Relationship between Malaysia’s economic growth and China’s outwards FDI

The present paper examines the short-run every bit good as long-term relationship between Malaysia ‘s economic growing and China ‘s outwards FDI. Besides, the determiners of China ‘s FDI flows into Malaysia, viz. Malaysia ‘s market size, exchange rate, and human capital development are besides being examined.

By using the technique of co-integration ( specifically the ARDL attack ) , an endogenous growing theoretical account is estimated for Malaysia, with the sample period from 1987 to 2009. Our consequences showed that China ‘s FDI played a important function in advancing growing of the Malayan economic system, while Malaysia ‘s trade openness and fiscal development besides have their influence on domestic economic growing in the long-term, though the former appears to be independent of Malaysia ‘s economic growing in the short-run. However, it is deserving to foreground that other than the direct part, China ‘s FDI besides stimulate Malaysia ‘s economic growing via its interaction with fiscal development and our consequences supply farther empirical grounds that this relationship is without uncertainness. Therefore, domestic absorbent capableness in reassigning the benefits embodied in China ‘s FDI outflows into higher economic growing is of import.

On the other manus, it was besides concluded that China ‘s outwards FDI into Malaysia is positively affected by market size, exchange rate, and human capital development in a statistically important mode. Meanwhile, our empirical consequences besides indicated that there is a unidirectional short-term causal consequence runs from China ‘s FDI to Malaysia ‘s economic growing.

Since China ‘s FDI has become progressively important, policies concentrating on enlarging domestic market size, beef uping the exchange rates, and human capital development are chiefly proposed. For the first instance, larger market size should have more FDI influxs compared to smaller states that have smaller market size. This is because the larger the market size, the better the chance for foreign investors to cut down entry costs and to achieve economic systems of graduated table, that is cut downing mean cost as a consequence of mass production. In this instance, the authorities is encouraged to advance cooperation on FDI policy among neighboring parts in order to obtain higher investing. Regionalism expands the size of the market, and therefore makes the part more attractive for FDI. The market size advantage of regionalism is of import for Malaya because our state is little in footings of both population and income. While for the 2nd instance, when the exchange rate is strengthened, FDI tend to lift because there is a greater rate of return in the part. States that require FDI can pull it besides by development of resources like human capital. Corporations seek out societies with a skilled, educated, and productive work force. In other words, investors progressively aim states where the quality of human capital is high. Human capital is besides a cardinal component of increasing per-worker labour productiveness. Furthermore, widespread regard for human rights facilitates the ability and enhances the chance for the host state ‘s citizens to achieve higher degrees of instruction and preparation.

By and large, current policies aimed at pulling FDI will hold to be revisited in footings of choosing the specific type of investing that is required. Governments have to stress on the economic reform policies and the displacement towards a free market which able to go on to assist the economic system to reapportion its resources expeditiously. When trade history is being liberalized, less limitations or cost will be imposed on international trade, viz. import and export. Therefore, higher importing degree of natural stuff with lower cost ( due to take down import responsibilities and competition ) enable houses to bring forth more end product in a more efficient mode, and therefore enhance productiveness and economic growing. On the other manus, greater export ( as a consequence of lower export revenue enhancement ) increases the degree of houses ‘ production and export in our state, and this will lift up houses ‘ gross or net income, which will in bend addition national income. Besides, greater export will besides lend in the decrease of current history shortages. In add-on, it is besides proposed that bettering productiveness and advanced capablenesss of the economic system ( particularly fabricating sectors ) , every bit good as strenghthening the back uping industries and establishments are of import. All these will in bend lead Malaysia to go attractive ( particularly to China ) in footings of FDI finish.

Recently, Malaysia ‘s FDI inflows from China has been bit by bit dropping yearly due to the competition from other states like Vietnam, Indonesia, India and other emerging states. They have both skilled and unskilled labour, every bit good as comparatively lower labour costs. As a consequence, Malaysia needs to heighten its production efficiency or cut down its comparatively higher labour cost in order to vie with its challengers. In the longer term, instead than its direct dependence on FDI, Malaysia should concentrate on developing new industries for their single growing and non entirely for intent of FDI influxs. If that is the instance, the industrial development in the state will be in a rapid way, which in bend will finally take to a growing in FDI influxs from China ( Jajri, 2009 ) .

Furthermore, in order to spur growing, Malaysia should non chiefly concentrate on pulling China ‘s FDI, but at the same time ignore the development of domestic substructure and installations like macroeconomic stableness, human capital development, and fiscal system development. Malaya can besides act upon the engineering alteration by reforming its absorbent capacity via farther publicities on fiscal reforms to derive sustainable economic growing and to the full utilize FDI influxs. This proposing that in order to be benefited from the positive interaction between FDI and economic development, one should liberalise the economic system while deregulating the fiscal sector, that is, a state should concentrate on schemes that promote fiscal development in the economic system.

5.2 Restrictions and recommendations for future Surveies

It is common that every research has its ain restrictions. Our survey is non an exclusion. First of all, little grade of freedom in our theoretical accounts would be a restriction. In peculiar, the grade of freedom is being earnestly exhausted due to the widely usage of lagged variables, and it left really few after the ARDL appraisals. Although the ARDL technique to cointegration is suited for little sample size surveies, the deficiency of grades of freedom might non be a desirable result as the appraisals might be hapless in footings of truth. However, there are non much work can be done in order to get the better of this restriction except fall backing to panel informations. In the field of development economic sciences, the lacking of statistical informations is non an unusual phenomenon. For our instance, limited China ‘s FDI informations ( from 1987 to 2009 merely ) might act upon our consequences or produce unwanted consequences. Harmonizing to MIDA, the bantam size of informations is because China started their undertakings in Malaysia merely from 1987 onwards.

We were besides unable to obtain sufficient sample size of China ‘s FDI outflows into Malaysia while features of FDI informations are non clarified. Future research workers are recommended to include industry features into the analysis in order to look into the impact of industry-specific factors. Analysis across industries could be conducted to place industrial forms of location distribution of China ‘s FDI.

In add-on, analyzing the comparative importance of different channels through which FDI affects economic growing in the underdeveloped economic systems versus the developed economic systems is another possible hereafter work in this country ( Ghosh & A ; Wang, 2009 ) .