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Outward Foreign Direct Investment By Malaysian Transnation Companies Economics Essay

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This paper tries to understand trends, patterns and determinants of outward foreign direct investment (OFDI) by Malaysian transnational companies. It shows that Malaysian OFDI had taken a massive leap since 1993 and the number of Malaysian transnational companies making investments abroad since the 1990s has increased radically.

The factors that influences the outflow of FDI is evaluated into considerations. The OFDI is focused mainly in services industry (finance, banking, insurance and tourism) and natural resources (oil and gas) with also manufacturing sector. This also includes the emergence of offshore financial centres and developed countries as the most important host region for trans-border activity although investments in developing countries especially within ASEAN have shown tremendous growth. The key drivers of OFDI have been to increase efficiency, to access resources and to access markets.

Keywords: Outward FDI, Malaysia, Economic Growth, Transnational MNC


Globalization has attracted increasing attention among researchers in international business. In an international business context globalization finds its roots in the increasing trade and investment flow between countries. Trade growth continuously exceeded the growth in both world commodity output and world Gross domestic product (GDP).

The World Investment Report (WIR2006) noted that the stock of outward foreign direct investment (OFDI) from transition and developing economies in 2005 reached USD1.4 trillion, up from USD335 billion 10 years ago.

As an emerging market, Asia is one of the regions in the world in which FDI activities are prevalent. Some developing countries especially in Asia also emerged as important sources of FDI. Malaysia is among the developing countries that involves in OFDI. It also stated that TNCs from Malaysia are extending their global reach [WIR2006: pp. 103]. More impressive is that Malaysia’s inward and outward flows are converging.

South, East and South-East Asia continued to register strong growth in FDI inflows in 2008 (17%), to reach a new high of $298 billion. Inflows into the major economies in the region varied significantly; they surged in China, India and the Republic of Korea; continued to grow in Hong Kong (China); dropped slightly in Malaysia and Thailand.

FDI outflows from other major economies (Malaysia, Singapore) in the region generally slowed down in early 2009, as the crisis has largely reduced the ability and motivation of many TNCs from these economies to invest abroad [WIR 2009: pp:24].

Outward FDI of Malaysia was nearly non-existent prior to 1970s. Nonetheless, recently Malaysia has not only been able to sustain FDI inflows position, but also emerged as the fifth largest investor among the developing economies in Asia region (UNTACD, 2005).Malaysian companies have been investing abroad since the mid-1970s.

However, Malaysian OFDI became significant in the early 1990s with the changes in the global economic order that came about with end of the Cold War. Internationally, the completion of the GATT/WTO Uruguay Round that began in 1986 and completed in1994, regionally, the formation of the ASEAN Free Trade Area (AFTA) in 1992 and domestically, the economic liberalization processes beginning in the mid 1980s were sign of the changing global economic order that prompted OFDI. Recession has strictly affected the OFDI from transnational MNC’s from Singapore and Malaysia during the last financial year.

Research Question

“Foreign direct investment re¬‚ects the objective of obtaining a lasting interest by a resident entity in one economy (”direct investor”) in an entity resident in an economy other than that of the investor (”direct investment enterprise”).

The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a signi¬cant degree of in¬‚uence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated” (OECD, 1999).

The study is conducted to find the outward foreign investment by Malaysian transnational firm abroad. The research paper tries to find the factor that influence outward flow of FDI from developing nations. The paper tries to evaluate what factor triggers the outward flow of FDI, the factor that triggers the outflow of FDI can be critically evaluated so that it assist to a improved perspective of the theme.

The paper also tries to understand how trade promotes OFDI. Transnational companies do trade with a number of countries thereby enhancing the opportunity for investment to be made abroad. The paper try to discover does trade actually trigger an outflow of FDI from a country. OFDI helps in the flow of knowledge and know-how between the member countries, the research tries to estimate to what extend does the knowledge transfer happens and how does it help the home country to achieve a better state. Finally the paper tries to understand the relationship between the OFDI and economic growth. The research tries to understand the character and factor that influence the possible economic growth through OFDI.

