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Before the Storm: The Impact of Foreign Capital Inflows on the Malaysian Economy, 1966–1996

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  • Wong Kiong
  • K. Jomo

Abstract

Foreign capital inflows (FCI) are supposed to bring positive effects by augmenting investible funds, domestic savings and foreign exchange earnings, thus closing the savings and foreign exchange gaps. FCI may also have undesirable effects on the domestic savings rate as well as on the recipient's balance of payments position. This study examines both sets of influences on Malaysia between 1966 and 1996, i.e. before the 1997–98 crisis. Historically, Malaysia has relied heavily on foreign capital, especially foreign direct investment, rather than long-term borrowings. While FCI augmented domestic investment funds to accelerate the growth rate, they had negative influences on the savings rate as well as on the balance of payments. The findings also suggest that domestically raised funds, from savings and self-generated export earnings, are better than external funding. Hence, to sustain economic growth, greater efforts should be directed to better mobilising domestic savings, rather than relying heavily on foreign capital.

Suggested Citation

  • Wong Kiong & K. Jomo, 2005. "Before the Storm: The Impact of Foreign Capital Inflows on the Malaysian Economy, 1966–1996," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 10(1), pages 56-69.
    • Handle: RePEc:taf:rjapxx:v:10:y:2005:i:1:p:56-69
    DOI: 10.1080/1354786042000309071
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    1. repec:ucp:ecdecc:v:18:y:1970:i:3:p:313-27 is not listed on IDEAS
    2. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-130, Jan.-Feb..
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    Cited by:

    1. Tang, Chor Foon, 2008. "A re-examination of the role of foreign direct investment and exports in Malaysia's economic growth," MPRA Paper 38536, University Library of Munich, Germany.
    2. Agnė Šimelytė & Jūratė Antanavičienė, 2013. "Economic development and its influence on state capital structure," Post-Print hal-01694339, HAL.
    3. Mohammad Enamul Hoque & Noor Azuddin Yakob, 2017. "Revisiting stock market development and economic growth nexus: The moderating role of foreign capital inflows and exchange rates," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1329975-132, January.
    4. Agnė Šimelytė & Jūratė Antanavičienė, 2013. "Economic development and its influence on state capital structure," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 1(1), pages 1-9, September.
    5. Shafaai, Shafizal & Masih, Mansur, 2018. "The dynamics of growth, exports, exchange rate and foreign direct investment: evidence from Malaysia," MPRA Paper 102538, University Library of Munich, Germany.
    6. Jomo Kwame Sundaram, 2008. "Obstacles To Implementing Lessons from the 1997-1998 East Asian Crises," Working Papers 66, United Nations, Department of Economics and Social Affairs.

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