Determinant Factors and Foreign Direct Investment in Malaysia: Cointegration and Causality Analysis

Abstract

This research attempts to examine the determinants of FDI in Malaysia. The infrastructure,
market size, exchange rate and inflation rate are considered independent factors that impact the
FDI in this research. Yearly data from 1991 to 2020 was sourced from World Bank. The ARDL
model was used to test the cointegration and causal relationship between the determinants and
FDI. Based on the results, the infrastructure has positively influenced the FDI in the long and
short-run. The impact of market size, exchange rate and inflation rate on FDI is statistically
insignificant in the long-run. However, the market size and exchange rate have a significant
short run relationship with FDI but none between the inflation rate and FDI. This research
provides decision-making insights for investors, policymakers and practitioners. It plays a vital
role in formulating FDI related policy in Malaysia. Despite facing limitations, this research
concluded with some recommendations for future research.