EXAMINING THE EFFECTS OF LABOUR FORCE, NATURAL RESOURCE ENDOWMENTS AND POLITICAL STABILITY ON FOREIGN DIRECT INVESTMENT INFLOW IN MALAYSIA

Abstract

This study investigates the long-run relationship between FDI inflows and selected determinants, namely political stability, natural resources, labour force, financial development, and market size, using annual data for Malaysia from 1990 to 2019. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to examine the existence of cointegration among the variables, while the Error Correction Model (ECM) is used to assess the speed of adjustment towards long-run equilibrium. The results provide evidence of a stable long-run relationship between FDI inflows and the selected determinants. Labour force expansion, political stability and financial development are found to exert positive and statistically significant effects on FDI inflows, highlighting the importance of human capital, institutional quality and financial sector efficiency in attracting foreign investment. In contrast, natural resource endowment exhibits a negative but statistically insignificant relationship with FDI inflows, suggesting that resource abundance is not a primary driver of foreign investment in Malaysia. The ECM results indicate a significant adjustment mechanism, confirming convergence towards long-run equilibrium following short-run shocks. These findings suggest that policies aimed at strengthening political stability, enhancing financial sector development, and improving workforce quality are essential for sustaining Malaysia's attractiveness as an FDI destination. The study contributes to the growing literature on FDI determinants by providing updated evidence from a major emerging economy in Southeast Asia.