Determinants Influencing Foreign Direct Investment .
DETERMINANTS INFLUENCING FOREIGNDIRECT INVESTMENT DECISION IN MALAYSIACHEONG CHIA SINGEE YING WEIJOCELYN OOI XIN YINGLEE JO YINLIM JIAN ZHONGBACHELOR OF BUSINESS ADMINISTRATION(HONS) BANKING AND FINANCEUNIVERSITI TUNKU ABDUL RAHMANFACULTY OF BUSINESS AND FINANCEDEPARTMENT OF FINANCEAUGUST 2017
DETERMINANTS INFLUENCING FOREIGN DIRECTINVESTMENT DECISION IN MALAYSIABYCHEONG CHIA SINGEE YING WEIJOCELYN OOI XIN YINGLEE JO YINLIM JIAN ZHONGA research project submitted in partial fulfillment of therequirement for the degree ofBACHELOR OF BUSINESS ADMINISTRATION(HONS) BANKING AND FINANCEUNIVERSITI TUNKU ABDUL RAHMANFACULTY OF BUSINESS AND FINANCEDEPARTMENT OF FINANCEAUGUST 2017
Determinants Influencing Foreign Direct Investment Decision in MalaysiaCopyright @ 2017ALL RIGHTS RESERVED. No part of this paper may be reproduced,stored in a retrieval system, or transmitted in any form or by any means,graphic, electronic, mechanical, photocopying, recording, scanning, orotherwise, without the prior consent of the authors.ii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaDECLARATIONWe hereby declare that:(1) This undergraduate research project is the end result of our ownwork and that due acknowledgement has been given in thereferences to ALL sources of information be they printed,electronic, or personal.(2) No portion of this research project has been submitted insupport of any application for any other degree or qualificationof this or any other university, or other institutes of learning.(3) Equal contribution has been made by each group member incompleting the research project.(4) The word count of this research report is 13700 words.Name of Student:Student ID:Signature:1. Cheong Chia Sin14ABB066322. Gee Ying Wei14ABB063613. Jocelyn Ooi Xin Ying14ABB069364. Lee Jo Yin13ABB061625. Lim Jian Zhong15ABB00543Date:iii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaACKNOWLEDGEMENTWithout the assistance, cooperation and guidance of severalparties, this research project would not be achievable. We would liketo take this opportunity to thank everyone who have helped and guidedus in completing this research project.Firstly, we would like to express our heartfelt gratitude andappreciation to our supervisor, Mr. Ahmad Harith who had guided usthroughout the duration of this study. We appreciate the valuable time,guidance and advices he has given us for the completion of thisresearch project.Furthermore, we would also like to thank the lecturers andtutors of UTAR who have guided us directly and indirectly with newinsights and ideas on the path of completing this study. Besides, wedeeply appreciate the moral support, understanding and endless love inwhich our family have given unconditionally throughout the process.Lastly, the cooperation and support received from all themembers who contributed to this research was vital for the success ofthis project. The ideas, suggestions, and perspective given greatlyenhanced this research project. Once again, we are in grateful and inappreciation of all the assistance contributed for our study.iv
Determinants Influencing Foreign Direct Investment Decision in MalaysiaTABLE OF CONTENTSCHAPTER 1: RESEARCH OVERVIEW1.0 Introduction . 11.1 Research Background . 31.2 Problem Statement . 41.3 Research Objectives . 71.3.1 General Objective . 71.3.2 Specific Objectives . 71.4 Research Questions . 71.5 Hypotheses of the Study . 81.6 Significance of the Study . 81.7 Conclusion . 91.8 Chapter Layout. 10CHAPTER 2: LITERATURE REVIEW2.0 Introduction . 112.1 Review of the Literature . 112.1.1 Foreign Direct Investment . 112.1.2 Economic Growth . 122.1.3 Market Size . 142.1.4 Inflation rate . 152.1.5 Exchange rate . 162.1.6 Trade Openness. 172.2 Review of Relevant Theoretical Models . 192.3 Proposed Theoretical / Conceptual Framework . 202.4 Hypothesis Development . 222.5 Conclusion . 23CHAPTER 3: METHODOLOGY3.0 Introduction . 243.1 Research Design. 243.2 Data Collection Method . 253.3 Data Processing. 253.4 Data Analysis . 263.4.1 Descriptive Analysis . 263.4.2 Correlation Analysis . 273.4.3 E-views . 273.4.4 Multiple Linear Regressions . 283.4.5 T-test Statistic . 293.4.6 F-test Statistic. 293.4.7 Diagnostic test. 303.4.7.1 Model Specification and Normality test . 303.4.7.2 Multicollinearity . 313.4.7.3 Heteroscedasticity . 323.4.7.4 Autocorrelation . 323.5 Conclusion . 33v
