Causal relationship between FDI, trade, economic growth and exchange rate: Malaysian evidence

Illani Fatiha and Abul Masih

MPRA Paper from University Library of Munich, Germany

Abstract: FDI plays an important role by increasing and supplementing the supply of funds for domestic investment in the host country. The spillovers from FDI can benefit a developing country like Malaysia especially in terms of creating employment and improving the standard of living while indirectly boosting the economic growth. Thus, this paper tests the causal relationship between foreign direct investment, trade openness, economic growth and foreign exchange rate in Malaysia. The findings based on cointegration tests indicate that these variables are theoretically related in the long run. In addition, the findings based on the Generalized variance decomposition (VDC) tend to indicate that economic growth is driven mostly by exchange rate followed by trade openness and FDI. The results appear to be plausible and intuitive and have strong policy implications for an emerging economy like Malaysia.

Keywords: Causality; FDI; trade; growth; exchange rate; VECM; VDC; Malaysia (search for similar items in EconPapers)
JEL-codes: C22 C58 E44 (search for similar items in EconPapers)
Date: 2017-05-30
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