This study has examined the causal relationships between trade openness and foreign direct investment (FDI) in Malaysia using annual time series data. Throughout this study, the exchange rate and economic growth acted as the control variables. Data were collected from 1977 to 2015 and were analysed using the unit root test and the Granger causality test. The autoregressive model was employed to remove autocorrelation from rising in this model. The result of the Granger causality test indicated that there was a unidirectional causality between trade openness and FDI. It also showed that trade openness has a positive and significant impact on the FDI. All independent variables, namely, exchange rate, economic growth and trade openness, were significant in explaining FDI inflows in Malaysia. Therefore, this study has concluded that a good combination of these independent variables would attract more inflows of FDI into Malaysia. In addition, the Malaysian government has to implement policies that favour trade openness, such as reducing trade barriers, to encourage more FDI inflows into Malaysia to promote higher economic growth.
Baharom, A. H., Habibullah, M. S., & Royfaizal, R. C. (2008). The relationship between trade openness, foreign direct investment and growth: case of Malaysia. MPRA paper no. 11928.
Blomström, M., & Kokko, A. (2002). FDI and Human Capital: A Research Agenda. OECD Development Centre Working Papers 195, OECD Publishing.
Damodaran, R. (2017), Malaysia has strong FDI prospects, says economist, New Straits Times, Kuala Lumpur.
Department of Statistics Malaysia. (2015). Retrieved from http://www.dosm.gov.my/
Granger C. W. J. (1988). Some recent development in a concept of causality. Journal of Econometrics, 39(1-2), 199-211.
Gorodnichenko, Y., Svejnar, J., & Terrell, K. (2014). When Does FDI Have Positive Spillovers? Evidence from 17 Transition Market Economies. Journal of Comparative Economics, 42(4), 954-969.
Gujarati, D. N., & Porter, D. C. (2010). Essentials of Econometrics. New York: McGraw Hill International Edition.
Kakar, Z. K., & Khilji, B. A. (2011). Impact of FDI and trade openness on economic growth: a comparative study of Pakistan and Malaysia. Theoretical and Applied Economics, 18(11), 53-58.
MIDA. (2016). Malaysia Investment Development Authority. Retrieved from: http://www.mida.gov.my/
Pesaran, M. H., Shin, Y., & Smith, R. J. (2010). Bounds Testing Approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Sekaran, U., & Bougie, R. (2013). Research Methods for Business: A skill building approaches. UK: John Wiley & Sons Ltd.
Sharma, R., & Kaur, M. (2013). Causal Links between Foreign Direct Investments and Trade: A Comparative. Study of India and China. Eurasian Journal of Business and Economics, 6(11), 75-91.
Supriya, S. (2016), Malaysia’s 2016 FDI inflow seen ‘stable’, The Edge Financial Daily, Kuala Lumpur.
Yusoff, M., & Nuh, R. (2015). Foreign Direct Investment, Trade Openness and Economic Growth. Empirical Evidence from Thailand. Foreign Trade Review, 50(2), 73-84.
In-Text Citation: (Sazali, Bakar, Huey, & Ghazali, 2018)
To Cite this Article: Sazali, S. B. M., Bakar, M. A. B. A., Huey, A. Y., & Ghazali, M. S. Bin. (2018). Causal Links between Trade Openness and Foreign Direct Investment in Malaysia. International Journal of Academic Research in Business and Social Sciences, 8(1), 930–937.
Copyright: © 2018 The Author(s)
Published by Human Resource Management Academic Research Society (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode
