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INTRODUCTION
It is generally accepted that Foreign Direct Investment (FDI) is a key driver in promoting
long-term economic growth, particularly in a developing countries, that have experienced a
shortage of capital accumulation for their development. Developing countries are highly
dependent on FDI as a mechanism of economic growth and have been trying to attract
foreign investors, particularly Multinational Enterprises (MNEs), by reducing barriers to
FDI and offering various tax incentives and subsidies.
Malaysia is one of the countries in Asia that has benefited from strong FDI inflow. The
economy relied on the foreign fund as a major source of capital, modern technology and
technical skills. Globalization, international financial integration and expansion of global
production have intensified FDI in the past decades.
FDI enables the investing firm to utilize their specific assets such as technologies and
managerial know-how. Thus, FDI brings benefits in various aspects, which are source of
funds in term of capital stock; increase in employment, income and growth, as well as in
skills and technology.
This paper identifies some of the main factors that contribute significantly to attracting
FDI in Malaysia. This is crucial because private investment has been given a leading role
to bring the economy to higher growth and sustainable economy.
Past literatures and studies argued that the impact of the openness in host countrys
economy is expected to be mixed but generally this variable in the conventional findings
tends to be positively associated with the FDI inflows. Based on the results by Moosa and
Cardak (2006), trade openness was verified to be significant and have a positive effect on
the inflows of FDI.
1.1. Inflation
This research concluded that inflation rate is a significant determinant of Malaysia FDI
inflows. Based on the result, there is a positive relationship between inflation rate and
Malaysia FDI inflows as supported by past researchers like Srinivasan (2011) and Addison
and Heshmati (2003). In the past research paper, Addison and Heshmati (2003) mentioned
that higher inflation rate indicates higher price levels which may lead to the increased
production activities of the host country. This then will attract more foreign firms to invest
in the host country for the increased expected level of profitability. In addition, as stated by
Srinivasan (2011), higher inflation may lead to an increase in product price, which in turns
decrease the demand for host countrys money. As currency of host country depreciates, it
attracts larger FDI inflows into Malaysia since its capacity to invest is increased through
the reduced cost of capital. On the other hand, the results are found to be inconsistent with
the some of the past researches done. Despite researchers like Shamsuddin (1994), Asiedu
(2002), Demirhan and Masca (2008), and Azam (2010) have proven inflation rate to be
statistically significant to the FDI inflows, it is also found that there is a negative
relationship between inflation rate and foreign direct investment. Asiedu (2002) mentioned
that a low inflation rate is taken as a sign of internal economic stability in the host country,
reflecting a lesser degree of uncertainty which encourage foreign direct investment.
Inflation is an important determinant of FDI inflows in Malaysia. It is supported by James
P. Walsh and Jiangyan (2010), who found that, the negative relationship of inflation rate,
when low, will give attractive benefits to attract additional FDI.
2. CONCLUSION
While there are many factors that affect Malaysias FDI inflows, the most significant
determinants are its market size, economic growth, trade openness, and inflation rate.
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