International capital inflows and labour immigration

Purpose - The purpose of this paper is to examine the relationship between inward foreign direct investment (FDI) and unskilled immigrants for a panel of 23 manufacturing industries in Malaysia, spanning the period 1985-2009. Design/methodology/approach - The paper establishes the causal FDI-immigrant links within a multivariate model framework for the period 2000-2009, and in a univariate context for 1985-1999 and 1985-2009. Findings - Based on heterogeneous panel cointegration tests, there is a long-run equilibrium between inward FDI, unskilled migrant share, output growth, export intensity and market concentration. The long-run cointegrating coefficient based on the fully modified least squares estimator suggests the presence of unskilled migrant workers a significant location determinant for inward FDI for the first sub-period and the overall period. The results of the panel vector error correction model further attest to causal links between unskilled migrant worker presence and inward FDI in the short- and long run. Bidirectional causality between inward capital and labour flows is present in the first sub-period and unidirectional causal links from unskilled migrants to inward FDI is evident for the overall period. Research limitations/implications - The observed FDI-immigration (unskilled) links in manufacturing support the argument that inward FDI is induced by unskilled migration. The study reveals that unskilled immigration increases FDI inflows or rather “capital chases labour” in terms of international factor mobility. Practical implications - This has profound implications for public policy as the government seeks to reduce its dependence on migrant workers. Policy coordination is therefore needed between regulating inflows of foreign capital and foreign labour so that implemented policies do not pull in different directions and undermine Malaysia’s attractiveness as a destination for FDI. Originality/value - The large presence of unskilled migrants, an intrinsic characteristic (based on the new trade theory that includes factor endowments) of Malaysia, seems to be largely ignored when explaining FDI inflows to manufacturing, particularly so when the siting of MNCs in this sector have traditionally been in light scale manufacturing.