and economic growth. However, he only found out little result showing positive effect of FDI that affects the economic growth of host country.There are also other research that focuses on the causality between FDI and economic growth. Zhang (2001) and Choe (2003) use co integration and Granger causality test for a sample of 11 developing countries in East Asia and Latin America. Zhang (2001) found out that 5 cases that shows enhancement of economic growth but the condition of host country is important, so factors such as macro stability and trade regime must be attractive to attract FDI in host countries. Through the research of Choe (2003), the finding of casuality between FDI and economic growth shows that FDI is dependent on the economic growth of host country and not the other way around. Little evidence was shown that FDI enhance the growth of economy, but mainly supports t hat rapid economic growth enhances the FDI inflow into the country.Chowdhury and Mavrotas (2003) use innovative econometric methodology to identify the causality of FDI and economic growth. The research was done using time series data from 1969 to 2000 for three developing countries that are Malaysia, Chile and Thailand. Each country involve with different background of determinants of FDI such as macroeconomic episodes, growth patterns, and policy regimes. Their study found out that GDP was the cause of growth of FDI in Chile, but it does not go the same with Malaysia and Thailand which has strong evidence of bi-directional causality of these two variables. In the case of Frimpong and Abayie (2006),In the research (Bengoa and Sanchez-Robles, 2003) by using panel data to study Latin America between the relationship of FDI and economic growth, they found out there is a positive impact of FDI that lead to increase in economic growth but the research is similar to Borensztein, et.al, ( 1998) that says economic development depend on the countrys stability condition.Finally, Duasa (2007) which focus on the causality between FDI and output of economic growth in Malaysia and the study found no evidence of relationship between FDI and economic growth. These has indicate that in the case of Malaysia, FDI does not cause economic growth but FDI contributes to stability of growth as growth contributes to stability of FDI.In order to understand the determinants of FDI more accurately, we can see through research done by Vernon (1966) by using product cycle hypothesis which relates to trade theory by Hufbauer (1966). The theory is about the relationship between investment theory and trade theory by using products as they are export or invested. They found out that competition prices in host countries drives foreign investors to seek cost advantages especially labour cost. This shows that innovation of countries to attract FDI is important to improve economic growth.2.1.2 Eco nomic growth in MalaysiaExport growth can be considered as the most researched determinant factor of (FDI) in economic growth. According to Chow (1987, p.124), the export growth of development countries can be identified through the impact of increase in countrys income, non-export production of goods, resource allocation, and capital efficiency, ability in handling external shocks, negative external effects and also total productivity factor. Therefore, research has shown export strategy has been an effective factor in enhancing the economic growth of developing countries. Furthermore, these countries have also testified that export promotion is an effective development strategy (Jung and Marshall, 1985).However, export strategy is not the main determinant factor of FDI that promotes economic growth. According to Ahmand and Harnhirun (1996) research, by using time data series from 1966 until 1988 to determine whether export is the main (FDI) factor that affects countries economic g rowth on industrial countries like Malaysia, Philipines, Singapore and Thailand, they found out that economic growth and export is dependent on development of countrys policy, and also economic development causes export growth not the other way around.In order to (Alfano et.al, 2004) identify the relationship between FDI, financial market, economic growth and also to find out whether countries with better financial systems are able to exploit FDI effectively. An empirical analysis was done by using cross country data from 1975 to 1995 which concluded that FDI played a leading role in contributing to economic growth in 71 countries which means countries with good financial market are able to take advantage of opportunity offered by FDI. Li and Liu (2005) studied whether FDI affect economic growth by using single and simultaneous system of equation techniques to test these two variables. Their research found a significant relationship between FDI and economic growth which identified,H uman capital has indirect interaction with FDI that leads to positive impact on economic growth in developing countries, whereas countries with insufficient technology knowledge will have significant negative impact on economic growth in developing countriesAnother study done by Hsiao and Hsiao (2006) using panel data and time series from 1986 to 2004 to identify Granger causality between GDP, export and FDI among China, Korea, Taiwan, Hong Kong, Singapore, Malaysia, Philippines and Thailand found out that FDI has direct one way effect on GDP and indirect effect through export. There was also bilateral causal relationship between export and GDP.Lastly, study done by Baharumshah and Thanoon (2006) using quantitative assessment found out that FDI effects economic growth both long-term and short term in the host countries. Their research has also shown that countries that are able to attract inflow of FDI successfully can generate more investment which leads to faster overall developme nt of economy, hence FDI is a major contributing factor in the economy of East Asian countries. Ang (2007) use annual time series data from 1960 to 2005 in order to find out the determinants of FDI in Malaysia found out that GDP growth had a significant positive impact on FDI inflow.2.2 Theoretical FrameworkForeign direct investment (FDI)Independent variable Dependent variableTechnology advancementEconomic growth in MalaysiaHuman CapitalPolicy developmentSocialGDP2.2.1 Analysis pathThis framework is to understand the research of the two variables in the case of my research proposal, foreign direct investment (FDI) is the independent variable and economic growth in Malaysia would be the dependent variable. The purpose of this research proposal is to understand the relationship of FDI and economic growth in Malaysia. In addition, Malaysia can implement different FDI contributing factor that can enhance economic growth in the country.The analysis here is about the determinants of FDI a nd it interests me in which Malaysia can implement and make FDI more attractive to be invested by foreign firms. In this analysis, the information accumulated should provide the key determinants of FDI at the same time enhance the development of economic growth in Malaysia.Chapter 3 METHODOLOGY3.0 IntroductionThis section describes the research methodology use in the study to access the relationship between FDI and economic growth in Malaysia. Simple ordinary least square (OLS) regression and the