LINKAGES BETWEEN FOREIGN DIRECT INVESTMENT, DOMESTIC INVESTMENT AND ECONOMIC GROWTH IN MALAYSIA

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1 PROSIDING PERKEM V, JILID 2 (2010) ISSN: X LINKAGES BETWEEN FOREIGN DIRECT INVESTMENT, DOMESTIC INVESTMENT AND ECONOMIC GROWTH IN MALAYSIA LEAN HOOI HOOI, TAN BEE WAH ABSTRACT This paper examines he linkages beween foreign direc invesmen (FDI), domesic invesmen and economic growh in Malaysia for he period of Specifically, we would like o find ou he impac of FDI and domesic invesmen on economic growh respecively and wheher FDI crowds in or crowds ou domesic invesmen. The objecives of his sudy can be performed using he following ess. Firs, he saionariy for each series is checked wih he convenional Augmened Dickey-Fuller and Phillips-Perron uni roo ess. Then, he Johansen-Juselius mulivariae coinegraion es in vecor auoregressive sysem is used o deec he poenial long-run equilibrium relaionship among he variables. Finally, he Granger causaliy es is implemened o examine he causal relaionship beween FDI, domesic invesmen and economic growh. I is expeced ha he empirical analysis and findings would show some insighful implicaions o he policy makers and marke players. Furhermore, he recen announced Tenh Malaysia Plan aaches wih an imporan mission of leading he counry owards a highincome naion. Privae secor is in a criical posiion of driving his new growh aspiraion. The quesion of aracing invesmen including FDI and domesic invesmen is foreseen o be a ho debae opic again despie numerous previous sudies on he subjec. Keywords: Causaliy; Coinegraion, Invesmen; Economic Growh INTRODUCTION For more han a cenury, foreign direc invesmen (FDI) has conribued significanly o he economic growh of Malaysia. Debae on he relaionship beween FDI and economic growh is ample and no new in he lieraure (e.g. Jackman, 1982; de Mello, 1997; de Mello, 1999; Feridun, 2004; Duasa, 2007; Pradhan, 2009). Many sudies found ha FDI and economic growh are closely relaed. However, Wong and Jomo (2005) argued ha he role of FDI in simulaing a hos counry s economic growh is no consisen in he afermah of Asian financial crisis. Neverheless, Duasa (2007) and Pradhan (2009) suppored he view ha no srong relaionship beween FDI and economic growh in Malaysia. They also suggesed ha he inflow of FDI conribues o less volailiy of economic growh. Hence, i is noed ha he exising empirical sudies focused on analyzing he broad relaionship beween FDI and economic growh in he case of Malaysia. On he oher hand, empirical sudies of domesic invesmen (DI) are resriced in he hos counry. Hihero, mos of he previous empirical sudies in Malaysia focused on FDI-led growh hypohesis raher han he DI-led growh hypohesis. Firebaugh (1992) suggesed ha DI is more likely o build relaionship wihin he domesic indusries. Apar from ha, DI plays a dual role in he economy as par of aggregae demand and enlarges a naion s sock of producive asses. Thus, i is believed ha DI is an imporan facor in accouning for business cycles and he policy makers shall consider DI in reforming he invesmen policy. For his reason, he rehabiliaed research s aenion is shifed o empirically analyze he dynamic linkages beween FDI and DI in influencing he economic growh (e.g. Choe, 2003; Razin, 2003; Kim and Seo, 2003; Hech a al., 2004; Apergis e al., 2006; Tang e al., 2008; Adams, 2009; Merican, 2009). They found he exisence of he long run relaionship among FDI, DI and economic growh bu he direcion beween he causal relaionships among he variables remains vague. For example, Choe (2003), Kim and Seo (2003), Hech e al. (2004) and Apergis e al. (2006) found bilaeral causal relaionship beween FDI and economic growh, and economic growh also causes DI. In conras, Tang e al. (2008) deermined ha Persidangan Kebangsaan Ekonomi Malaysia ke V (PERKEM V), Inovasi dan Perumbuhan Ekonomi, Por Dickson, Negeri Sembilan, Okober 2010

