Prague Economic Papers 2014, 23(4):413-425 | DOI: 10.18267/j.pep.491

Could Inward FDI Offset the Substitution Effect of Outward FDI on Domestic Investment? Evidence from Malaysia

Soo Khoon Goh1, Koi Nyen Wong2
1 Universiti Sains Malaysia, Centre for Policy Research and International Studies Penang, Malaysia (skgoh@usm.my).
2 Sunway University, Business School, Selangor Darul Ehsan, Malaysia (koinyenw@sunway.edu.my).

It is well documented in the literature that Malaysia has become an emerging source of outward foreign direct investment (OFDI) in the region. The drastic increase in its OFDI has raised concerns as to whether the outbound direct investment activities from the country would detract from domestic investment activities, which have been sluggish since the aftermath of the Asian Currency Crisis. Using the autoregressive distrusted lag (ARDL) modelling approach to cointegration, the findings show that there is a long-run equilibrium relationship involving the four variables, i.e. between domestic investment and its determinants such as FDI outflows, FDI inflows and domestic savings. Moreover, this study reveals that the effect on domestic investment by FDI outflows is substitutional and inelastic, while that by FDI inflows is complementary and elastic, implying that the latter can overcome the substitution effect caused by the former if the Malaysian government could formulate pragmatic policies in attracting FDI inflows.

Keywords: outward FDI, multinationals, Malaysia, inward FDI, domestic investment
JEL classification: F21

