Capital Controls : Impact on Foreign Direct Investment and Portfolio Investment in Malaysia 1991-2004

This paper examine the effects of three types of capital controls policies in Malaysia: (i) the existence of fixed exchange rates (indirect capital controls), (ii) controls on capital account and (iii) the stringency of requirements for the repatriation (direct capital controls) on FDI and PI flows as the dependent variable. The study examined the significant impact of the controls in influencing the investment atmosphere in Malaysia. The analysis were done over two period, where the period of 1991-1997 [7 years] is considered as a period where Malaysia imposed floating exchange rate system (liberalization of capital controls), and the second period 1998-2004 [7 years] as an age where the Malaysian government started imposing the fixed exchange rate regime. Overall, the result shows that the effect of capital controls on FDI flows was not significant as there were trade-off between the setback and the benefits of imposing capital controls. Meanwhile, it was also found that the reason why capital controls have more effect on PI than FDI was largely due to different nature of both investments