Heterogeneity of the micro-mechanisms and pathways of the impacts of FDI on GDP in Asian developing economies

Purpose — This research provides a thorough examination of the impact of foreign direct investment (FDI) inflows in China and Malaysia, considering the diverse mechanisms and pathways involved.Method — Using panel data from 1991 to 2021 and a fixed-effects model to address unobserved individual heterogeneity, this study employs multiple regression to analyse the impact of FDI on GDP, controlling for capital formation, trade share, and labour force participation rates. Sensitivity tests examine whether the impact of FDI varies across specifications.Findings — The results show a significant positive impact of FDI on GDP, with a stronger marginal effect observed for China. Trade share and excessive money supply exert significant negative effects, while labour participation and capital formation exhibit heterogeneous impacts. Inflation has a two-sided effect, with its direction varying across specifications. Implications — Prioritise policies that attract FDI and improve its quality and efficiency. Both countries should optimise trade structures and raise export value added, address ageing and urban–rural labour imbalances through skills training and technological innovation and pursue practical monetary policies to keep inflation moderate. Originality — This study fills a gap in cross-country comparative research by revealing how the mechanisms of action differ across economies. It also develops a quantitative model that incorporates capital formation, trade share, labour participation rates, savings rates, and inflation.