Exchange rate variability and the export demand for Malaysia's semiconductors: an empirical study

Abstract

This article examines the effects of exchange rate variability on export demand for semiconductors, which is the largest sub-sector of electronics industry in Malaysia as reported by Malaysian Industrial Development Authority (MIDA, 2004). The empirical results, which are estimated based on the Johansen's multivariate cointegration tests and error-correction model, suggest that there is a unique long-run relationship among quantities of export, relative price, real foreign income and real exchange rate variability. The major finding of this article is that the variability of real exchange rate has some effect on semiconductor exports in both the long run and the short run. In the light of rapid advances in technology in the global markets for electronics products, the findings are useful to policy makers for the design and target of appropriate exchange rate and industrial policies to enhance the export competitiveness of semiconductor industry.

Notes

¹ They are automatic data processing (SITC 752), radio-broadcast receivers with sound recorders or reproducers (SITC 762), sound recorders or reproducers; television image and sound recorders or reproducers (SITC 763), telecommunication equipment, parts and accessories (SITC 764) and thermionic valves and tubes; photocells etc (SITC 776).

² The software is available from http://www.jmulti.de/

³ According to Abeysinghe and Boon (1999), in small samples OLS may still be the best choice among the six estimation techniques, namely OLS, unrestricted error-correction model or Autoregressive Distributed Lag (ARDL) model, a fully modified least square, 3-step estimator, OLS regression augmented by leads and lags of the differenced explanatory variables and Johansen's estimator.

⁴ However, this is not a serious concern since the instability is observed in 1996q2–1997q2 and the CUSUM test rejects instability.