Theoretical Rationale

There are a number of relevant theories on the growth and motivation of FDI explaining the outward FDI activities. One of the most popular theories is the OLI Eclectic Paradigms (Dunning, 1980) Ownership, Internalization and Locational. Firms make investment abroad due to certain ownership (O) advantages obtained by the firms.

These advantages enable the firms to utilize through a process of internalization (I) in countries that offer the essential locational (L) advantages. International Production Theory (Dunning, 1980 and Fayer weather, 1982) highlight on the affinity of a firm to open foreign production, depending on the particular lure of its home compared with resource implications and advantages of locating in another country.

Another popular theory regarding the FDI is associated to the income level of a country. Higher income of a country will leave vital proposition towards structural changes on the economy of the country. As pointed out by Chenery et al. (1986), firms are able to gain competitive advantage in term of economy of scale in the production despite adoption of new technologies.

Eventually, firms are able to acquire ownership advantages which become the driving force for establishing foreign production (Grubaugh, 1987). Meanwhile, higher degree openness is linked with greater level of outward FDI. Kogut (1983) stressed that the adoption of export-oriented policy eventually enable firms to acquire knowledge on the foreign market as well as skills in running operations abroad.

Eventually, the firms will decide to shift their strategy from exporting to make investment abroad.

On the other hand, they also revealed that exchange rate is an influential factor in affecting the outward FDI. Meanwhile, low interest rate in the home country relatively will lead to higher tendency of outward FDI (Prugel, 1987).

Investment made abroad require sound financial support and capital abundance in term of low interest rate enable firms to access to capital market. Therefore, firms can obtain necessary funding to finance their abroad investment. In related to that, exchange rate also has significant impacts towards the outward FDI.

Implication for Organisation

Since the amount of study prepared on this particular subject matter is fewer compared to FDI to the nation, the study would assist everybody to recognize the factor that influence the flow of outward FDI between two or more nation.

The amount of literature available on FDI to a country is comparative extra than the OFDI. The study would trigger more interest on the subject matter thereby increasing the number of study conducted on that subject matter. The paper tries to evaluate the difference between the export and outward foreign direct investment. The study would help companies to recognize the better option between investment and export.

Literature Review

Over the past two decades, FDI flows have grown at remarkable rates, with outflows averaging over 28 percent per annum from 1991 to 2000 (UNCTAD, 2004), greatly outpacing growth of exports.

Foreign Direct Investment (FDI) is always considered to be beneficial for the host countries economic growth, lot of studies on the impact of FDI on the economic growth and productivity domestic firm have also being undertaken. FDI which assist in the transfer of technology and knowledge help the firms to undertake their business actions in an improved approach.

Studies for developed home economies focus on a wide range of potential economic impacts of OFDI including impacts on domestic employment, wages, expenditures on research and development and innovation, trade flows and tax revenues, among others (Kokko, 2006).When we consider the factor that triggers the flow of Outward FDI economic condition prevailing in the nation play a vital role for the decision (Sanjaya Lall, 1997).

The growth of the Per Capita GNP also is an important characteristic that TNC’s consider while making these decision (J P Agarwal, 1980). The economic growth of the nation is the main character that attracts the companies to make investments in those particular countries.

As suggested above, the potential economic impacts of OFDI can best be appreciated in the context of how OFDI contributes to a nation’s international economic integration (Daniel Shapiro, Steven Globeman, 2006). It is important to note, however, that while there is a strong theoretical basis for expecting that OFDI will promote international trade, the causal linkage between the two is difficult to identify empirically (Duran and Ubeda, 2005).

Host countries policies and strategies of the transitional corporation also influence the decision of outward FDI (Sanjaya Lall, 1997). Another major aspect that influence OFDI is the government policies, if the policies favour the FDI then the transnational companies will have invest in the nation.

