The Effects of Foreign Direct Investment on Economic Growth in Malaysia

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CHAPTER 1: INTRODUCTION
1.0Introduction
In this chapter, the background, problem statement, objectives and justification of the study are discussed. The general and specific objectives are listed and the scopes of the study are described.

1.1Background of the Study
1.1.1 Malaysia Economic Growth

Malaysian economy was consistently reached a GDP growth of more than 7% followed by the low inflation rate in the 1980s and 1990s. The economy went on to an extensive diversification and continued economic growth averaging 9% per annum in the period of 1988-1997. During the year of 1996-1997, on average, the economy had grown at annual rate of 8.7% whereas inflation averaged 3.8% and the unemployment rate was low, averaging around 2.5% per annum. Manufacturing sector grew from 13.9% of GDP in 1970 to roughly about 30% in 1999, whereas agriculture and mining sectors together was 42.7% of GDP in 1970 and falls to 9.3% and 7.3%, respectively in 1999 (Marial and Ngee, 2009).

Malaysia’s economic growth is growing rapidly and is a relatively open economy. In the year of 2007, the Malaysia economy was rank 29th largest economy in the world by purchasing power parity with gross domestic product for 2007 was estimated to be approximately $357.9 billion (World Bank, 2007). It has been recorded that, Malaysia experienced a stable and consistence record of economic growth in GDP which averaging an annual rate of around 7 percent over the period between 1970 until 2005.

Due to Malaysian open economy, from the externalities, it will create a major impact as well as the oil crises of the 1970s, the decline in the electronics industry in the mid 1980s and particularly the Asian financial crisis in 1997. In terms of the economic performance, the Malaysian economy experienced sluggish growth in 2001 with 0.3 percent, but rebounded strongly in 2002 with 4.1 percent. As the time goes by, the Malaysian economy however had strongly expanded in the year of 2004 increased by 7.1 percent and a stable growth was being marked in the year 2005 and 2006 by 5.3 percent and 5.9 percent respectively (figure 1).

Figure 1: Gross Domestic Product of Malaysia, 2001-2011, (RM Millions)
Note: 2011 is an estimate data based on Bank Negara Malaysia 2010 Annual Report Source: Economic Planning Unit, Malaysia

Moreover, the Malaysian economy had contracted by 6.2 percent in first quarter of 2009 (Q4 2008: 0.1%), it was the first contraction since the third quarter of 2001. It was mainly due to a significant declining in external demand in which the economy has been affected by the spillover of deepening recession in several advanced economies as well as slower growth in the regional economies. Besides, it was also due to contracted of domestic demand mainly because of weaker investment and private consumptionh activities.

However, Malaysian economy regained the growth momentum by 4.5% in fourth quarter by the contribution in strengthening domestic and external demand. After the downturn in 2009, Malaysian economy experienced a strong growth in 2010 at 7.2% which mainly driven by healthy domestic demand and with strong expansion in private sector activity, whereas in 2011, Bank Negara Malaysia estimated that Malaysian economic growth will grow at 5.0% which is likely to improve where private investment is expected to remain strong and also accompanied with the government initiative under the ETP. FDI are also expected to increase given the positive economic outlook, increasing business confidence, enhancing global FDI flows, better corporate earnings and also government’s extensive economic transformation projects. 1.1.2Trends and Patterns of FDI Flows in Malaysia

Foreign Direct Investment (FDI) has been the underlying key vehicle that drives the strong growth performance experienced by the Malaysian economy. The reformation of policy which consist of the introduction of the Investment Incentives Act 1968, the establishment of...
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