Best Journal - Macroeconomics determinants of Malaysian national competitiveness: Factors influencing Malaysia Foreign Direct Investment.

Macroeconomics determinants of Malaysian national competitiveness: Factors influencing Malaysia Foreign Direct Investment.

by

Name : Zainal Abidin bin Sait






1.0 Introduction

The main factors that influence economics growth are household, firm, finance, government, and the external factors. In a simple economics chain, household is a major source for firms in term of labor and it also becomes the major consumer for the firm’s product. Besides, household also becomes a taxpayer to the government together with the firms and the financial institutions. Government also becomes a consumer to firms and also provides household with facilities such as infrastructures and education.
In the globalization wave, economic growth depends on external factors more than internal factors especially to balance net export. In general, net export has strong positive correlation with unilateral trade and diplomatic affairs. Malaysian economics growth is strongly depending on the net export value since 1990 to 2005.
Malaysia is too small compared to China and India which are among the biggest countries in the world. The combination of China and India population makes half of the world population. So, in term of population, China and India will become the next world largest consumptions of world products. Until 2006, Malaysia is still not affected by China and India economics growth. This scenario shows that Malaysia has a very strong mechanism to resist the influence of their economics.



2.0 Literature Review

Ramli Hassan (2005), explains the pattern of Malaysian foreign direct investment (FDI). He divides FDI into two; FDI manufacturing and FDI services. He explains how Government Net Investment (GNI), gross domestic product (GDP) rate, inflation (Inf) rate, business negotiation openness (OPEN), exchange (EX) rate, and Malaysian Lending rate (Ir-libor) have a strong correlation with FDI in Malaysia since 1980 to 2005.
Ed Watkins (2006), explains how investors in services industries especially hotels used to choose the right country for their investment. Ed Watkins explains that the major factor is domestic market segment and he divides the market segment into economy, mid-market, upscale, and luxury. So, Ed Watkins also believes that GDP rate, EX rate, and Inf rate are the factors for investors to invest in.
Riccardo Faini (2006), in his journal, Fiscal Policy and Interest Rates in Europe, explains how European countries use their fiscal policy to control inflation and GDP. The objective of this action is to attract more multinational firms to invest in Europe. Riccardo Faini believes that the national budget can be an effective tool to control interest rate and interest rate will balance the inflation rate.Furthermore, Riccardo Faini also explains how inflation rate will determine FDI in Europe.
Jurgen G. Backhaus and Richard E. Wagner (2006), explain how public financial policy controls the interest rate in order to attract more investors. They show how government controls base lending rate to make sure of positive GDP and low inflation rate to attract more investors. Hence, Jurgen G. Backhaus and Richard E. Wagner believe that GDP rate and inflation rate have strong correlation with FDI.

3.0 Research Problem

This research problem is to find the factors influencing Malaysian FDI from 1985 to 2005. The factors selected are factors that can be controlled by government policies such as fiscal policy and monetary policy.

4.0 Research Objective

The objectives of this research are to find the association between Malaysian FDI Manufacturing and FDI Services with:
a. Government Net Investment (GNI),
b. Gross domestic product (GDP) rate,
c. inflation (Inf) rate,
d. business negotiation openness (OPEN),
e. exchange (EX) rate, and
f. Malaysian Lending rate (Ir-libor)






5.0 Research Framework and Methodology

The research framework is as below.
DEPENDENT VARIABLES

FDI Manufacturing
FDI Services
INDEPENDENT VARIABLES

a. (GNI),
b. GDP
c. Inf
d. OPEN
e. EX
f. Ir-libor













The methodology of this research is quantitative by using secondary data. The data is provided by Bank Negara Malaysia dated from 1985 to 2005. The analysis is by using multiple regression and ANOVA one way. The software, MINITAB is used to find the strength of the correlation between dependent variables and independent variables.
6.0 Analysis and Finding

Analysis

FDI - Manufacturing

The regression equation is
FDI M = 11.3 - 0.0429 GNI + 0.218 GDP Rate + 0.160 Ir-Libor + 0.154 Inflation
+ 2.20 Open Rate - 2.36 Exchange


Predictor Coef SE Coef T P
Constant 11.314 8.300 1.36 0.194
GNI -0.04294 0.05005 -0.86 0.405
GDP Rate 0.2175 0.1366 1.59 0.134
Ir-Libor 0.1597 0.1985 0.80 0.435
Inflation 0.1545 0.1249 1.24 0.236
Open Rate 2.200 3.708 0.59 0.562
Exchange -2.356 1.322 -1.78 0.096


S = 1.54013 R-Sq = 64.2% R-Sq(adj) = 48.8%



Analysis of Variance

Source DF SS MS F P
Regression 6 59.468 9.911 4.18 0.013
Residual Error 14 33.208 2.372
Total 20 92.676


Source DF Seq SS
GNI 1 21.190
GDP Rate 1 22.059
Ir-Libor 1 0.355
Inflation 1 1.122
Open Rate 1 7.208
Exchange 1 7.534



