A causal relationship between exports, foreign direct investment and income for Malaysia

The objective of this paper is to study foreign trade and investment dimensions of Malaysia in comparison with other ASEAN countries and to study the role of Foreign Direct Investment (FDI) to the growth of exports. Vector Autoregression (VAR) model is adopted to estimate the long-run causal relationship among exports, foreign direct investment and Gross Domestic Product (GDP). The cointegration test result shows that there exists a long-run equilibrium relationship among exports, FDI and GDP. It is found from the estimated error correction model that FDI is a significant variable and the result indicates that 1 unit increase in FDI in Malaysia will lead to 7.1 units increase in exports. The Granger causality test indicates that there is a unilateral relationship between exports and FDI and the direction is from FDI to exports which means that FDI causes exports.