Attracting Foreign Direct Investment (FDI) in Madani Economy: What factors matter?

Foreign Direct Investment (FDI) has long been acknowledged as a vital driver of economic development, and Southeast Asia stands out as a prime destination for such investments. However, Malaysia's share of FDI in the region has been diminishing, signalling a loss of competitiveness. In response, the Malaysian government has prioritized enhancing competitive strength in its recent development framework, Madani Economy. This study aims to shed light on the factors that require greater attention to achieve these objectives. Utilizing the Autoregressive Distributed Lag (ARDL) approach and monthly data spanning from 2010 to 2019, the findings underscore the importance of growing market size and currency appreciation in attracting FDI inflows to Malaysia, indicative of the predominance of market-seeking FDI in the nation's economy. Meanwhile, a negative relationship between population growth and FDI inflows is observed, likely due to concerns about rising unemployment and dampening economic growth resulting from a growing population. These findings imply that to attract FDI inflows successfully, greater emphasis should be placed on developing the domestic market, given the significant role of market-seeking FDI in Malaysia. Additionally, it suggests the necessity for Malaysia to prioritize the development of environmentally friendly production approaches, as the burgeoning population places greater strain on resources, potentially reducing availability for multinational enterprises. Coincidentally, this aligns with the increasing global consciousness surrounding sustainable development, as evidenced by growing concerns regarding energy production and water supply, epitomized by initiatives like the Sustainable Development Goals (SDGs). These efforts indirectly foster long-term economic development by prioritizing environmental sustainability alongside economic prosperity.