Abstract

The coming of Foreign Direct Investment (FDI) into a country is said to boost the economic growth and contribute positive impact on the development of the country. However, there are studies that show that FDI is also one of the factors that contribute to the problem of disparities between regions in the country. This is because FDI typically tend to focus on the areas that offer economic advantages that can lower the production cost of goods and sevices as compared to those areas of backward regions of the country. The concentration of FDI in a few relatively advanced regions may have prevented positive effects of FDI from spreading to the whole country. This study aimed to investigate the effect of FDI on economic development and regional disparities in Malaysia. It explores the proposition that regional disparities are linked to the FDI that come into the country. Variables used involved secondary data and the period covered was 26 years ranging from the year of 1980 to 2006. Data were acquired from Bank Negara Malaysia Report (BNM), The Ninth and Tenth Malaysia Plans (Malaysia 2006, 2010), Labor Investigation Report, Department of Statistics Malaysia, Malaysian Industrial Development Authority (MIDA) and Economic Planning Unit (EPU). This analysis was conducted using classical production function which explains output as function to capital and labor. It was found that FDI is positive and significantly related to GDP implying that FDI is enhancing economic growth of the country. Since FDI focuses on the developed areas especially the states of Selangor, Penang, Malacca and Johore; these concentration will widen the disparities between the more developed states compared to the poorer states in the eastern part of the country.