Determinants Influencing Foreign Direct Investment Decision in MalaysiaCHAPTER 4: DATA ANALYSIS4.0 Introduction . 344.1 Descriptive Analysis . 344.2 Correlation Analysis . 374.3 Empirical Result of Multiple Linear Regressions Model . 384.3.1 T-Statistic Test . 394.3.2 F-Statistic Test . 424.3.3 Model Specification Test . 434.3.4 Normality Test . 444.3.5 Multicollinearity . 454.3.6 Heteroscedasticity . 474.3.7 Autocorrelation . 484.4 Problem Solving. 494.4.2 Interpretation of Coefficients . 504.4.2.1 Economic Growth . 504.4.3.2 Market Size . 504.4.3.3 Inflation rate . 514.4.3.4 Exchange rate . 514.4.3.5 Trade Openness . 514.4.3.6 LAG Malaysia Foreign Direct Investment . 514.4.4 T-Statistic test for Model 1 . 524.4.5 F-Statistic Test . 534.5 Conclusion . 54CHAPTER 5: DISCUSSION, CONCLUSION AND IMPLICATIONS5.0 Introduction . 555.1 Summary of Statistical Analyses . 565.2 Discussion on Major Findings . 595.2.1 Economic Growth . 595.2.2 Market Size . 605.2.3 Inflation Rate . 615.2.4 Exchange Rate . 625.2.5 Trade Openness. 625.3 Implications of Study . 635.4 Limitations of Study . 655.5 Recommendations for Future Research . 665.6 Conclusion . 66References . 68Appendices. 79vi
Determinants Influencing Foreign Direct Investment Decision in MalaysiaLIST OF FIGURESPageFigure 1.1: Total FDI inflows in Malaysia (% of GDP): 1970 – 2015 . 3Figure 2.1: Theoretical Model . .19Figure 2.2: The Determinants of Foreign Direct Investment in Malaysia .20vii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaLIST OF TABLESPageTable 4.1: Descriptive analysis . .34Table 4.2: Correlation Analysis . .37Table 4.3: MFDI is explained by EG, INMS, INF, EX, & TO(Ordinary Least Squares) . . . 38Table 4.3.1: Ramsey RESET Test . .43Table 4.3.2: Jarque-Bera Normality Test . .44Table 4.3.3: Variance Inflation Factor (VIF) Analysis . .46Table 4.3.4: VIF value indication . .46Table 4.3.5: Heteroskedasticity Test: Breusch-Pagan-Godfrey .47Table 4.3.6: Breusch-Godfrey Serial Correlation LM Test . .48Table 4.4: MFDI is explained by EG, INMS, INF, EX, TO & LAGMFDI(Model 1) . . .49Table 4.4.1: Results of T-statistic for Model 1 . .52Table 5.1: Summary of diagnostic checking in OLS model . .56Table 5.2: Summary of statistical analysis in OLS model . .56Table 5.3: Summary of diagnostic checking in Model 1 . . 57Table 5.4: Summary of statistical analysis in Model 1 . .58viii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaLIST OF ABBREVIATIONSADFAugmented-Dickey FullerASEANAssociation of Southeast Asian NationsECMError Correction ModelEGEconomic GrowthE-viewsElectronic ViewsEXExchange RateFDFinancial DevelopmentFDIForeign Direct InvestmentFEFixed EffectsFTAFree Trade AgreementsGDPGross Domestic ProductGNPGross National ProductGROAnnual Growth RateGUIGraphical User InterfaceINFInflation RateINFInfrastructure DevelopmentJBJarque-BeraMFDIFDI Inflows in MalaysiaMNCSMultinational Companiesix
Determinants Influencing Foreign Direct Investment Decision in MalaysiaMNEMultinational EnterpriseMSMarker SizeOECDOrganisation for Economic Co-operation and DevelopmentOLSOrdinary Least SquareOPETrade OpennessOREEROfficial Real Exchange RateRERandom EffectsRERReal Exchange RateRESETRegression Equation Specification Error TestSAARCSouth Asian Association for Regional CooperationSACUSouthern Africa Customs UnionTAXCorporate Tax RateTOTrade OpennessTOLToleranceUNCMacroeconomic VolatilityVARVector Auto RegressionVIFVariance Inflation Factorx
Determinants Influencing Foreign Direct Investment Decision in MalaysiaLIST OF APPENDIXPageAppendix 1: Empirical Result of Multiple Linear Regression Model . .79Appendix 2: Statistical Result for VIF Analysis .80Appendix 2.1: Economic Growth . 80Appendix 2.2: Market Size. . . 81Appendix 2.3: Inflation Rate . . .81Appendix 2.4: Exchange Rate . . . 82Appendix 2.5: Trade Openness . . . .82Appendix 3: Model Specification Bias (Ramsey RESET Test) . .83Appendix 4: Normality Test (Jarque-Bera Test) . 84Appendix 5:Heteroscedasticity (Breusch-Pagan-Godfrey Test) . 85Appendix 6: Autocorrelation (Breusch-Godfrey Serial CorrelationLM Test) . .86Appendix 7: Empirical Result of Multiple Linear Regression Model:Model 1 . . 87Appendix 8: Model Specification Bias (Ramsey RESET Test):Model 1 . .88Appendix 9: Normality Test (Jarque-Bera Test): Model 1 . 89Appendix 10: Heteroscedasticity (Breusch-Pagan-Godfrey Test):Model 1 . 90Appendix 11: Autocorrelation (Breusch-Godfrey Serial CorrelationLM Test): Model 1 . . . .91xi
