The Impacts of Bilateral Trade and Foreign Direct Investment on Malaysia’s Economic Growth: The Roles of Singapore

Abstract

Open economy is essential for a country to achieve sustainable economic growth. There existsa bilateral tiebetween Malaysia and Singapore since 1965. Thisrelationship has made Singaporeachievedas a high-income nation that enjoys modern infrastructure and technology, skilled labour, and strong financial structure, but Malaysia is still trying to upgrade itself to become a high-income nation via open economy. Furthermore, Malaysia’s reliance on the external market has inevitablyleft the economy to be more exposed to external shock. This research analysesthe impacts of Malaysia’s bilateral trade and investment with Singapore on Malaysia’s economic growth from2008 to 2016. Vector error correction model (VECM) reveals that Malaysia’s exports to Singapore arepositive and significant on Malaysia’s economic growth and Malaysia’s OFDI in Singapore is significant but negative on Malaysia’s economic growth.However, Malaysia’s imports from Singapore and Malaysia’s inward foreign direct investment (IFDI) by Singapore have insignificant impacts on Malaysia’s economic growth. It concludes that only Malaysia’s exports to Singapore can help to increase Malaysia’s economic growth.Thus,Malaysia’sgovernment couldprovide incentives to encourage Malaysian local firms to boost the exportationsto Singapore.