We Bring You Capital and Job – Foreign Investment and Employment in Malaysia

Abstract

Research Question: Do foreign investment inflows bring jobs for a small open economy, Malaysia? Motivation: Past studies have employed aggregate FDI and employment data, but their findings are subjected to aggregation bias. This ‘puzzle’ is resolved by employing disaggregated data. This study is built on the basis of Wong and Tang (2011), Hale and Xu (2016), and Jude and Silaghi (2016). This study explores the impact of foreign investment inflows on jobs creation for 19 industries. It offers a better understanding either foreign investment inflows create jobs or not in the host country. It is important because foreign investment has been strategized long ago by Malaysia for economic growth. The findings are relevant for policymakers. Idea: The core idea is that foreign investment inflows into different industries in Malaysia may have different impact on jobs creation. Data: Foreign investment inflows and employment data are obtained from Malaysian Investment Development Authority (MIDA) covering annual observations between 1980 and 2016. Other variables are human capital, population, and real Gross Domestic Product acting as control variables. Method/Tools: This study considers cross-sectional (ordinary least square, OLS) equation for its respective year between 1980 and 2016. And, time-series autoregressive-distributed lag (ARDL) approach for the 19 industries, respectively. Findings: Of the estimated cross-sectional equations, foreign investment has a positive effect on employment, in which the largest effect is in the year of 1995 (0.85). The ARDL results show that foreign investment inflows and employment are cointegrated for the 19 industries. Their long-run elasticity of foreign investment on employment are statistically significant, expect for Textiles & Textile Products (TTP), Paper, Printing & Publishing (PPP), and Petroleum Products (including Petrochemicals) (PetP) industries. They have a positive sign as expected (i.e. foreign investment creates jobs), except for Leather & Leather Products (LLP), and Non-Metallic Mineral Products (NMMP) industries. Contributions: This study adds fresh findings to the research literature on effect of foreign investment inflows on employment in Malaysia, in general, and her 19 industries. It sheds an insight for policy implication, especially for both financial market and labour market.