среда, 3 апреля 2019 г.
Analysis Of Foreign Direct Investment In Malaysia Economics Essay
Analysis Of external Direct Investment In Malaysia Economics EssayForeign subscribe to investiture (FDI) is an activity in which an investor resident in bingle bucolic has a lasting interest in, and a tumescent influence on the management of an entity resident in a nonher outlandish (OECD, 2003). It involves any greenfield investing or merger and acquisitions (MAs). The former represents generating a wholely new enterprise and it exerts more than positive effects, period the latter represents amending the ownership of existing enterprises and it has a visit positive effect or even a negative externalities. FDI tush too be defined as opposite kinds of financial minutes among enterprises, such as reinvestment of the earnings of the FDI enterprise or other slay of metropolis.There argon various(a) forms of FDI, in which one of them is the ownership of the plentiful penalty of the shares of the national degraded or possession of the project forrader the acquisit ion of the outside investor. Joint venture is another form of FDI, in which a company is being set up in the legions arena with the col travailation of topical anesthetic partners. Due to the partnership and the experience of the local anaesthetic market, this form is generally preferred. Another priming coat that makes it less risky is that hostile partner is not given the right to to the full intervene all over the operation of the project. In addition, FDI could be in the form of setting up new subsidiaries or branches of unknown parent companies, as soundly as marketing goods in the host country (Madura, 2006).FDI consists of the substantiation of mobile and gigantic equipments uniform aircraft and oil construction activity, exploration or extraction of subjective minerals acquisition of real dimension by exotic investors retained profits, which pelt along keen accumulation investment property rights, which are the funded projects and the setting up of compan ies and factories in which investor is a rule partner with shares atleast 10% of the total property rights (Abdel Ghaffar, 2002).There are determinants of FDI in the recipient country, despite its benefits. first off of all, the frugal determinants are sepa located into three components (i) the stinting determinant related to investments that sample to market along with abundance and ingathering of per capita income and size of the market as easily as the free areas. (ii) the stinting determinants related to those investment that are making production efficient, and (iii) involving those investments that seek the resources and assets, having plenty of simple natural resources, infrastructure, and more or less of the investment involve horizontal integration in seeking investment in the market. In addition, there is also a factor cal take constitution framework that determines FDI in the host countries. It consists of institutional framework and scotch policies that crap an blow on investment in the host countrys political stability, legal philosophy and legislation, ex channel rate and others. Another determinant is related to business facilitation, i.e. the special(prenominal) facilities to assist management of investors, the promotion of investment, building reputation, investment incentives, administrative and bureaucratic practices, as well as the provision of social services (Chung et al, 1999). consort to Choong and Lim (2009), the choice of models for scotch ontogeny determines the channels through which FDI influence stinting growth. For lesson, a great impact of FDI on sparing growth which bunghole be honourd via the production function is theorized by the endogenous growth models. In particular, overseas working groovy inflows (FCIs) endure a significant impact on municipal capital formation or accumulation, in which it either has a crowding-out or a crowding-in effect on local investment. If foreign capital complements house servant capital, FDI lead have greater influence on output growth. On the other hand, if FDI expand the variety of intermediate and capital goods, then the productivity level of the recipient country can be upraised. Moreover, FDI reduces unemployment by creating dividing line opportunities (Borensztein et al., 1998).FDI is beta in the sense that it provides investible funds and foreign exchange earnings, in which foreign exchange can be use to import primitive materials (Wong Jomo, 2005). Both elements rarify the resource availability of a country, thus enhance savings and investment, and in treat resurrect economic growth. Therefore, it leave behind help ontogeny countries to eventually achieve self-sustained growth. This is because spunkyer(prenominal) investment and growth rate with foreign capital supplement, are in turn also subjoin the interior(prenominal) saving rate. Most developing countries do not have enough capital goods to meet the desired investment le vel and required inputs have to be imported by using foreign exchange. FDI makes up for any foreign exchange shortfall by bringing in foreign exchange to pay for the needful imports of capital and intermediate goods. anyhow, it brings in new technology, technical assistance and expertise, infrequent managerial skill, external marketing connection, marketing know-how etc.Foreign direct investment played a crucial exercise in Malayan rescue since last few decades. Through twain micro and macro instruction levels, FDI can affect a recipient country (Choong Lim, 2009). In micro level, via labor training, technological transfer, and positive spillover effects, multinational corporations (MNCs) can bring in technical and management faculty to local firms. While for the latter case, FDI whitethorn affect both the financial variables (like balance of payment (BOP), inflation, interest rate, and foreign exchange rate) and real variables such as import, exporting, employment, econ omic growth and internal investment (Levine, 1997). tally to Choong and Lim (2009), it cannot be denied that the significancy of FDI is greater in diffusing or transferring technology know-how embodied in human capital such as organizational arrangements, new management practices, skill acquisition, and training. All of these will promote greater economic growth through mettle nigher level of efficiency and productivity in labor. On the other hand, by raising the technological level in the recipient country, FDI can bring technological change equally to both labor and capital. In this case, via a learning-by-doing process, economic surgical process can be influenced by FDI. In particular, expertise in fully occupied factor endowments of the recipient country, new managerial and organizational techniques, international marketing connections, product design and production systems can be voiced by FDI (Dunning, 1995). Imitation is therefore important. FDI is also favorable to the productivity of local research and growing (RD) activities.In contrast, FDI may harm domestic scrimping. First of all, FDI may have a substitutive effect on domestic savings. e real negative effect of FDI on the domestic saving rate will have negative side effects on the investment rate. In addition, liberal regulations on income repatriation, which is often considered necessary as an investment incentive, may also adversely affect the balance of payment (BOP). If the private capital inflows are not large enough to fully offset interlocking dividend outflows, meaning that the sugar financial contribution of FDI will be negative. The capacious outflows of interest payments also will contribute importantly to the service depend deficits, which will in turn have negative implications for macroeconomic stability. The danger of high import content may also deteriorate the domestic economy. preciseally, large influx of FDI into a country may lead to colossal imports of investm ent and intermediate goods, which will in turn contribute importantly to growing import bill, declining merchandise account surplus and large menses account deficit. High import content also implies low domestic value-added and limited domestic linkages. In short, FDI may cause import propensities to increase. Furthermore, FDI may also result in an increased industry concentration, which is equivalent to high degree of market power for a few large firms, resulting in high barriers to entry for other slight firms. To the extent that large firm is MNCs, a crowding out of local firms can be expect to have taken place (Wong Jomo, 2005).FDI is also conventionally seen as a critical source of capital accumulation of a country from the perspectives of exemplar neoclassical growth models (Solow-type) (Choong Lim, 2009). Specifically, there is no disparity in the midst of overseas and local capital in stimulating output growth. It is also suggested that FDI significantly affect growt h only in the short term, but not in the medium or long term, given the assumption of lessen return to capital (Barro Sala-I-Martin, 1992).In short, there are various forms of FDI and it (FDI) consists of the establishment of mobile and massive equipments. FDI is benefical to a countrys economic performance as well as welfare. However, there are also disadvantages that bring harm to a nations economy.1.2) Historical Background of MalaysiaAccording to World Bank (1993), Malaysia was designated as one of the East Asiatic Miracles due to the rapid growth of its economy during the catamenia of 1960-1990. The steady growth rate (long lasting) attained drew a take of attention around the world.In the 1960s, the economy grew yearlyly in an middling of 6%, followed by 7.3% per annum in the first half of the 1970s, which indicated an improvement in the growth rate. After that, it performed correct by achieving higher growth rate (GDP) at 8.6% per annum until 1980. However, in 1981-19 85, the growth rate slowed shore to 5.1% annually, followed by a pick up again to 6.7% annually in 1986-1990. From 1996 to 2000, the economy grew at a slower rate of 4.6% per annum, following a comparatively speedy growth of 8.7% annually in 1991-1995 (Jajri, 2009).Based on the report, it was shown that FDI generally plays a critical role in the economy of Malaysia (Wong, 2006). FDI has been carrying a heavy weightage in Malaysias GDP. For example, it carried 23.7% in 1985, 24.1% in 1990, and even 65.3% in 1999. Over time, there was also a rise in the stock of FDI. For instance, it was 7.4 billion U.S dollar($) in 1985, increase to $10.3 billion in 1990, and even increased by $44 billion from 1990 to 2000. Furthermore, in terms of gross fixed capital formation, FDI has been carrying a high portion, that is, it carried 15.1% in 1997, 13.9% in 1998, and even 20.1% in 1999.Since manufacturing industry has been