Outward FDI and Institutional Factors: Malaysian Experience

Abstract

This paper aims to investigate the role of home country institution in affecting outward FDI from Malaysia using data spans from 1980 to 2012. The model specification is examined in autoregressive distributed lag (ARDL) bounds testing framework. The empirical evidence reveals that GDP, exchange rate, openness to trade, and corporate tax rate are the key drivers of outward FDI from Malaysia. This portrays that internationalization strategy of firms is not only relied on home macroeconomic environment, but also home institution. More importantly, corporate tax rate, as one of the institution factors, is positively related to outward FDI which signifies that high tax rate would prompt local firms to engage in investment abroad as a sign of escape response. This reflects that international expansion appears to be exit strategy from home country instead of entry strategy into foreign markets. The findings have some important implications on internationalization strategy of firms.

The Effect of Institutional Quality on Foreign Direct Investment

“…The negative effect of corporate tax on FDI is consistent in all models and appears to be robust from all model specifications. This result supports the findings of Gastanaga et al (1998), Billington (1999), Wei (2000, Choi (2003), Fedderke andRomm (2006), Quazi (2007), Ang (2008) and Chen et al (2016). A tax incentive policy is expected to attract foreign investment interest whereas imposing a higher tax rate will hinder the inward flow of such investments.…”

Causality between Foreign Direct Investment Outflows and Economic Fragility: A Study on Eight Fragile Economies

“…Chen and Zulkifli (2012) determined that there is a bidirectional causality relationship between FDI outflows and GDP in the Malaysian economy. In another study on the Malaysian economy, Chen et al (2016) observed that GDP, trade openness, real exchange rate index and corporate tax have a positive effect on FDI outflows. Lee et al (2016) found that GDP in the destination country, exchange rate and free trade agreements with the destination country increase FDI outflows in Singapore.…”

The determinants of China’s outward foreign direct investment in ASEAN: A panel ARDL approach

“…The host country's institutional quality has significant long-run and short-run favorable effects. Moreover, some research (Chen et al, 2016;Christofi et al, 2022;Kaushal, 2022;Li et al, 2020;Wang et al, 2014) examined the impact of institutional determinants on OFDI. For example, Li et al (2020) did a Chinese OFDI study across 150 countries between 2003 and 2015.…”