2 Prosiding Persidangan Kebangsaan Ekonomi Malaysia Ke V here is only one way causaliy from FDI o DI and FDI o GDP in China, while he causal link beween DI and economic growh is bilaeral. Furhermore, he linkage beween FDI and DI raises a quesion: does FDI crowd in or crowd ou DI? Agosin and Machado (2005) claimed ha if FDI crowds ou DI, he increase in oal invesmen is smaller han he increase in FDI. If here is a crowding in, he increase in oal invesmen will be more han he increase in FDI. Ineresingly, Kim and Seo (2003) showed ha an expansion in FDI neiher crowds in nor crowds ou he DI in Souh Korea. However, Wang (2008) found ha conemporaneous FDI crowds ou DI in he developing counries. Empirical findings of FDI crowds in and/or crowds ou DI from previous sudies sugges ha he effecs are no on he scale and need furher analysis o prove he complemenary and subsiuion effecs beween FDI and DI. Specifically, his paper seeks o conribue on counry-specific sudy for he dynamic linkages among FDI, DI and economic growh in Malaysia. Mos sudies in he lieraure (e.g. Choe, 2003; Hech e al., 2004; Apergis e al., 2006; Wang, 2008; Adams, 2009) employed cross-secional or panel daa o invesigae he relaionship beween FDI, DI and economic growh ha likely o suffer from problem of daa comparabiliy and heerogeneiy. Adams (2009) used panel daa analysis o conduc a sudy of FDI and DI in 42 Sub-Saharan Africa counries. The auhor found ha FDI did no have posiive impac on economic growh due o he low level of developmen in Sub-Saharan Africa bu DI revealed posiive and significan correlaion wih economic growh. Adams (2009) also revealed a ne crowd ou effec of FDI on DI as FDI is negaively correlaed wih DI. On he oher hand, Hech e al. (2004) explored ha mos of he DI has significan impac on FDI while he impac of FDI inflow owards DI is weaker among he 64 esimaion counries. In addiion, Choe (2003) found ha he causal relaionship is bilaeral beween FDI and economic growh; while only unilaeral causal relaionship running from economic growh o DI in he 80 observaion counries. Noneheless, he resuls provide evidence ha he causal relaionship beween FDI and DI remains conroversial. To he core, here are limied sudies which explicily analyze he relaionships beween FDI, DI and economic growh in Malaysia (e.g. Ang, 2009 and Merican, 2009). Ang (2009) examined he long-run relaionship beween privae DI, public invesmen and FDI in Malaysia for he period of The resuls show ha public invesmen, privae DI and FDI are coinegraing in he long-run. Moreover, boh FDI and public invesmen is saisically significan wih privae DI a a posiive sign. Merican (2009) examined he linkages beween FDI, DI and economic growh in four ASEAN members namely, Indonesia, Malaysia, Thailand and Philippines over he period of The auhor found ha FDI are beer han DI in promoing economic growh of Malaysia. Neverheless, boh of hese sudies did no es he causaliy beween he variables which is conradic o he earlier sudies ha assumed a leas an unilaeral causal relaionship beween FDI and economic growh (Zhang, 2001; Feridun, 2004; Pradhan, 2009) or DI and economic growh (Liwan and Lau, 2007; Balcioglu and Vural, 2009). Obviously, he causal relaionship beween FDI, DI and economic growh is sill full of misiness. Agains his backdrop, he causal relaionship among he variables for a counry specific analysis is very imporan for policy makers o design he policy. This sudy aemps o generae a beer undersanding of he dynamic linkages beween FDI, DI and economic growh in Malaysia over he period of 1970 o Specifically, we would like o find ou he impac of FDI and DI on economic growh respecively. Furhermore, his sudy assesses o find ou he effec of FDI on DI in order o examine wheher FDI crowds in or crowds ou DI. The objecives of his sudy can be performed by he following analyses. Firs, we employ he convenional Augmened Dickey- Fuller (ADF) and Phillips-Perron (PP) uni roo ess o check he saionariy of each series. Second, he Johansen and Juselius (1990) mulivariae coinegraion es will be used o deec he poenial long-run relaionship among he variables. Third, we normalize he coinegraing vecor by DI o find ou he crowding effec of FDI o DI. Finally, he Granger causaliy es will be implemened o examine he causal relaionship beween FDI, DI and economic growh. The res of his paper is organized as follows. Secion 2 overviews he FDI, DI and economic growh in Malaysia. Secion 3 discusses daa, model specificaion and mehodology used in his sudy. The empirical findings are repored in Secion 4. Finally, he conclusion and policy recommendaions are presened in Secion 5. OVERVIEW OF MALAYSIA S FDI, DI AND ECONOMIC GROWTH

