Under their study and done the empiricalUnder their study and done the empirical

Under this objective, I referred research made by Yong Ting Aw and Tuck Cheong Tang. Authors revised the determinants of inward FDI in Malaysia and added two concerns that related to politic which is the event of China joining the WTO in 2001 and the level of corruption in their study and done the empirical test on the co-integration between the determinants of FDI in Malaysia with two concern mentioned above. The determinants that revised by the authors are market size, exchange rate, inflation rate, interest rate, trade openness, infrastructure quality with the addition of corruption and China joining WTO.

As I mentioned above, the authors reused the existing models and extended it with that two events and examined the relationships between inward FDI and the determinants. The authors divided the determinants into four models which are model 1 (basic model), model 2 (China joining WTO), model 3 (corruption), and model 4 (the combination of China joining WTO and corruption). Then, they identified the degree of co-integration by Dickey-Fuller test (ADF), Philips-Perron (PP) tests, Autoregressive Distributed Lag (ARDL) test, Ordinary Least Squares (OLS) tests, Engle-Granger tests, Error Correction Model (ECM) tests and Johansen’s multivariate tests.

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The result from this authors is inward FDI has a co-integration relation FDI with all the key determinants after considered that two events. For both long-run and short-run, the interest rate, trade openness, inflation rate, corruption and China joining WTO do influence the inward FDI in Malaysia. As for the infrastructure quality, it does influence inward FDI in short-run but not in long-run. As for market size and exchange rate, the authors found that both of the variables are not a significant determinant of inward FDI even though these two variables has co-integration relation with inward FDI.

To summarize all the results from the previous studies, interest rates for price of capital and infrastructure quality has positive impacts on the decision of the investors to invest in Malaysia which means both of the variables can attract the investors so that the inward FDI can be improve. While, market size and trade openness can positively and negatively impacts the decisions of the investors to invest in Malaysia. Finally, the real exchange rate and corruption will negatively impact the inward FDI in Malaysia which means the increases in both variables will deter the investors to invest in Malaysia so the inward FDI will decline.

To make it easier to read the results from previous studies, the summarization of selected determinants of inward FDI will be summarized in table below.

 

Impacts on FDI

Determinants of inward FDI

Positive

Negative

Market Size

1. Schneider and Frey (1985)
2. Ancharaz (2000)
3. Chakrabarti (2001)
4. Asiedu (2002)
5. Eicher (2002)

1. Choong and Lim (2007)
Market size in China

Trade Openness

1. Ancharaz (2000)
1.    Aseidu (2002)
2.    Eicher (2002)
3.    Ismail and Yusof (2003)

1. Chakrabarti (2001)

Infrastructure quality

1. Ancharaz (2000)
2. Urata and Kawai (2000)
3. Aseidu (2002)
4. Eicher(2002)
1       

 

Inflation rate

 

1. Schneider and Frey (1985)
2. Urata and Kawai (2000)
3. Yusop and Choong (2002)

Real exchange rate

 

1. Ancharaz (2000)
2. Chakrabarti (2001)

Corruption

 

1 Hines (1995)
2. Eicher (2002)
3. Smarzynska and Wei (2002)

Table 2 shows the summarization from previous studies on determinants of inward FDI (Source: Yong ting Aw and Tuck Cheong Tang in the journal titled the determinants of inward foreign direct investment: the case of Malaysia)