empirical analysis are done using annual data of FDI and economic growth in Malaysia over the 1970-2005 periods. The research was done using annual data from IMF international Financial Statistic tables, published by International Monetary Fund to find out the relationship between FDI and economic growth in Malaysia.3.1 Data3.1.1 Data ResourcesAccording to Romano (2004), primary data can be define as data that is collected specially for the purpose of answering research question, while seco ndary data can be define as existing data collected in order to answer different research project. Secondary data was chosen for this research because it is less expensive compared to primary data, and takes less time to collect data that is needed for research. (Romano, 2004) Secondary data has made information far easier to be obtain by interpreting information from primary data and published them through secondary resource such as newspaper, journals, books, internet, and also research reports. () The existence of secondary data happens when a project needs the collection of data that has already been research in order to further understand the research question on a new project That is why secondary data is essential in order for us because it provide us with the knowledge to form research design and also answering our research questions in a more in depth scale.3.1.2 Data Analysis ProcedureIn order to complete this research proposal we have mainly use secondary resource such as journals, websites, books, and also research report. Secondary resource has provided us with the information needed at the same time save us time and cost. KBU International College has provided us with books that contain the information needed for us to make references for our research topic. Internet network has been a major contribution by using the Google Chromes search engine we are able to obtain various journals and reports from websites that allows us to make reference and understand our research objectives. Emerald website in particular by using Anglia Ruskin University account has granted us the access to various journals that are easy to obtain without any hassle. The usage of less text book is because the library has insufficient information needed to answer our research questions.3.2 HypothesisNull hypothesisH0 FDI is not important for transporting advance technology to enhance host country economic growth.Alternate hypothesisH1 FDI is important for transporting advanc e technology to enhance host country economic growth.Technology advancement is essential in developing economic growth because it produces skilled labor that will enhance productivity and satisfying demands from consumer. According to Easterly et al. (1995), technology transfer depends on the diffusion process and can take place in 4 forms which is transfer of new technologies and ideas, high technology imports, foreign technology adoption and also level of human capital. Diffusion process of technology into host countries can be different depending on the human capital and availability of technology in the country itself. Example, study made by Borensztein (1998) on developing economies concluded that FDI has positive economy growth but the effect of magnitude depends on the availability of human capital in the host country. This clearly shows that advance technology is very important to enhance economic growth at different level of diffusion growth.Null hypothesisH0 Economic stabi lity is not important to attract FDI into the countryAlternate hypothesisH2 Economic stability is important to attract FDI into the countryMany countries should pay more attention to economic stability in order to attract FDI which can enhance economic growth. With a stable economy it portrays a positive image and good economic positioning, which in turn attracts foreign investors to invest and generate profit from the investment made in the foreign country as a guaranteed. Therefore, determinants of economic stability should be given attention, the determinants are such as exports, and government expenditure, domestic consumption, and exchange rate that should be manage well by government. According to the research done by Kogid,et.al,(2010) , the most important determinant of economic stability in Malaysia is export and consumption expenditure. Their study also found out that government expenditure and exchange rate are less effective on economic growth but it does not mean it sho uld be ignored but these factors can be act as catalyst and complement factor of economic growth.Null hypothesisH0 Implication of policy does not promote economic growth.Alternate hypothesisH3 Implication of policy does promote economic growthImplication of policy reform is important to draw attention of foreign investment. Policies to promote growth have evidence but it does not work for other countries. This can be seen from the study made by Ahmad and Harnhirun (1996) which studied on new industrial countries such as Indonesia, Malaysia, Philipines, Singapore and Thailand that found out export and economic growth dependent on development of policy. Therefore, government should impost relevant policies to attract FDI into Malaysia. Example, policies like joint venture which give opportunities to domestic producer to become one with foreign investors. This way will benefit local partner as they have exposure towards technology.3.3 LimitationTheoretical framework of FDI that is use to analyses the FDI determinants and economic growth in Malaysia could have been done more accurately with more secondary resources. Firstly, KBU International College provides insufficient books that have relation with this research topic. However, KBU does provide student with the account to access Emerald websites that contains many research journals and reports that is very convenient for our research topic.In addition, some determinants of FDI in the theoretical framework were not taken into consideration because there has been insufficient research done on some determinants of FDI that affects economic growth in Malaysia. As a result, this research is not entirely completed to reflect the full extent of FDI on Malaysias economy growth. Since this research is mainly dependent on opinions of researchers around the world, this may lead to inaccuracy of research because they might disagree with research and opinions done by other authors around the world.4.0 Ethical ConsiderationB efore the research is done, respondents will be notified regarding the aim, benefits and purpose of the research is conducted and the method that is engage to carry out this research so that respondent will be able to understand the reason of caring out this research and the potential hazard level of this research. There are also no pressure of any kind shall be force for individual to become subject of research. In addition, respondents have the permission to withdraw or terminate from participating and becoming subject of the research. These are the ethical action taken so that there will be no violation of human rights. The identity of respondents from who involves in the survey is strictly confidential and shall be discarded once research is completed unless permission is granted by respondents for publish sake. No information of respondents will be revealed and included in the final report.