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The Rapid Growth Of The Malaysian Economy

2179 words - 9 pages

It is well documented that Malaysia is a country that experiences fast and rapid growth in its overall economy. According to the Asian Development Bank (ADB), Malaysia has the potential to rise as one of the seven drivers of the Asian economy by 2050 led by China, India, Indonesia, Japan, South Korea, Malaysia and Thailand (Malaysian Insider, 2011). In the 1970’s, Malaysian companies started to focus on foreign investment but the numbers were still small. These investments started off focusing on banking and finance sectors of developed countries such as the US and Australia. The country only began venturing in outward foreign direct investments (OFDI) in the 1990’s. Malaysia’s OFDI has skyrocketed from a low RM0.45 billion in 1980 to RM10.41 billion in 1997, and further to RM36.7 billion in 2007 (Goh and Wong, 2011). Malaysia has been experiencing a peculiar trend when it comes to foreign investments. The country has encountered a drastic drop in FDI inflows whereas FDI outflow has been increasing at a substantial rate especially in 2007 as seen in the graph. It is worth arguing whether OFDI is a able to substitute domestic investments and will it cause a significant drop in output in the domestic markets (Stevens and Lipsey, 1992). From a different viewpoint, OFDI can also complement domestic markets and increases local industry activities by home country multinationals and, as a result boost up domestic output ( Desai et al., 2005). Therefore, there exist a conceptually causal relationship between OFDI and the domestic economic growth that could result in either way. This essay revolves around the efforts of determining the push and pull factors that influences OFDI and critically analyzing the transition effects of Malaysia to be an export-led economy.

Among all the countries in East Asia, Malaysia is one the most active participants in abroad investments activities. Malaysian companies are also seen expanding globally and trends of outward investments are becoming more prominent. To determine the factors that influences OFDI in Malaysia, we will be using John Dunning’s Eclectic paradigm. He suggested that the main factors that lead to FDI inflows are the need to have market access, the opportunities presented by large scale privatization processes and the degree of economic and political stability (Dunning and Lundan, 2008). The Eclectic paradigm consist of 3 key factors which are ownership, location and internalisation advantage. According to Dunning’s theory, in order for a county to be successful in the foreign market, it has to satisfy these factors.

To approach Dunning's Eclectic paradigm we first split the elements into greater detail and separate them into two factors which are the pull (reaction) and push (pro-action) factors. The transition of Malaysia from a domestically focused to an export-led country occurs when local firms acquire firm-specific advantages which enables them to engage in OFDI. Location is one of the 3...

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