3 50 Lean Hooi Hooi, Tan Bee Wah Since he independence in 1957, Malaysia experienced a solid growh wih an average annual rae of 6 per cen during he period of 1970 o GDP growh recorded nearly 0 per cen during he economic depression in he middle of 1980s. Then, he counry recovered from he crisis in mid-1980s and achieved an average GDP growh rae of a leas 9 per cen during 1990 o However, he GDP growh rae declined o -7 per cen during he Asian financial crisis. Since hen, he economic growh showed a slow process of recovery and mainained inconsisen, wih an annual growh rae of 5 per cen from 2002 o Figure 1 presens he ime series plo of he real GDP growh rae in Malaysia for he period of 1970 o DI accouned for abou 30 per cen of GDP from 1970s o 1980s in average. The share declined o per cen before picking up again in he 1990s. On he whole, DI dominaed FDI wih he share ino GDP for more han half cenury prior o he 2007 global financial/economic crisis. Besides DI, FDI inflow is also a dominan facor o spur he economic growh of Malaysia as i mainains an open policy oward invesmen and rade since According o he inward FDI Poenial Index 1 (UNCTAD, 2004) and Ang (2009), Malaysia was ranked he firs among he Asian developing counries for receiving FDI in Thus, he imporance of FDI o economic developmen is herefore undeniable. In erm of global compeiive landscape, Malaysia faces greaer compeiion han ever (Tenh Malaysia Plan 2 ). Thus, he policy enhancemen in consolidae he FDI and DI are needed in order o drive he economic growh. The DI and FDI are expressed as he raio of GDP wih five years average in Table 1. In 1970 o 1974, he shares of DI and FDI o GDP were per cen and 2.99 per cen respecively. The number surged o per cen and 7.18 per cen in 1990 o 1994, making i he highes hroughou he sample period. In average, he DI and FDI conribued per cen and 3.85 per cen respecively o GDP over he whole sample periods. On he oher hand, he proporional shares of FDI o DI recorded a per cen from he earlier 1970s and slummed ino he lower share of 8.65 per cen in However, he shares of FDI o DI increased dramaically o per cen in he following five years. On he whole, he average raio of FDI o DI is per cen from 1970 o DATA, MODEL SPECIFICATION AND METHODS Daa and Model Specificaion The daa se consiss of annual ime series daa over a fory year period from 1970 o 2009, which is obained from Inernaional Financial Saisics (IFS) and World Bank. Economic growh is measured by real GDP a year 2000 consan price, DI is proxy by real gross fixed capial formaion (GFCF) 4, and FDI is esimaed using ne FDI inflows. All variables are measured in Ringgi Malaysia (RM) in million. All he variables are ransformed ino naural logarihmic form for he usual saisical reasons before he analysis. The esimaed model can be expressed in equaion (1) below. lny ln FDI ln DI (1) The inward FDI Poenial Index is shown for hree-year period o offse annual flucuaions in he daa. The index covers 141 economies for as much of he period as he daa permi. However, some economies in ransiion could no be ranked in he early years for lack of daa or because hey did no exis as a separae counry. The index excludes ax havens, which for ax raher han producive reasons end o have massive FDI inflows in relaion o heir economic size. 2 Malaysia governmen allocaed RM230 billion for developmen expendiure under he Tenh Malaysia Plan. Economic secor received 55% of he oal allocaion. To achieve he goal of 6 per cen per annum growh rae, he Malaysian Invesmen Developmen Auhoriy has been corporaized and rebranded o leap he invesmen aciviies. 3 This aggressive rend became incoheren due o he economic downurn in 1980s. 4 The gross fixed capial formaion (GFCF) does no measure he oal invesmen as all kinds of financial asses are excluded. GFCF included land improvemens; plan, machinery, and equipmen purchases; and he consrucion of roads, railway, privae residenial dwellings, commercial and indusrial buildings ec.