Malaysia being the one of the front runner among the South East Asian Countries had significant economic prosperity from the early 90’s onwards with an average economic growth of 9 % (Malaysian Budget, 2001). This favourable economic growth had assisted Malaysian transnational companies to make investment abroad.

The outward FDI from the country was growing on a stable manner; only during 1998 and 2001 it had a sudden deterioration due to the financial crisis that has prevailing in the Asian economic market (UNCTAD). The Financial crisis of 1997 had a significant impact on the OFDI made by the TNC’s of Malaysia; there were a few firms that made a steady progress investing abroad, firms such as PETRONAS, YTL Corporation (UNCTAD 2006).

According to the United Nation Conference on Trade and Development (UNCTAD) report of 2006 the OFDI has seen tremendous increase over the last 15 years increasing to almost 34% by the end of 2005. FDI outflows from South, East, and South-East Asia rose by 7% to US$186 billion in 2008. The region´s outward FDI to developed countries has been growing as part of efforts by Asian firms to acquire strategic assets abroad.

However, due to the negative impact of the global crisis on Asian TNCs, FDI outflows from the region will inevitably slow in 2009, although to a lesser degree than in many other parts of the world (WIR, 2009). During 2009 GDP Malaysian economy was -3%, though a decline in the economy means the country is under-performing the Malaysian economy was considerably doing better off than they predicted GDP of -5% ( Malaysian Budget , 2010).

The recession may have affected the world economy drastically but when we consider the WIR 2009 report there was a 7% increase in OFDI made from these regions. So when we take into consideration whether OFDI help in economic prosperity of a nation, we can conclude that it certainly does helping in improving the environment of the economy.


The research is carried out to discover the one central aspect

“Does OFDI really lead to the economic prosperity of the nation?”

Data Source

The paper tries to comprehend outward foreign direct investment between two or more nation. Since the scale of subject matter is pretty enormous collecting first hand information making use of primary data collection method to evaluate the subject is a time consuming process. So the data relevant for the completion of the paper will be taken from secondary sources such as journal, books, and website and academic papers.

The information concerning to the paper can be accessed from official sources, this make the more accurate and precise. Secondary source of data is a better way to conduct to the study, since the element of time involved and also due to that fact that it would help to improve on the finding or to contradict any finding regarding the topic.

Academic papers and journals would help to understand the subject matter in a better point of view and so thereby helping to make the paper more accurate and informatics.

Resign Design

While taking into considering the number of available literature on the subject matter, it would be better off to include case studies done on TNC’s from Malaysia and other Asean Countries to give an idea about the present condition of OFDI from the region.

Literature from official source will be taken into consideration as they depict a true and fair view regarding the subject matter, other reliable sources such as the United Nations Conference on Trade and Development (UNCTAD) report and the World Investment Report (United Nations) give a better perspective of the prevailing condition.

Approval from the regulatory body and the government will be taken for the successful completion of the research. Recession of 2009 which played a imperative task in the by and large actions of the transnational companies will be taken into deliberation and will assist us to evaluate the critical factor the influence investing abroad.


The research undertaken by me involves use of secondary data sources as case studies, books, journals, websites and newspaper information regarding the pattern and factor that influence the flow of foreign direct investment from a nation. This method of collection information for the purpose of study is termed as Realist Research (Fisher, 2007).

Both Quantitative and Quantitative approach will be applied so that depth knowledge and understanding of the subject, and make it easier to find out procedures that link one variable to another (Fisher, 2007). This would help to have a better outlook of the current situation. Since the research paper involves factor that influence the outflow and the growth the economy, statistical data regarding will be taken into consideration, thereby assisting the research for more accurate results.

Ethical Issue

The research paper is on outward foreign direct investment made by Malaysian transnational companies, proper care will be taken so that no ethical issue arise during the course of the study and if any ethical issue arise proper care will be given to take care about the issue.

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