Foreign Investment and Industrialization in Malaysia: Exports, Employment and Spillovers*

Over the past two decades, there has been a decisive shift in trade and industry policy in developing countries (DCs) away from import substitution and towards export‐orientation. As part of this policy shift, an increasing number of DCs have become more receptive to foreign direct investment (FDI). Despite its policy relevance, the literature on the role of FDI in export expansion, employment generation and spillovers in DCs is sparse. This paper attempts to fill this gap through a case study of the role of export‐oriented FDI in Malaysia's rapid industrialization. The overall conclusion of the paper is that export‐oriented FDI has brought significant returns to Malaysia principally because the general economic climate has been favourable for the internationalization of production for a considerable period of time.