1.4 Objectives of Study
The general objective of this paper is primarily to study the major factors discussed above as determinants of the FDI flows into Malaysia. The objectives of this paper are as follows:
To ascertain the significance of per capita income, GDP growth rate, gross capital formation as determinants of FDI in Malaysia.
To analysis the various factors that explain foreign direct investment inflows in Malaysia from 1978 to 2007.
CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
A number of studies have been conducted to identify the determinant of foreign direct investment (FDI). This chapter will relate about the previous study conducted by other researchers describing the sample, methodology and finding in order to give clear understanding of the issue regarding to determinant of FDI.
2.1 Previous studies on the Determinant of Foreign Direct Investment (FDI)
Aristotelous and Fountas (1996), use a cross-section and time-series approach to study the determinant of FDI I the European Union (EU). Using annual data from 1980s and 1990s, the researchers studied the FDI determinant of United States and Japanese in the EU by pooling the date by the host country. They found that the anticipation of a large market size leads to increase in the flow of FDI of those countries. The study also shows that FDI flows in the EU depend on the market growth, trade barrier, exchange rate, and gross capital formation.
In this study, the market size of host country is expected to be positively correlated to FDI flows since a larger market size is necessary to allow the achievement of economies of scale. The researchers characterized the host country’s real gross domestic product (GDP). According to the acceleration principle, the FDI will increase if the aggregate demand grows the need for the new investment increase. The authors also use the annual growth rate of GDP of the host country in order to measure the market growth.
Borensztein (1998) estimate aggregate investment equations for 69 countries over the 1960s and 1970s, and add patterns of FDI. It is shown that both gross capital formation (GCF) and economic growth will increase inward FDI. They also found that the GFCF brings with it technology which stimulates domestic productivity growth and then stimulate the positive growth of FDI. The similar conclusion made by Bosworth & Collins (1999), who suggested the positive relationship between GDP and the size of FDI. However, they found that the correlation between FDI and GDP growth is much weaker, where they found that additional 1% of GDP added to annual FDI yields 0.