attracting the largest amount of FDI in Malaysia compared to other indus tries, we will specifically concentrate on it. According to Yusop and Ghaffar (1994), in the cultivation of manufacturing industry in Malaysia, FDI plays an important role. By enhancing product quality, the conflict of the manufacturing export (Malaysian) has been improving globally. In addition, business experiences and technology know-how has been spilled over to Malaysia when various multinational corporations (MNCs) invest directly in the manufacturing sector in Malaysia. ace of the major strategies of the policy makers is to open foreign investment projects which can enlarge the countrys resource availability and potentiality, alter investments or activities and promote economic development through contribution of capital, skilled jobs creation, and technological transfer (Jajri, 2009). Attracting FDI was one of the Malaysian governments key approaches to stimulate growth. The country always favored a pick up policy on investment and duty since the 1980s. Obviously, FDI h as a crucial role in the formation of capital and thus, the economic development. In the 1980s and mid-nineties, Malaysia was very participative in deregulating its investment regime in the manufacturing sector compared to other countries under the Association of due south East Asiatic Nations (ASEAN). We can ob see a significant progress when Mahathir Mohamad, our former prime minister, launched the new spliff venture projects (especially with Korea and Japan) with the state-owned enterprise (SOEs). For instance, Malaysia received large inflows of FDI accompanied by better expertise and technology due to the promotion of the Investment Act in 1986. In particular, various incentives like the establishment of Free Trade Zones (FTZs), export promotion by having tax deduction, tax allowances for projects expansion, investment expansion, tax holidays, originate status and other kinds of incentives to attract FDI were being provided.In the late 1980s, Malaysia keep to pursue crafts manship liberalization by deregulating the barriers over capital ownership of MNCs, which in turn raised its FDI inflows. Over the years, the rates of responsibility in Malaysia have gradually decline because FDI is needed to take entrepreneurial risks in order to make profits, at the same time to enhance the host countrys productivity. Despite the importance of other determinants, the strategic location of Malaysia is the master(prenominal) factor that attracted foreign investors to invest in the domestic markets (Jajri, 2009).As a result, Malaysia has been receiving vast amount of FDI during 1980s and 1990s. However, since the early 1990s, total foreign investments had been slowed down in several periods, though it has generally been increasing over the years. Specifically, a shine in investments from Taiwan and Japan, the major source of investments led to a substantial decrease in FDI in 1993. The drop in investment can be attributed to the lacking of competitiveness in terms of labor greet as compared to other South East Asian countries like Indonesia and Vietnam. On the other hand, investments that are not much affected by the upgrade labor cost (relatively) in the manufacturing sector such as investments in petroleum and petroleum related products sector by US were relatively stable.Asian Financial Crisis in 1997-1998 which affected most of the South East Asian countries is another key reason to the decrease in investment to Malaysia. Nonetheless, the substantial depreciation in ringgit Malaysia (RM) against US dollar led to an increase in the value of investments by General Electric, Boeing and other US-based huge MNCs. Therefore, local consumers were benefited from a positive effect of the influx of the US investors in terms of by and by-sales service and follow-up services, which are highly valued by Malaysians (Jajri, 2009).In short, due to the successfulness in the adoption of economic policies, programs and strategies, Malaysias economic per formance has been spectacular from the late 1980s (Karim Ahmad, 2009). Nevertheless, its distribution gap of economic growth among states has to be filled. As a consequence, the government continues to prioritize the distributional affairs in its national development plans. In order to decrease the imbalances of social welfare between states (less and more developed), a poverty rest period program was adopted in its regional development plan. During the Third limn Perspective Plan (OPP3) period (2001-2010) which was under the National Vision Policy, agricultural, services, and manufacturing sectors are being determined to facilitate a more rapid economic growth under the program. Specifically, in the manufacturing sector, foreign and domestic firms were given incentives to diversify their activities across all states. In this case, liberal equity policies, tax incentives, and diametrical types of investment options were provided in order to attract FDI inflows into Malaysia.Figu re 1 Malaysias foreign direct investment (FDI), net inflows from 1970 to 2008.Source World Bank.Figure 1 illustrates the cut back of Malaysia FDI inflows from 1970 to 2008, where the X-axis represents time period in year while the Y-axis measures FDI net inflows in thousand of US dollar. From the period of 1970 to 1982, although Malaysias FDI inflows shown an increasing trend (gradual), it