CHAPTER 1: INTRODUCTION
1.0 Background of the Study
Research on Foreign Direct Investment (FDI) has been one of the most intensive areas of international economics in the last decade (Pan, 2002). The Economy Watch (2010) defines FDI as a type of investment involving the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. More specifically, FDI refers to the investment of foreign asset into domestic goods and services and this does not include the foreign investments in stock markets (Ong, P’ng, Poon, Tan and Yong, 2012). Over the past decade, FDI has increased sharply as a major form of international capital transfer. Economic phenomena such as globalization, liberalization and economic
The authors also pointed out that FDI mobilizes the capital from rich countries to capital scarce countries. As a result, both countries can gain from this capital movement. In particular, developing countries rely heavily on FDI to promote their economy as they face capital shortage for their development process. The shortage of capital for the development process has always been a key problem in developing countries (Aqeel & Nishat, 2004). This is mainly because domestically generated resources are insufficient to satisfy the growing needs of investments in education, infrastructure and exploitation of natural resources, thus, resulting in their inability to generate internal savings that meet their investment needs (Vadlamannati, Tamazian, & Irala, 2009). FDI inflows act as the lifeblood to developing countries as it brings capital to their countries. Other than that, it made possible the transfer of technology and managerial skills, increase in employment and enhancement in the productivity of home country (Awan, Khan, & Zaman, 2011). Besides, FDI also benefits investors in developed countries by enabling them to take ownership advantage in the host country and gain profits. Hence, there is mutual benefit in the international movement of capital among
Availability of these kind of resources especially minerals, agriculture product and raw material become an important determinant of FDI for host country. Malaysia, on the other hand, a medium-size country, having upper middle income developing economy, although it is largely urbanized but the state continues to develop their cultural sectors actively. This is aided well by its rich natural resources. In addition, Malaysia is in condition where it has a political stability which is highly attractive to foreign investment. Hence, FDI appears to a key driver underlying the strong growth performance experienced by the Malaysian economy. Furthermore, Malaysia government recognizes that foreign investment particularly in manufacturing helped Malaysia to improve economy growth and provide benefit of employment opportunity. In addition, FDI also acts as an agent of transformation in the Malaysian economy. This is proven with the dominance of the influx of FDI into the manufacturing sector in its transformation from agricultural economy to industrialized economy (Abdul Rahim, 2006). Wong and Jomo (2005) point out that FDI can bring in foreign exchange to be used in the payment of necessary capital and intermediate goods imports, consequently, solving the foreign exchange problems. The movement of