Causal Links between Foreign Direct Investment and Exports: Evidence from Malaysia

Abstract

Malaysia has encouraged foreign investment not only for its role in technology transfer but also for its contribution to Malaysian exports. Therefore, the aim of this study is to investigate empirically the causal relationship between FDI inflows and exports in Malaysia. The methodologies of stationarity of time series and the multivariate Granger concept of causality were employed to carry out the investigation. The finding that time series variables are cointegrated implies that there is a long term relationship between them. The results appear to support the effectiveness of the outward looking orientation policy deployed in this country.Keywords: Foreign direct investment, Export, Causality, Cointegration, Malaysia IntroductionThe present study chooses to fill the gap by investigating the issue with annual data for the sample period of 1970-2003. This paper intends to carry out an econometric analysis to investigate interlinkages between the two variables. Although FDI has been the primary mechanism linking countries' economies, the issues of what FDI means for trade are of particular interest in the context of policies for trade and FDI. Therefore, the motivation of this current study is to empirically investigate the causal relationship between export and FDI inflows by means of the Granger causality test in the cointegration and error correction model framework for annual data from 1970 to 2003.In the case of Malaysia, the government opted for more liberal policies favoring the private sector especially foreign direct investment participation. Responding to this swift change of policies, the domestic private sector has received an Vol. 3, No. 12 International Journal of Business and Management 178aggressive inflow of FDI to ensure the sustained expansion in output growth. Moreover, since its adoption of the policy adjustment and liberalization in the mid 1980s, Malaysia's external trade has expanded at even higher rates. Hence, Malaysia had become one of the fastest growing economies before the financial crisis of 1997. Since FDI and trade are important for growth and development, it is important to understand the interlinkages between the two.The positive relationship between FDI inflows and exports in relation to economic performance has been broadly accepted; however, the empirical work on the relationship is relatively limited. Survey and empirical results are always uncertain, which necessitates a formal testing. Most of the existing research stresses complementarity and substitutability relationships between exports and FDI. However, many of these studies do not discuss the issue of causality between inflows of FDI and exports. The existing literature on the Malaysian position in relation to this subject matter proves to be inadequate.The rest of the paper is organized as follows. In section two, gives a brief discussion about the data set used and outlines the methodology employed. Section three, consisted of discussion and empirical results, concluding remarks with main finding and policy ...

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