Economic Growth, Foreign Direct Investment, Macroeconomic Conditions and Sustainability in Malaysia

Most studies on examining the links between economic growth and FDI inflows have relied on the conventional GDP measure which has been argued as inadequate to provide clear insights on the macro sustainability of a country. Alternatively, the Genuine Savings (GS) indicator has been proposed as one of the alternative measures to reflect whether an economy is moving on a sustainable path, albeit in the weak sustainability sense. In this paper, we estimated the impact of FDI on conventional GDP and GS growth as well as on the GDP-GS gap for Malaysia from 1974-2009. The potential nonlinearities associated with the impact of FDI are captured using a macroeconomic conditions indicator as a threshold variable. The results demonstrate stronger FDI impacts on Malaysian GDP and GS growth as well as on reducing the GDP-GS gap once the general macroeconomic conditions in the country reaches a particular level. The results may suggest that FDIs will be more impactful in accelerating future economic growth and sustainability if a country is able to maintain a particular state of macroeconomic conditions.