Empirical Analysis of the Relationships between inward FDI and Business Cycles in Malaysia

Abstract

Globalization has been spreading macro economic effects around the world as well as fueling firms' cross-national activities. Are there any links between these two influences? This paper chose Malaysia as subject and examined the causal relationships between inward foreign direct investment (FDI) and business cycles. A set of models based on Granger Causality test and VAR Impulse Responses were constructed. Time-series data covered from 1970 to 2008. And the findings clearly indicated that in the case of Malaysia, there is evidence of bi-directional causality and long-run relationships between firms' (foreign) activities (inward FDI) and business cycle developments in a long term.

FDI: Hot or Cold Money? The Behaviour of Sectoral FDI Inflows and Outflows Over Periods of Growth Accelerations and Decelerations

“…The authors also find no evidence that German cyclical developments have an impact on foreign activities. In a study on Malaysia, Omer and Yao (2011) examined the causal relationships between inward FDI and business cycles with a Granger causality test and VAR impulse responses with data for the period 1970-2008 and found clear evidence of bi-directional causality between inward FDI and business cycles in the long run. At last, Doytch (2015) who examined the fluctuations of sector-level FDI with output gap for 17 Asian economies finds evidence of countercyclicality for services FDI and acyclical behaviour of both extractive sector and manufacturing FDI.…”