Determinants of Foreign Direct Investment: An Analysis on Policy Variables in the Malaysian Manufacturing Industry

Using the current 2-digit levels of a panel data set during the period of 2000 to 2018, this study adds to the literature by investigating the determinants of policy variables that influence the increase of foreign direct investment (FDI) inward stock in nine manufacturing industries according to the industry classification. Applying the ordinary least square (OLS) estimator with a robust standard error, this study concludes that direct domestic investment from local investors and investment in employers’ training play a very significant role to influence FDI inward stock in the medium-high and low technology industries. The study also found that degree holders working in the electrical and electronics (E&E), chemical, and machinery and equipment industries negatively influence FDI inwards due to their perceived level of absorptive capacity. The result implies that there is a mismatch of supply and demand of labour force and skills in dealing with the rapidly changing labour-market conditions. This study thus suggests that courses offered at tertiary institutions undergo a revision to make them more industry- driven. Human capital investment needs to focus on in-demand skills rather than skills deemed obsolete in the industries. Graduates, therefore, need to be equipped with transferable skills that can be “transferred” across different industries.