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FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN MALAYSIA: THE ROLE OF DOMESTIC FINANCIAL SECTOR

Chee-Keong Choong (), Zulkornain Yusop and Siew-Choo Soo
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Zulkornain Yusop: Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor D.E., Malaysia
Siew-Choo Soo: Department of Econometrics and Business Statistics, School of Business, Monash University Malaysia, No.2 Jalan Kolej, Bandar Sunway, 46150 Petaling Jaya, Selangor D.E., Malaysia

The Singapore Economic Review (SER), 2005, vol. 50, issue 02, 245-268

Abstract: This study aims to incorporate the role of domestic financial system in transferring the technological diffusion embodied in FDI inflows on the Malaysian economy from 1970–2001. Applyingbound test, orunrestricted error correction model(UECM) proposed by Pesaranet al.(2001), the presence of FDI inflows creates a positive technological diffusion in both short- and long-run if the evolution of domestic financial system has achieved a certain minimum level. This implies that the improvement of technology level in Malaysia in the long run is due to the spillover efficiency effects from FDI. Hence, the study suggests that FDI tends to be more likely to enhance economic growth more efficiently when a recipient country has a well-developed and well-functioning financial sector.

Keywords: Financial development; foreign direct investment; economic growth; bound test; technological diffusion (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0217590805001998

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