Fdi Inflow, Current Account Balance, Inflation and Interest Rate: How Do They Impact the Malaysian Economy?

In principal, foreign direct investment is usually considered the most desirable form of capital inflows for developing countries. It directly adds capital stocks to host countries, and therefore contributes to investment and growth in host countries through various channels

Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.

In the 1970 the leading sector in development had been a wide range of export manufacturing industries such as textiles, electrical and electronic goods, rubber products. In the 1980s, Malaysia was hit with a brief recession. Bank Negara Malaysia knew they had to come up with a plan to save

Abadie and Gardeazabel (2007) agreed that the stock markets are the main source of FDI, it is well known. But foreign firms that have been purchased through the stock market are in desperate need of financial services. This way, as a prospective investor makes decisions regarding his investments, he will be able to take into account the country’s financial development and banking development, and determine how such factors will ultimately affect their investments

FDI has broadened its meaning into the acquisition of a lasting management interest in a firm outside the investing enterprise’s home country. For the reason above, it comes in different forms which include direct acquisition of foreign companies, construction of a factory in a foreign country and investment in joint ventures. Britton and Worthington (2009) described FDI as an important aspect of globalisation as well as the activities of multinational companies.

According to Kolodkin(2013), the FDI is major source which helps the countries which have limited of capital or funds for the government expense and receive finance aid from wealthier countries investor. For example, the united state is the world’s largest economy which are consist a lot of investors which have surplus fund to invest in companies and the project internationally. FDI is determined by the investor to invest into the countries based on the country situation and environment. For example, the government of Malaysia wants to attract the investor around the world to invest in Malaysia by giving a benefit such as tax reduced, percentage of share that they can buy.

In the recent time, significant rise of outward foreign direct investment (FDI) was witnessed from developing countries like China and India. The Organisation for Economic Co-operation and Development (OECD) defines FDI as an investment that reflects the objective of establishing a lasting interest or long-term relationship by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the

FDI is where the MNE invests directly in production or other facilities over which it has effective control in a host economy (j &t). According to Pollan (), the definition of the terms “investment” is highly significant to Foreign Direct Investment, which can be typical comprehend as the conveyance of capital to a country. Investment can be defined as money committed or property acquired in order to gain profitable returns, as interest, future income or appreciation in value (business dictionary, 2014). The commonest definition used to understand the idea of FDI is the definition provided by International Monetary Fund’s (IMF). The IMF definition of FDI introduces systems and structures which clearly demarcates foreign direct investment from portfolio investment. According to the IMF, direct investment creates a lasting interest in an enterprise, consisting of a long-term relationship between the investor and the enterprise and that the investor has an outstanding amount of control on the management of the enterprise, while portfolio investment does not create an extended relationship and the portfolio investor is rarely directly partaking in the day-to-day management of the enterprise (Pollan,). FDI however has no comprehensive, authoritative and ubiquitous legal definition and the test for the existence of enough degree of control differs in scope depending on applicable law in a

Foreign direct investment (FDI) inflows rose from $24.5 billion in 2003 to $76.2 billion in 2010. Intra-ASEAN capital flows have increased more than fourfold, accounting for 16.1% of the regional total in 2010 compared to 11.1% seven years ago. Only the EU contributes more.

To understand the change i.e. increase and decrease of GDP growth rate with the fluctuations in FDI.

Malaysia government has a generally favourable attitude toward foreign investment, especially regarding projects that facilitate technology transfers, create high skilled jobs and contribute capital

FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ideal resources.

In Spite of the day by day challenging global economic circumstances, the Malaysian economy had expanded to 5.1% during the first half year of 2012 compared with the previous year of 2011 which is 4.7% and this has been increased by 0.4%. As the Euro region debt crisis shows no obvious indication of alleviate, the global economic is prospective to further ease up during the second half of 2012. During second half year of 2012, the depravation of the slowdown of emerging economies especially in India and China or the economic growth in developed economies correction in merchandise prices are prospective to weigh Malaysia’s export performance. By reason of the resilient domestic economy and external sector consider cause of downside risk, the real Gross Domestic Product (GDP) is predicted to extend from 4.5% to 5% in 2012, while the previous year is 5.1%.

The inflation rate in Malaysia was reported at 3.1% in July 2011. From 2005 to 2010, the average inflation rate in Malaysia was 2.77% reaching an historical high of 8.5% in July 2008 and a record low of -2.4% in July 2009 (Trading Economics Malaysia Inflation Rate).

Due to the inflation, Malaysia government already applied different strategies to face the inflation that occurred recently. Bank Negara Malaysia controls the inflation rate by implementing the monetary policies such as influence the level of interest rate that commercial banks have to pay on their loans. Sometimes commercial banks have unexpected or urgent needs for extra funds, Bank Negara Malaysia will make a short term loan to them in such case. Acceptable collateral and a promissory note (IOU) such as government securities are given when commercial banks borrow. Bank Negara Malaysia will obstruct commercial banks to make loan from them for obtaining additional funds when the inflation