4 Prosiding Persidangan Kebangsaan Ekonomi Malaysia Ke V Y is real GDP, ln FDI is ne FDI inflows and ln where ln and is he error erms. DI is he DI, 0 is he consan parameer METHODOLOGY We begin by employing he augmened Dickey-Fuller (ADF) (Dickey and Fuller, 1981) and Phillips-Perron (PP) (Phillips and Perron, 1988) uni roo ess o check he saionariy properies of each variable in order o avoid any spurious regression. Then, he long-run equilibrium relaionship beween he hree variables is esed by Johansen s mulivariae coinegraion procedure (Johansen, 1988; Johansen and Juselius, 1990). In order o examine he Johansen s coinegraion approach, he vecor auoregressive (VAR) model is esimaed: k 1 Y Y Y u 1 i i i 1 where is he firs difference operaor, Y is a vecor of he hree endogenous variables ln Y,ln FDI,ln DI. is a marix of VAR parameers for lag i and is a coefficien marix which conain informaion abou he long run relaionship beween variables in he vecor. If he variables are coinegraed, he coinegraing rank, r, is given as ', where is he marix of parameers denoing he speed of convergence o he long-run equilibrium and represens he marix of parameers of he coinegraing vecor. Johansen-Juselius derived race es ( race ) and maximum eigenvalues es ( max ) for esing he numbers of coinegraing rank in he sysem. If he variables are coinegraed, an error correcion erm should be included ino he vecor error correcion model (VECM) 5 below o examine he causaliy beween he variables: k k k lny lny ln FDI ln DI EC 1 1i i 2i i 3i i i 1 i 1 i 1 k k k ln FDI lny ln FDI ln DI EC 2 1i i 2i i 3i i i 1 i 1 i 1 k k k ln DI lny ln FDI ln DI EC 3 1i i 1i i 1i i i 1 i 1 i 1 From he equaions above, is he firs difference operaor and he residuals i are assumed o be normally disribued and whie noise. EC 1 is he one period lagged error correcion erm derives from he coinegraing equaion 6. The error correcion erm will delay he speed of shor-run adjusmen oward 5 According o Engle and Granger (1987), if he variables are coinegraed, Granger causaliy es wihin he firs difference VAR model will be misleading. Therefore, an error correcion erm should be included ino he VECM model. 6 This erm mus be included o avoid misspecificaion and omission of imporan consrains and will be excluded if he variables are no coinegraed.