Determinants Influencing Foreign Direct Investment Decision in MalaysiaPREFACEThis research paper is submitted as a part of the requirement to fulfill forthe Bachelor of Business Administration (Hons) Banking and Finance course. Thetitle chosen for this research project is “Determinants influencing foreign directinvestment decision in Malaysia”. It revolves around the determinants of theforeign direct investment inflows in Malaysia.Foreign Direct Investment (FDI) is one of the key drivers in speeding upthe development and economic growth in Malaysia. Sound macroeconomicmanagement, presence of a well-functioning financial system and sustainedeconomic growth has made Malaysia an attractive country for FDI. Moreover,FDI plays a crucial role in Malaysia economy as it generates economic growth byincreasing capital formation through the expansion of production capacity.It is reported that the charm of Malaysia in attracting FDI had declinedeventually from 1992 until 2001. It was then increased from 2002 to 2006 butdropped significantly from 2007 to 2009. Surprisingly, FDI inflow in Malaysiaincreased dramatically in 2010. The high volatility of FDI inflows to Malaysia hasdrawn attention to the further study of the determinants of FDI inflow in Malaysia.xii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaABSTRACTForeign Direct Investment (FDI) plays a crucial role in speeding up thedevelopment and economic growth of a country. In particular, developingcountries rely heavily on FDI to promote their economy as they face capitalshortage for their development process. FDI not only brings in capitals andtechnology, but also skills into developing countries. And these ended up helpingthe countries to grow faster by satisfying the country‟s needs.The strong growth performances experienced by Malaysia economygreatly depends on the FDI. FDI generates economic growth by increasing capitalformation through the expansion of production capacity, promotion of exportgrowth and creation of employment in Malaysia. FDI inflows of Malaysia startedfluctuating from 1996 to 2010 and this high volatility of Malaysia FDI inflowsdrew the researchers‟ attention to examine the factors affecting FDI inflows inMalaysia by using the annual data from year 1970-2015. Multiple linearregressions model is applied to study the relationship between explanatoryvariables (economic growth, market size, inflation rate, exchange rate and tradeopenness) and explained variable (Malaysia FDI inflow).Empirical results show that economic growth, inflation rate, exchange rate,and trade openness are significant in determining MFDI. Conversely, market sizeis insignificant in determining MFDI. Nevertheless, there is autocorrelation inOLS model. In order to remove autocorrelation, the researchers add one periodlag of dependent variable, LAGMFDI. In the new model, the market size,exchange rate and trade openness have shown to be insignificant between MFDI.Other explanatory variables such as economic growth, inflation rate and laggedMalaysia foreign direct investment have respectively shown to be significant toMFDI.xiii
Determinants Influencing Foreign Direct Investment Decision in MalaysiaCHAPTER 1: RESEARCH OVERVIEW1.0IntroductionForeign direct investment (FDI)
Determinants Influencing Foreign Direct Investment Decision in Malaysia xii PREFACE This research paper is submitted as a part of the requirement to fulfill for the Bachelor of Business Administration (Hons) Banking and Finance course. The title chosen for this research project is “Determinants influencing foreign direct
Determinants of foreign direct investment inflows: A case of the Visegrad countries 223 1. INTRODUCTION Foreign direct investment (hereinafter also “FDI”) and its determinants is a widely discussed topic within economic literature. It is generally believed that the advantages that FDI brings to the standard of
Growth Impact and Determinants of Foreign Direct Investment into South Africa, 1956-2003 J.W.Fedderke and A.T.Romm† December 2004 Abstract The paper is concerned with the growth impact and the determinants of foreign direct investment in South Africa. Estimation is in terms of a standard spill-over model of investment, and in terms of a new
different types of investments. Similarly, the determinants of investment vary across different business types, one that led to the export of natural resources put less emphasis on the local market scale. 3. Determinants of FDI Shaver (1998) identified several elements which impact the choice of US foreign direct investment location.
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showed that the determinants factors of foreign exchange rate through foreign exchange reserve, export and import is capable of influencing which has an direct relationship and statistically significant to the foreign exchange rate. However, result shown insignificant relationship between lending interest rate and foreign exchange rate.
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A Course on Rough Paths With an introduction to regularity structures June 2014 Errata (last update: April 2015) Springer. To Waltraud and Rudolf Friz and To Xue-Mei. Preface Since its original development in the mid-nineties by Terry Lyons, culminating in the landmark paper [Lyo98], the theory of rough paths has grown into a mature and widely applicable mathematical theory, and there are by .
