Do public investment and FDI crowd in or crowd out private domestic investment in Malaysia?

Abstract

Motivated by the concern of a persistent decline in total investment in Malaysia during the post-crisis era, this article examines the long-run relationship between private domestic investment (PDI), public investment and foreign direct investment (FDI) in Malaysia. Using multivariate cointegration techniques, the results indicate a fairly robust cointegrated relationship between these variables during the period 1960 to 2003. Both public investment and FDI are found to be complementary to, rather than competing with, PDI.

Acknowledgements

The author would like to thank Russell Smyth and Yew-Kwang Ng for suggesting this topic of research. Constructive suggestions and comments from two anonymous referees of this journal are much appreciated. The usual disclaimer applies.

Notes

¹See, e.g. Blejer and Khan (1984) for a sample of 24 developing countries, Ghali (1998) for Tunisia and Ghura and Goodwin (2000) for Asia and Latin America, among others.

²For an analysis of the dynamic relationship between domestic saving and investment rates in Malaysia, see Ang (2007a).

³Ang and McKibbin (2007) provide an analysis of the dynamic relationship between financial development and economic growth in Malaysia. Their results show that financial depth and economic development are positively related. Similar findings are also obtained by Ang (2007b).

⁴To shed more light on the complementary relationship observed between FDI and private domestic investment, a detailed analysis of the industrial composition of FDI and inter-industry relations is desirable. However, this is beyond the scope of the present study.