The Effect of Foreign Direct Investment on Wage in Malaysian Manufacturing Sector: New Evidence using ARDL

Abstract

Foreign direct investment (FDI) is essential to each country because it can increase economic growth. However, political and economic instability can affect the FDI inflow into a country. This study investigated the effect of FDI on wages in the Malaysian manufacturing sector for the period 1985-2018 by using the Autoregressive Distributed Lag (ARDL) method. The unit root test result showed that all the variables were stationary at first difference. The results obtained showed significant positive relationships between FDI and wage in the long and short run. Besides, education and skilled labour also showed a significant and positive relationship with wages in the manufacturing sector in the short run. Therefore, this study suggests that the policy makers have to stimulate a new policy to attract more investors to invest in Malaysia, especially in the manufacturing sector, as it has a positive effect on wages and increases employment in the host country. Other than that, the FDI inflow can also bring technology and human capital spillover.