5 52 Lean Hooi Hooi, Tan Bee Wah he long-run equilibrium. The significance of he EC 1 erm represens he long-run causaliy, while he join F-ess on he differenced explanaory variables depic he shor-run causaliy. EMPIRICAL FINDINGS The resuls of ADF and PP uni roo ess in Table 2 indicae ha boh ess canno rejec he null hypohesis in level bu i is rejeced a he firs differenced. Hence, we conclude ha all variables are I(1) 7. Given ha he variables are I(1), we proceed o es he long-run equilibrium relaionship wih he mulivariae Johansen-Juselius coinegraion es. In order o specify he model, he Akaike s informaion crierion (AIC) saisic suggess ha hree year is he opimal lag lengh in his VAR sysem. Table 3 Panel A summarizes he resuls of likelihood raio ess for coinegraion. Amusingly, boh he race and maximum eigenvalues saisics indicae ha he null hypohesis of zero coinegraion is rejeced a he 1 per cen significan level. Hence, we conclude he exisence of a leas one coinegraion relaionship among he variables. As he variables are coinegraed and he ineres of his sudy is o evaluae he response of real oupu on FDI and DI respecively, we normalized he coefficien of lny o 1 o obain he long-run coefficiens of lny wih respec o FDI and DI. The long-run coefficiens are repored in Table 2 Panel B. I is shown ha ln FDI is posiively relaed o lny bu ln DI is in a reverse direcion. Conversely, he coefficiens of boh variables are saisically significan a he 1 per cen level. This resul infers ha he real oupu will increase in he long-run if FDI increases. FDI may conribue o he economic growh hrough is impac on capial sock, marke compeiion and echnology ransfer o he local firms in Malaysia. In conras, increase of DI will depreciae GDP growh. This resul alhough conradics wih Tang e al. (2008) and Merican (2009) bu i is consisen wih Elboiashi e al. (2009). The conradicion may be due o differen framework and sample period used for he invesigaion. According o Elboiashi e al. (2009), here may be an offse effec beween FDI and DI in he counry. Boh local and foreign firms are compeing for he human capial and scarce producion facors. Foreign firms which are more producive and efficien will be he winner. Neverheless, by normalizing he coefficien of DI o 1, we find ha FDI is posiively significan a 1% level wih he coefficien of In oher words, a 1 per cen increase in FDI will lead o 1.06 per cen increase in DI. Therefore, we can verify ha FDI crowds in DI in Malaysia. This finding is in line wih Ang (2009). In view of he fac ha he series are coinegraed, we proceed o deermine he direcion of causaliy wihin he VECM framework. The resuls of boh long-run and shor-run Granger causaliy ess are presened in Table 4. For he long-run Granger causaliy, we find ha he one period lagged error correcion erm has a negaive sign bu i only saisically significan when FDI as he dependen variable. This infers ha FDI has causaliy relaionship wih DI and economic growh in he long-run. For he shorrun causaliy analysis, we find ha only unilaeral Granger causaliy running from GDP o FDI and from DI o FDI. This resul suggess ha he foreign invesors are concerned abou he economic growh and he local invesmen senimen o make heir invesmen decision in Malaysia. CONCLUSION AND POLICY RECOMMENDATIONS This paper promps o access he dynamic linkages beween FDI, DI and economic growh in Malaysia from 1970 o The empirical resuls of his sudy can be summarized as follows. Firs, he FDI, DI and economic growh are coinegraed in he long run. Second, FDI has posiive impac o he economic growh while DI is negaively affecing he economic growh in he long-run. Third, an increase of FDI will bring posiive impac o he DI. In oher words, FDI crowds in DI and here appears complemenary effec 7 Nelson and Plosser (1982) indicaed ha mos of he macroeconomic variables are no saionary a level bu i will saionary afer he firs differencing.