FDI Services

The regression equation is
FDI_1 = 1.16 + 0.0152 GNI + 0.0446 GDP Rate - 0.0062 Ir-Libor - 0.0211 Inflation
+ 0.300 Open Rate - 0.432 Exchange


Predictor Coef SE Coef T P
Constant 1.160 1.527 0.76 0.460
GNI 0.015174 0.009207 1.65 0.122
GDP Rate 0.04459 0.02513 1.77 0.098
Ir-Libor -0.00620 0.03652 -0.17 0.868
Inflation -0.02109 0.02297 -0.92 0.374
Open Rate 0.3004 0.6821 0.44 0.666
Exchange -0.4324 0.2432 -1.78 0.097


S = 0.283341 R-Sq = 89.7% R-Sq(adj) = 85.2%


Analysis of Variance

Source DF SS MS F P
Regression 6 9.7599 1.6267 20.26 0.000
Residual Error 14 1.1240 0.0803
Total 20 10.8839


Source DF Seq SS
GNI 1 8.2067
GDP Rate 1 0.8179
Ir-Libor 1 0.0917
Inflation 1 0.1937
Open Rate 1 0.1962
Exchange 1 0.2538


Unusual Observations

Obs GNI FDI_1 Fit SE Fit Residual St Resid
12 83.0 2.0600 1.5133 0.1321 0.5467 2.18R

R denotes an observation with a large standardized residual.
Finding

In manufacturing, there is a negative correlation between FDI with Government Net Investment (-0.249) and Exchange rate (-0.0429). But it shows a positive correlation between FDI and Gross domestic product (GDP) rate (0.218), inflation (Inf) rate (0.154), business negotiation openness (OPEN) (2.20), and Malaysian Lending rate (Ir-libor) (0.160). From that equation, it shows that Malaysia needs the minimum USD 11.3 billion FDI in manufacturing a year. Malaysian FDI in manufacturing is 64.2% depend on the independent variables. The analysis also shows that all independent variables are significant to the dependent variables (T > P ). The ANOVA shows that every independent variable does not depend on each other (F > P).
In services there is negative correlation between FDI and Malaysian Lending rate (Ir-libor) (-0.0062), Inflation (Inf) rate(-0.0211), and Exchange rate (-0.432). But it shows a positive correlation between FDI and Gross domestic product (GDP) rate (0.0446), business negotiation openness (OPEN) (0.3), and Government Net Investment (0.0152). From that equation it shows that Malaysia needs the minimum of USD 1.16 billion FDI in services a year. Malaysian FDI in services is 89.7% depend on the independent variables. The analysis also shows that all independent variables are significant to the dependent variables (T > P ). The ANOVA shows that every independent variable does not depend on each other (F > P).



7.0 Discussion

Findings Summary

Independent
Variables
FDI
Manufacturing
FDI
Services
Suggestion
a. GNI,
b. GDP
c. Inf
d. OPEN
e. EX
f. Ir-libor

-0.0429
0.218
0.154
2.20
-2.36
0.16
0.0152
0.0446
-0.0211
0.3
-0.432
-0.0062
A
B
C
D
E
F
Constant
11.3
1.16

R-squares
64.2
89.7


Suggestion A

Malaysia needs to focus on the types of FDI. If Malaysia wants to increase the volume of FDI Manufacturing, Malaysia has to decrease the volume of government net investments. If Malaysia wants to increase the volume of FDI Services, Malaysia needs to increase the volume of government net investments.
Suggestions B and D

Malaysia needs to increase GDP rate and needs to enhance the negotiation process to increase the volume of FDI manufacturing and services.
Suggestions C and F
Malaysia needs to focus on the types of FDI. If Malaysia wants to increase the volume of FDI Manufacturing, Malaysia has to increase the inflation rate and the base lending rate. If Malaysia wants to increase the volume of FDI Services, Malaysia needs to decrease the inflation rate and the base lending rate.


Suggestion E
Malaysia needs to decrease the exchange rate to increase the volume of FDI manufacturing and FDI services.
Limitations of the research
This research is using a secondary data dated from 1985 to 2005. So, the findings in this research will not take into consideration all the economics influences before 1985 and after 2005. The research findings also depend on the validity and the variability from the sources of the data.

8.0 Conclusion

The development of macroeconomics is one of the major breakthroughs of 21st century economics. The external factors lead to a much better understanding of how to combat periodic economic crisis and how to stimulate long term economics growth.
Macroeconomics issues dominated the Malaysia political and economics agenda since 1957. Malaysia had changed the economics patterns from agriculture to commodity and then to industrial sector. To enhance the industrial sector, Malaysia needs multinational firms to invest in the country. In 1985, Malaysia started to develop the heavy industry. In 1997, Malaysia started to develop its offshore finance territory in Labuan. By doing so, Malaysia started to attract the big investors both in manufacturing and services. Until 2005, Malaysia still needed USD12.6 billion FDI. So, today Malaysia needs to focus on the right FDI; manufacturing or services.