Foreign Direct Investment: Key to Poverty Reduction in Malaysia

Abstract

: Malaysia s rapid economic growth has given rise to the realization of distributional objectives for achieving its ultimate goal of national unity. Reducing poverty and income disparities among races, income groups and regions is continuously emphasized by the Government of Malaysia in the country s series of national development plans. This paper concentrates on the significance of Foreign Direct Investment (FDI) in poverty reduction across the states of Malaysia. In the econometric analysis, a set of panel data covers eight sub-periods over the period 1984-2005. All the 13 states and 3 federal territories of Malaysia are taken into account in the analysis. The FDI-poverty model selected is in the log-linear form and the FDI inflows into the manufacturing sector is the only explanatory variable. The empirical results show that the FDI coefficient has a statistically significant negative sign, suggesting that the poverty incidence could be reduced by increasing FDI inflows into the Malaysian states.