was sort of inactive due to the lack of knowledge, unpopularity in this area, as well as restrictive government policies which in turn will result in less mobility of capital between countries. In 1982 to 1987, there was a rebuff decrease in Malaysias FDI inflows before it raised dramatically in 1987 from roughly US$0.5 million to about US$5 million in 1992. This was due to the Japans currency appreciation, Japans and Asian newly industrialized economies (NIEs) trade clash with the US and European Union (EU) countries, as well as Japans and NIEs rising wage rates in the mid-1980s (Wong, 2006) .In addition, the equipped necessary infrastructures for investment need and incentives (monetary and fiscal) provided by the government led to the increment of Malaysias FDI inflows. Another reason that causes the increase of Malaysias FDI inflows is the pool of disciplined and well-trained workers with relatively low wage.To foster kick upstairs investment activities in manufacturing industries, the Investment Act 1986 was introduced. The introduction of this act reflected Malaysian governments active efforts in stimulating private sector investment since the mid-eighties, that was when the country facing its worst recession. As a result, there were more foreign investors, especially from mainland mainland chinaware switching their capital (investing) into the country. After that, the trend of FDI inflows was diminish from 1992 to 2001, followed by an increasing trend from 2001 to 2007, before it decreased in 2008. In conclusion, Malaysias FDI inflows were fluctuated from 1970 to 2008.1.3) Problem StatementAlthough Malaysia received FDI from China, it has to contend with China (one of the emerging economies) for oversea funds and facing domestic constraints and structural weaknesses simultaneously. Specifically, these limitations include high cost of doing business, in beguile public delivery system and lack of skilled labors. In addition, Malaysia was relatively low in terms of production cost competitiveness compared to other countries, and Malaysias capital outflows trend has generated a few issues. One of them is the chances that deteriorating FDI will lower the countrys potential output, given falling private investment. Another reside is about a loss in domestic investors confidence in the country which is resulted from capital outflows. In short, Malaysia is still lag behind in ease of doing business.For a developing country like Malaysia, the issue of job creation is very important. According to Abor and Harvey (2008), although FDI is related to technological unemployment, it does play a critical role in job creation. FDI inflows from China are associated with big and mass production and thus there is a need for large amount of domestic labor force to maintain the high production. In short, Chinas FDI swear outs as an alternative engine of growth to Malaysia. Besides increasing domestic investments, it improves the ability of foreign technology absorption, contributing to technology transfers and helping in innovation, promotes international trade integration, and thus brings our country to a competitive slur (Ghosh Wang, 2009).Figure 2 Chinas FDI outflows to Malaysia from 1987 to 2009Source Malaysian Industrial Development confidence (MIDA)Figure 2 depicts the trend of FDI outflows from China into Malaysia over 1987-2009 through annual flows and its share in total Chinas FDI outflows to Malaysia in ringgit Malaysia (RM). Since the late 1980s, it shows a small fluctuation in trend of Malaysias inward FDI from China wi th a relatively stable and low amount (amount not deviate too much). During the 1990s and early 2000s, the stable trend showed that China has opened up its economy to international trade and this in turn lead the amount of Malaysias FDI value from China increased. In 2006, we can see that there is a dramatical increase in trend due to Chinas heavy investment in Malaysias big steel project in Terengganu in producing flat irons, slabs, billets, hot involute coils, and the former also involved in the mega project of Penangs second bridge. However, aft(prenominal) the peak in 2007, there was a sharp decline in amount of Chinese investment which was mainly attributed to 2007/08 global financial crisis.China played a major role in the expansion of intra-regional trade and vertical specialization which are becoming increasingly important. According to Zebregs (2004), China carried 32 % proportion of Asians total export growth. The rising intra-regional trade among the Asian high-perform ing countries was significantly affected by spectacular outward-oriented growth performance of the Chinese economy. The vertical specialization in the case means China imports raw materials or intermediate goods from Malaysia and to produce final products which will be exported back to Malaysia. In recent years, Chinas trade has became more vertically specialized and Chinas exports find out a large proportion of imported goods from other Asian countries including Malaysia (Rumbaug and Blancher, 2004).Besides that, China is guaranteed to be continuously affect the growth trends of Malaysian economy due to the formers rapid economic growth, openness and size of economy. China became an example of autonomous liberalization as it became the biggest liberalizer of the local economy. China and other Asian high performing countries pursued free trade