6 Prosiding Persidangan Kebangsaan Ekonomi Malaysia Ke V from FDI o DI. Forh, here is one way causal relaionship from DI and economic growh o FDI respecively in he shor-run. We suppor he view ha high economic growh will arac FDI inflow in Malaysia. DI is also an imporan facor in aracing FDI in he shor-run. Wih he crowd in effec of FDI on DI, he expansion in FDI inflows may be associaed wih an incredible boos in DI, and boh FDI and DI can collaborae hemselves for he developmen in he counry. Therefore, i is ime o review he invesmen policy for encouraging DI besides FDI. Facing he high compeiion from he neighbouring counries in aracing FDI, he policy maker shall provide a conducive environmen o local invesors. Domesic promoions and aracive packages such as axes incenives, finance faciliies, reduce he ransacion coss and improve he delivery sysem by cuing bureaucracy and corrupion can be launched. The Minisry of Inernaional Trade and Indusry has argeed DI o make up 40 per cen of he counry s aggregae invesmen in year On he oher hand, Malaysia is en roue o improve he qualiy of reaining and aracing FDI inflows in order o woo he FDI afer he recen global financial/economic crisis. As proposed in he Tenh Malaysia Plan, iniiaives such as benchmarking Malaysia s araciveness, empowering Malaysian Invesmen Developmen Auhoriy o arac invesmen and invesing in alen recruimen can be underaken. In limiaion, he exac ypes of DI and inward FDI ha will conribue mos o he oupu growh is beyond he scope of his paper. This migh be an ineresing issue for fuure research. Moreover, he proxy variable of DI and he decomposiion of DI o privae and public funds may give a clearer picure of is impac in he counry. REFERENCES Adam, S. (2009) Foreign direc invesmen, domesic invesmen and economic growh in Sub-Saharan Africa. Journal of Policy Modeling, 31(6), pp Agosin, M.R. and Machado, R. (2005) Foreign invesmen in developing counries: does i crowd in domesic invesmen? Oxford Developmen Sudies, 33(2), pp Ang, L.B. (2009) Do public invesmen and FDI crowd in or crowd ou privae domesic invesmen in Malaysia? Applied Economics, 41(7), pp Apergis, N., Karakilidis, C.P. and Tabakis, N.M. (2006) Dynamic linkages beween FDI inflows and domesic invesmen: a panel coinegraion approach. Alanic Economic Journal, 34, pp Balcioglu, H.B. and Vural, K. (2009) Comparison of macroeconomic performance of seleced Asian counries. An economeric analysis of China economic growh and policy implicaions. Theoreical and Applied Economics, Sepember 2009, pp Choe, J.I. (2003) Do foreign direc invesmen and gross domesic invesmen promoe economic growh? Review of Developmen Economics, 7(1), pp De Mello, L.R. (1997) Foreign direc invesmen in developing counries and growh: A selecive survey. Journal of Developmen Sudies, 34(1), pp De Mello, J.L.R. (1999) Foreign direc invesmen-led growh: evidence from ime series and panel daa. Oxford Economic Papers, 51(1), pp Dickey, D.A. and Fuller, W.A. (1981) Likelihood raio saisics for auoregressive ime series wih a uni roo. Economerica, 49(4), pp Duasa, J. (2007) Malaysian foreign direc invesmen and growh: does sabiliy maer? Journal of Economic Cooperaion, 28(2), pp Economic Planning Uni, (2010) Tenh Malaysia Plan , Prime Miniser s Deparmen, Purajaya, Malaysia. Elboiashi, H., Noorbakhsh, F., Paloni, A. and Azemar, C. (2009) The causal relaionships beween foreign direc invesmen (FDI), domesic invesmen (DI) and economic growh (GDP) in Norh African non-oil producing counries: empirical evidence from coinegraion analysis. Advances in Managemen, 2(11), pp Engle, R.F. and Granger, C.W.J. (1987) Co-inegraion and error correcion: Represenaion, esimaion, and esing. Economerica, 55(2), pp Firebaugh, G. (1992) Growh effecs of foreign and domesic invesmen. American Journal of Sociology, 98(1), pp

