CHAPTER 1

The US Bureau of Economic Analysis defines the foreign direct investment (FDI) as an acquisition of foreign assets (based on residence) with the intention to exert control, which, in practical terms, usually means ownership of more than 10 percent (De Santis, R.A., Anderton, R., Hijzen, A., 2004). Consequently, countries differ with regard to the minimum percentage of equity ownership that they consider direct as opposed to portfolio investment (Caves, 1996).

FDI can also classified by any subsequent transactions in financial assets or liabilities that occur between nonresident direct investors and resident companies that are linked by a foreign direct investment relationship. The transactions could be between the companies in Malaysia with its immediate parent, ultimate parent or fellow companies as shown in the diagram below.

In simple word, foreign direct investment (FDI) is defined as capital inflows from other countries that invest in the production capacity of the host economy.

Foreign direct investment (FDI) can be divided into several components which are equity capital, reinvested earnings and other capital associated with inter-company debt transactions. International Monetary Fund (IMF) describes FDI components as follows:

Equity capital comprises equity in branches, all shares in subsidiaries and associate companies (except non-participating preference shares).

Reinvested earnings consists of direct investors’ shares of earnings not distributed as dividends by subsidiaries or associates and earnings of branches not remitted to direct investors,

Other Capital consists of debt securities, trade credits, loans, deposits and others.

Normally, the are several motives why firms engaged in FDI. It might be due to access to resources, access to markets, efficiency gains, and acquisition of strategic assets (Dunning,1993).

1.2 Background of Study

FDI Position in Malaysia

Over the recent decade, Malaysia attracted net FDI inflow averaging 3% of GDP per annum, which is more moderate compared with the 1990s (average of 6.4% of GDP), due mainly to the changing nature of investment. The trend in gross FDI has remained stable since 2000 after a moderation during the Asian financial crisis. A growing share of these investments have been channelled into less capitalintensive and higher value-added activity.

Furthermore, higher competition for FDI from emerging economies, particularly low labour cost countries such as China and Vietnam have also contributed to the lower net inflows. Nonetheless, the average share of foreign investment to total private investment has remained stable.

Three factors that make Malaysia attractive to FDI are undervalued currency, low cost of labour and fairly low inflation rate (Oti-Prempeh, 2003). The strength of Malaysia appeal to FDI is rooted in its Promotions of Investment Act no 327 (1986) which have been strongly observed in successive National Economic Plan (NEP).

FDI has contributed significantly to the growth and transformation of the Malaysian economy. The large presence of multinational corporations (MNCs) has provided direct benefits in the form of employment creation and capital formation. It also provided opportunities for local firms to perform the role of vendors by supplying parts and services to the large MNCs, which has benefited the small and medium enterprises (SMEs).

More importantly, FDI can also lead to the transfer of knowledge, technology and skills in developing local firms and human capital. Particularly, in the manufacturing sector, Malaysia has steadily climbed up the value chain with improved productivity levels. The real value-added per worker in the manufacturing sector has increased from RM49,013 in 2000 to RM78,707 in 2010 (equivalent to USD12,898 in 2000 to USD24,435 in 2010).In terms of sectoral distribution, net FDI inflows during 2000-2010 were channelled mainly into the manufacturing, services, and oil and gas sectors where the manufacturing sector remains the major recipient of the net inflows.

Thus, this study seeks to examining FDI inflows of Malaysia contributed by manufacturing industry over the period 1980 to 2010. Some of the macroeconomics factors influencing FDI are examined, including the market size and degree of openness of the economy, the currency value and economic stability.

This paper is structured as follows: This chapter discuss general idea about the topic discoverd in this study while the next chapter provide a review of the theoretical literature dealing with the determinants of foreign direct investment in manufacturing industry in Malaysia. In Chapter 3, estimated regression model and the hypotheses to be tested is developed and results obtained presented in Chapter 4. The results are then analysed too. Lastly, in Section 5, the conclusions of this study is presented and recommendation is given.

Problem Statement

Foreign Direct Investment is increasingly important to Malaysia in their efforts to catch up and develop their economies. Malaysia received substantial amounts of annual FDI inflows in its manufacturing industry over the past decade. In 1980-1989, the average of FDI approved projects was 648.9 million US dollars. That average increased dramatically to 4752.7 million US dollars in 1990 – 1999. In 2002, the amount was 3,046.8 million US dollars. 2010?? The increasing amount of annual FDI inflows in manufacturing industry was not really affected even during financial crisis in 1997-1998. As evidence, in 1996, it was 12,353.6 million US dollars and increased to 12,829.9 million US dollars in 1997. In 1998, it was 8,274.1 million US dollars (MoF, various issues). Thus, FDI in manufacturing industry in Malaysia can be considered as stabl