Foreign Direct Investment and Manufacturing Growth: The Malaysian Experience

Abstract

This paper examines the short and long run dynamics of Foreign Direct Investment (FDI) over the manufacturing growth in a developing country – Malaysia for the period of 1970-2003. Due to the small sample size, we used a fairly new cointegration method known as "bounds test" and the autoregressive distributed lag (ARDL) approach to estimate the short and long run production elasticity of FDI. Estimated FDI elasticity in the short and long run were found to be statistically significant. In the long run, a 1% increase in FDI contributes to 0.115% increase in manufacturing value added output in Malaysia. The model extracts the influence of FDI and technological progress towards manufacturing output. As a consequence of the results, strategies to enhance the competitiveness of Malaysian manufacturing sectors in the world of intense competition for FDI especially among the Asian economies like China and other ASEAN members is further recommended.