Foreign direct investment (FDI) means an international capital flows in which a firm in one country creates or expands a subsidiary in another (Krugman & Obstfeld, 2006). Directly, it means the subsidiary not only has the financial obligation towards its parent company, it extends to the same organizational structure and value.
Theoretically, companies involve in FDI due to cost saving on the location, usage of abundance resources, technology transfer, vertical integration (coordinating supply and demand to an agreed price) and currency exchange that will reduce cost and increase value to shareholders. FDI in a host country is expecting to boost the manufacturing and services industry and consequently boost up the economy.
FDI impact on economy and social
The area has been widely studied by economist and among others, in East Asia, FDI is used as channel of increasing capital stock and it has positive effect on the economic growth in Vietnam (Thu Thi, Paitoon, & Bangorn, 2010) and more growth in Vietnam if the invest is done in education, training, financial market development (Anwar & Lan Phi, 2010). FDI increase wages of skilled and unskilled labour (Oladi, Gilbert, & Beladi, 2011) and it could
increase the household spending in the host country.
However, the distance of investors from origin country to destination or host country plays an important role in promoting FDI in the latter. This is a sample of macroeconomic gravity impact whereby the investors easily commute from their home country and understanding of the custom and language could reduce the barrier in communication. Foreign investment could contribute in ethical and structural norm in an organization rather than the
western cultural transfers. Local cultural norm shall be adhered to during the negotiation process in order to have a win-win situation between investors and local entrepreneur. It is also discussed that political stress may impacted the inflow of FDI by tightening the rules and regulation which in turn will make the investment environment in destination country is less attractive compare to global environment.
FDI are positive correlated with network (Shaner & Maznevski, 2011) and regional integration (Nathapornpan Piyaareekul & Peridy, 2009); host countries’ levels of financial market and institutional development, better governance and appropriate macroeconomic policies (Polpat, Bangorn, & Paitoon, 2011; Vadlamannati, Tamazian, & Irala, 2009); productive improvement and learning experience from previous FDI (Takechi, 2011). Therefore, a good support from the government is vital in promoting the FDI in host country.
Not only FDI expect good support from the government, study shows that FDI creates instability and worsen crisis (Kazi, 2011). The way to control FDIs in one country are defined the terms and sectors which they are allowed to invest; do a thorough risk assessment on the portfolio; and resolve global dispute in an organization such as World Trade Organization (Cohen, 2009).
FDI and determinants are co-integrated. Among determinants FDI factors in Malaysia are openness of a company, interest rates, inflation rate, China joining WTO1 and level of corruption.(Ting-Yong & Tuck-Cheong, 2010). Comparing to ASEAN as a whole, FDI is looked as more market-seeking rather than profit-seeking due to growing internal markets (Siew-Yong, Chen-Chen, & Hui-Boon, 2010). Contrary, Prema-chandra and Swarnim (2011) found that FDI in Malaysia has eroded compare to outflow to another countries.
World Trade Organization
Facts on FDI in Malaysia (2002-2011)
Annual percentage growth rate of Gross Domestic Product (GDP) at market prices based on constant local currency. Aggregates are based on constant 2000 U.S. dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources2.
Data from World Bank (Chart 1 and Chart 2) revealed that FDI into Malaysia has a significant increment over past decade. However, there was a drop of FDI net inflows in 2009, due to world economic recession in 2008. The uptrend is picking up to a highest point at approximately USD12 billion from the last decade. Comparing to our neighboring country, Thailand, whom has a higher GDP, it has the same effect except the decline trend after 2010. It might be influenced by political crisis in Thailand since 2008 that effected international companies’ decision to extend their business in Thailand.
From Chart 3, we gathered that the gross capital formation for Malaysia approximately between 20% to 25% of our GDP, with the lowest point at 17.84% in 2009 after 2008 recession. Foreign investment inflows are following the same trend and it clearly shows that FDI dropped synchronize with capital formation following the recession.