7 54 Lean Hooi Hooi, Tan Bee Wah Feridun, M. (2004) Foreign direc invesmen and economic growh: a causaliy analysis for Cyprus, Journal of Applied Sciences, 4(4), pp Hech, Y., Razin, A. and Shinar, N.G. (2004) Ineracion beween capial inflows and domesic invesmen : Israel and developing economies. Israel Economic Review, 2(2), pp Jackman, R.W. (1982) Dependence on foreign invesmen and economic growh in he Third World. World Poliics, 34(2), pp Johansen, S. (1988). Saisical analysis of coinegraing vecors. Journal of Economic Dynamics and Conrol, 12(2-3), pp Johansen, S. and Juselius, K. (1990) Maximum likelihood esimaion and inference on coinegraion wih applicaions o he demand for money. Oxford Bullein of Economics and Saisics, 52(2), pp Kim, D.D-K. and Seo, J.S. (2003) Does FDI inflow crowd ou domesic invesmen in Korea? Journal of Economic Sudies, 30(6), pp Liwan, A. and Lau, E. (2007) Managing growh: The role of expor, inflaion and invesmen in hree ASEAN neighbouring counries. ICFAI Journal of Managerial Economics, 5(4), pp Merican, Y. (2009) Foreign direc invesmen and growh in ASEAN-4 naions. Inernaional Journal of Business and Managemen, 4(5), pp Nelson, C.R. and Plosser, C.R. (1982) Trends and random walks in macroeconomic ime series: some evidence and implicaions. Journal of Moneary Economics, 10(2), pp Oserwald-Lenum, M. (1992) A noe wih quaniies of he asympoic disribuion if he maximum likelihood coinegraion rank es saisics, Oxford Bullein of Economics and Saisics, 54(3), pp Phillips, P.C.B. and P. Perron (1988) Tesing for a uni roo in ime series regression. Biomerika, 75(2), pp Pradhan, R.P. (2009) The FDI-led growh hypohesis in ASEAN-5 counries: evidence from coinegraed panel analysis. Inernaional Journal of Business and Managemen, 4(12), pp Razin, A. (2003) FDI flows and domesic invesmen: overview. CESifo Economic Sudies, 49(3), pp Tang, S., Selvanahan, E.A. and Selvanahan, S. (2008) Foreign direc invesmen, domesic invesmen, and economic growh in China. World Economy, 31(10), pp UNCTAD (2004) World Invesmen Repor Unied Naions, New York. Wang, M. (2008) Foreign direc invesmen and domesic invesmen in he hos counry: evidence from panel sudy. Applied Economics, ifirs. Wong, H.K. and Jomo, K.S. (2005) Before he sorm: The impac of foreign capial inflows on he Malaysian economy, Journal of he Asian Pacific Economy, 10(1), pp Zhang, K.H. (2001) Does foreign direc invesmen promoing economic growh? Evidence from Eas Asia and Lain America. Conemporary Economic Policy, 19(2), pp

8 Prosiding Persidangan Kebangsaan Ekonomi Malaysia Ke V FIGURE 1: Annual growh raes of GDP TABLE 1: Average raio of DI o GDP, FDI o GDP and FDI o DI (in percenage) Year DI/GDP FDI/GDP FDI/DI

9 56 Lean Hooi Hooi, Tan Bee Wah TABLE 2: The resuls of uni roo ess Variables Tes saisics ADF PP lny (0) (1) lny (0)*** (1)*** ln FDI (0) (1) ln FDI (0)*** (1)*** ln DI (1) (1)* ln DI (0)*** (1)*** Noe: The aserisks ***, ** and * denoe he significance a 1, 5 and 10 per cen levels respecively. ADF is he augmened Dickey-Fuller es and PP is he Phillips-Perron es. ln denoes as naural logarihm and Δ is he firs differen operaor. Figure in he parenheses indicae he opimal lag lengh for ADF es and bandwidh for PP es. The opimal lag lengh and bandwidh are seleced by Akaike s informaion crierion (AIC) and Newey-Wes Barle kernel. The criical values are obained from MacKinnon (1996). Panel A: Mulivariae coinegraion es TABLE 3: The resul of Johansen-Juselius coinegraion es Series: lny ln FDI ln DI LR ess Hypoheses H 0 1 LR race saisics Criical values # H 1 per cen 5 per cen r 0 r *** r 1 r r 2 r LR max r 0 r *** r 1 r r 2 r Panel B: Normalised long run coefficiens lny ln FDI ln DI Inercep *** *** *** Noe: *** denoes he significan level a 1 per cen. # represen ha he criical values were obained from Oserwald-Lenum (1992). The Akaike s Informaion Crierion (AIC) is used o selec he opimal lag order.

10 Prosiding Persidangan Kebangsaan Ekonomi Malaysia Ke V TABLE 4: The resuls of Granger causaliy ess based on VECM Dependen variable lny ln FDI ln DI 2 saisics [p-values] ln Y ln FDI ln DI ** [0.0105] [0.9045] [0.5171] [0.7231] [0.7135] ** [0.0325] ECT [-saisics] [ ] *** [ ] [ ] Noe: ***, ** and * denoe he significan level a 1, 5 and 10 per cen levels respecively.