among themselves to the World trade organization.Furthermore, an increasing number of Malaysias capital goods and investment, components an d sub-assemblies, parts, as well as primary products have been absorbed by China. In this short time period, a wholely new investment and trade pattern has occurred. Malaysian economy has been influenced both directly and indirectly by Chinas investment and trade, in which the indirect influences came from the method in which Chinas investment and trade manipulate Malaysias economic condition while the direct effects came from Chinas bilateral trade and investment familys with Malaysia. In short, it is promiscuous that a major economic change in Malaysia has been caused by China.In addition, China also becomes increasingly crucial to Malaysia because of upgrading technology base reasons. According to Das (2008), China managed to absorb a wide range of industrial technologies, and was proven to be superior to other emerging market economies in doing so over the antecedent two decades, which were also the period when China was gradually becoming the worlds number 1 manufacturer of high-volumed industrial products. The trend was due to its extra focus on science and technology education, the gateway of the private sector into the provision of tertiary education, wide-based education adjustments, and the low-wage, but unexceptionable skilled and flexible workers. Because of huge and increasing investment, the life span of equipment and fix was reduced to seven years (Das, 2008).In a nutshell, since Chinas outwards FDI is extremely important to our nations economy (and even important to the rest of the world), it is worthwhile and proficient for us to memorize its impact on our countrys economic growth. Furthermore, the factors that determine Chinas FDI are crucial in the field of economics, and thus this motivates us to shed some light on them.1.4) General Objective of the StudyThe research interrogative and worry statement give us an insight and motivation to analyze the relationship between Chinas FDI and Malaysias economic growth, in which Chinas ou twards FDI and Malaysias GDP serve as the respective proxies. Our research will be able to serve as a significant contributor to the efforts in stimulating Malaysias economic growth as well as the field of development economics.1.5) Specific Objectives of the StudyTo visualise the effect of Chinas FDI on Malaysias economic growth from 1987-2009.To examine the determinants of Chinas FDI outflows in Malaysia.To investigate the short-run dynamic linkage between FDI outflows (China) and economic growth (Malaysia).1.6) Significance of the StudyMost of the empirical literatures in examining the relationship between FDI and economic growth were too general. The rapidly emerging economies in China who is able to provide huge investment funds, provided the recipient country is fundamentally strong in terms of macroeconomics and financial system have not been studied specifically. Thus, through our research, we may able to solve the problem by filling the gap resulted from past researchers. It is a very important study as it may suggest the rationality and suitability of further employing FDI (especially from China) as an engine of growth for Malaysia. As such, it talent prevent photocopy of resources as the government can genuinely allocate funds to appropriate areas for economic development and economic growth.In addition, the study on the determinants of Chinas FDI (outward) might suggests some appropriate factors in attracting Chinas outward FDI, which will in turn enhance the efficiency and effectiveness in the efforts or process of attracting Chinas FDI into Malaysia. Therefore, the study may assists policy makers in their decisions to enlarge or enhance certain promising areas, for example market size and human capital development in order to attract Chinas FDI into Malaysia, and thus stimulate economic growth.In short, by conducting this study, we will be able to provide more full-bodied results on the impact of Malaysias trade openness, financial developme nt, and most significantly Chinas FDI on Malaysias economic growth. The relationship was seldom being analyzed by previous researchers. Note that FDI is important to stimulate private investment as well as to create job opportunities. In addition, after the study, we can crystalize the determinants of Chinas FDI outflows, specifically the relationship between Malaysias market size, exchange rate, human capital development (all are independent variables), and Chinas FDI outflows (the dependent variable). Lastly, the causal relationship between Chinas FDI and Malaysias economic growth can also be justified after the study. All three aspects being mentioned above are crucial in assisting policy makers to implement sound and wise policies, strategies as well as programs. Therefore, we hope that our research could contribute to the society as well as the nation as a whole in the expansion and development of our country in order to achieve 2020 Vision and become a developed nation.1.7) O rganization of the PaperThe remaining sections are organized as the followings section 2 represents literature review, followed by section 3 which illustrates the selective information description and methodology being employed. Our empirical results and interpretation are in section 4 before we conclude in section 5.