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

8688 Words35 Pages
Masters of Science (Banking)


FDI Inflow, Current Account Balance, Inflation And Interest Rate: How Do They Impact The Malaysian Economy?


Siva Kumar Kandiah (Matric No: 89306)



This article seeks to find which of the macroeconomic variables among FDI inflow, current account balance, inflation and interest rate play a significant role in economic growth in Malaysia using the SPSS Regression method for a time period of 14 years from 1995 to 2008 (Oct). The results of the research indicated that FDI and inflation are not significantly related to economic growth in Malaysia during the period of study. However, CA
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In fact, FDI is said to be the most important contributing factor for Malaysia’s economic performance. The early beginnings of luring foreign investors to Malaysian soil started with the introduction of the Investment Incentives Act 1968, and followed by the establishment of the Free Trade Zones (FTZs) during the Second Malaysia Plan (1971-75). Since then, Malaysia has attracted a large portion of the investment dollar that flowed into Asia. In 1995, for example, Malaysia was the second largest FDI recipient among Asian economies at US$ 5.8 billion.

Malaysia recorded inward FDI of USD 7.3 billion and USD 6.3 billion in 1996 and 1997 respectively. The lower figures in 1997 may be attributed to the lack of confidence as a result of the Asian financial crisis but by 1998, figures indicate that investor confidence had improved. Malaysia’s highest FDI inflow was recorded in 2007 when the amount surged to USD 8.4 billion from USD 6.0 billion in 2006.

FDIs are private-sector investments that are made by a company into a foreign country. Foreign direct investments create a strong demand for a local currency and help boost the economy. With money coming into a country, strong foreign direct investment is one way governments can finance current account deficits. However, just as funds flow in, they also can flow out,

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