Foreign Direct Investment Case Study

Factors of Reduction in Foreign Direct Investment (FDI) Inflows in Malaysia

First and foremost, foreign direct investment is to promote Malaysia’s economy when they face capital shortage for their development process. Besides, FDI also help Malaysia to grow faster as other countries like Japan and Korea by satisfying country’s needs. Other than bring in capital and technologies to the country, FDI also provide managerial skills for developing countries. The FDI inflows start to fluctuate in 1996 until 2010. It has been founded that Malaysia’s FDI net inflows has been decline starting from 1992 reaching to minimum point in 2001. There are several factors that make the reduction in foreign direct investment inflows in Malaysia such as:

1) Economic

Macro-empirical work on the FDI-growth relationship overall suggests that FDI has a positive impact on economic growth. However, FDI in Malaysia has faced several periods of slowdown since the early of 1990. FDI in Malaysia has dropped drastically in 1993 due to a slowdown in investments from two main sources of investments for Malaysia which are Japan and Taiwan. The main reason of the slowdown in investment is because of the wage rates in Malaysia is rise relative to other Asian country such as Indonesia, China and Vietnam. Thus, Malaysia overcome the high wage crisis and provided incentives like monetary and fiscal policy to meet up the preferences of direct investors who consider investing in Malaysia.

Furthermore, the second main reason that causes slowdown of FDI in Malaysia during the year 1997 is because of the financial crisis. The financial crisis affected almost all of the Southeast Asia. Nevertheless, Malaysia was quite stable compared to other forms of foreign investment although Malaysia faced financial crisis around 1997, for instance, the decreased in the foreign loans and portfolio investment during the

This lead to the decrease in economic growth where there is dropping in number of investors to invest in Malaysia’s market. This is because, the smaller the size market, the lower the demand of product. Investors are usually looking up the market size of the host country to determine whether to invest or not. Notably, a larger market size of a country will be more efficient and in utilizing their resources and exploitation of economic of scale (Charkrabarti, 2001 as cited in Moosa & Cardak, 2006). Traditionally Malaysia has small and medium-sized of businesses that were built around retail sector but the retail sector started to grow in terms of its size and quality service due to the increase in income and the tourisms arrival. Small market size country will lose its competitiveness in comparison to other countries in attracting most investors (Medvedev,