Published: January 1, 2014  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
Goh, S.K., & Wong, K.N. (2014). Could Inward FDI Offset the Substitution Effect of Outward FDI on Domestic Investment? Evidence from Malaysia. Prague Economic Papers, 23(4), 413-425. doi: 10.18267/j.pep.491
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Ali, A. (1994), "Technology Transfer", in K. S. Jomo, ed., Malaysia's Economy in the Nineties, Selangor: Pelanduk Publications, pp. 171-194.
    2. Andersen, P. S., Hainaut P. (1998), "Foreign Direct Investment and Employment in the Industrial Countries." Bank for International Settlements, BIS Working Paper, No. 61. Go to original source...
    3. Atan, G. (1994), "Foreign Investment", in K. S. Jomo, ed., Malaysia's Economy in the Nineties, Selangor: Pelanduk Publications, pp. 37-61.
    4. Athukorala, P. (2009), "Outward Foreign Direct Investment from India." Asian Development Review, Vol. 26, No. 2, pp. 125-153.
    5. Bijsterbosch, M., Kolasa, M. (2009), "FDI and Productivity Convergence in Central and Eastern Europe - An Industry-level Investigation." ECB Working Paper No. 992. Go to original source...
    6. Campos, N. F., Kinoshita, Y. (2008), "Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America." International Monetary Fund Working Paper No. 08/26. Go to original source...
    7. Carstensen, K., Toubal, F. (2003), "Foreign Direct Investment in Central and Eastern European Countries: A Dynamic Panel Analysis." Kiel Working Paper No. 1143.
    8. Choong, C. K., Yusop, Z., Soo, S. C. (2005), "Foreign Direct Investment and Economic Growth in Malaysia: the Role of Domestic Financial Sector." Singapore Economic Review, Vol. 50, No. 2, pp. 245-268. Go to original source...
    9. Desai, M. A., Foley, C. F., Hine, J. R. Jr (2005), "Foreign Direct Investment and the Domestic Capital Stock." American Economic Review, Vol. 95, No. 2, pp. 33-38. Go to original source...
    10. Dunning, J. H. (1981), "Explaining the International Position of Countries towards a Dynamic or Developmental Approach." Weltwirtschaftliches Archiv, Vol. 117, pp. 30-64. Go to original source...
    11. Dunning, J. H. (1986), "The Investment Development Cycle Revisited." Weltwirtschaftliches Archiv, Vol. 122, pp. 667-677. Go to original source...
    12. Engle, R. F., Granger, C. W. J. (1987), "Cointegration and Error Correction: Representation, Estimation and Testing." Econometrica, Vol. 55, pp. 251-276. Go to original source...
    13. Feldstein, M. S. (1995), "The Effect of Outbound Foreign Direct Investment on the Domestic Capital Stock." In: M. S. Feldstein, J. R. Hines, R. G. Hubbard, ed., The Effects of Taxation on Multinational Corporations. Chicago: Unviersity of Chicago Press, pp. 43-66. Go to original source...
    14. Feldstein, M. S., Horioka, C. Y. (1980), "Domestic Savings and International Capital Flows." Economic Journal, Vol. 90, No. 358, pp. 314-329. Go to original source...
    15. Goh, S. K., Wong, K. N. (2011), "Malaysia's Outward FDI: The Effects of Market Size and Government Policy." Journal of Policy Modeling, Vol. 33, No. 3, pp. 497-510. Go to original source...
    16. Goh, S. K., Wong, K. N., Tham, S. Y. (2012), "Does Outward FDI Matter in International Trade? Evidence from Malaysia." MPRA Working Paper No. 39715.
    17. Gounder, R. (1999), "The Political Economy of Development: Empirical Results from Fiji." Economic Analysis and Policy, Vol. 29, No. 1, pp. 133-150. Go to original source...
    18. Gounder, R. (2002), "Political and Economic Freedom, Fiscal Policy and Growth Nexus: Some Empirical Results for Fiji." Contemporary Economic Policy, Vol. 20, No. 3, pp. 234-245. Go to original source...
    19. Herzer, D., Schrooten, M. (2007), "Outward FDI and Domestic Investment." DIW Berlin, Discussion Paper No. 679.
    20. Hiratsuka, D. (2006), "Outward FDI from ASEAN and Intraregional FDI in ASEAN: Trends and Drivers." Institute of Developing Economies, Japan, Discussion Paper No. 77.
    21. Holland, D., Pain, N. (1998), "The Diffusion of Innovations in Central and Eastern Europe: A Study of the Determinants and Impact of Foreign Direct Investment." NIESR Discussion Paper No. 137.
    22. Johansen, S. (1995), Likelihood Based Inference in Cointegrated Vector Autoregressive Models. Oxford: Oxford University Press. Go to original source...
    23. Kalotay, K. (2004), "Outward FDI from Central and Eastern European Countries." Economics of Planning, Vol. 37, No. 2, pp. 141-172. Go to original source...
    24. Kim, S. (2000), "Effects of Outward Foreign Direct Investment on Home Country Performance: Evidence from Korea." Chapter URL: http://www.nber.org/chapters/c8503.
    25. Kueh, S. H., Puah, C. H., Apoi, A. (2008), "Outward FDI of Malaysia: An Empirical Examination from Macroeconomic Perspective." Economic Bulletin, Vol. 6, No. 28, pp. 1-11.
    26. Kueh, S. H., Puah, C. H., Mansor, S. A. (2009), "Empirical Analysis on Emerging Issues of Malaysia Outward FDI from Macroeconomic Perspective." International Review of Business Research Papers, Vol. 5, No. 1, pp. 124-134.
    27. Narayan, P. (2005), "The Saving and Investment Nexus for China: Evidence from Cointegration Tests." Applied Economics, Vol. 37, No. 17, pp. 1979-1990. Go to original source...
    28. Pattichis, C. A. (1999), "Price and Income Elasticities of Disaggregated Import Demands: Results from UECMs and an Application." Applied Economics, Vol. 31, pp. 1061-1071. Go to original source...
    29. Pesaran, M. H., Shin, Y., Smith, R. J. (2001), "Bounds Testing Approaches to the Analysis of Level Relationship." Journal of Applied Econometrics, Vol. 16, No. 3, pp. 289-326. Go to original source...
    30. Pesaran, H. M., Pesaran, B. (2009), Microfit 5.0. Oxford: Oxford University Press.
    31. Sim, A. B. (2005), "An Exploratory Study of Internationalization Strategies of Emerging Malaysian Multinational Enterprises." Journal of Asia-Pacific Business, Vol. 6, No. 1, pp. 33-57. Go to original source...
    32. Stevens, G. V. G., Lipsey, R. E. (1992), "Interactions between Domestic and Foreign Investment." Journal of Money and Finance, Vol. 11, No. 1, pp. 40-62. Go to original source...
    33. Svensson, R. (1993), "Domestic and Foreign Investment by Swedish Multinationals." Stockholm, Industrial Institute for Economic and Social Research Working Paper No. 391. Go to original source...
    34. Tang, T. C. (2001), "Bank Lending and Inflation in Malaysia: Assessment from Unrestricted Errorcorrection Models." Asian Economic Journal, Vol. 15, No. 3, pp. 275-289. Go to original source...
    35. Tang, T. C. (2002), "Demand for M3 and Expenditure Components in Malaysia: Assessment from Bounds Testing Approach." Applied Economics Letters, Vol. 9, No. 11, pp. 721-725. Go to original source...
    36. Tang, T. C., Nair, M. (2002), "A Cointegration Analysis of Malaysian Import Demand Function: Reassessment from the Bounds Test." Applied Economics Letters, Vol. 9, No. 5, pp. 293-296. Go to original source...
    37. Tham, S. Y. (2007), "Outward Foreign Direct Investment from Malaysia: An Exploratory Study." Journal of Current Southeast Asian Affairs, Vol. 26, No. 5, pp. 45-72.
    38. UNCTAD (1996), World Investment Report 1996. New York: United Nations. Go to original source...
    39. UNCTAD (2008), World Investment Report 2008: Transnational Corporations and Infrastructure Challenge. New York and Geneva: United Nations.
    40. Wong, K. N., Tang, T. C. (2007), "Foreign Direct Investment and Electronics Exports: Exploratory Empirical Evidence from Malaysia's Top Five Electronics Exports." Economics Bulletin, Vol. 6, No. 14, pp. 1-8.
    41. Wong, K. N., Goh, S. K. (2013), "Outward FDI, Merchandise and Services Trade: Evidence from Singapore." Journal of Business Economics and Management, Vol.12, No. 2, pp. 276-291. Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content