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Factors Influencing FDI Inflow to India, China and Malaysia: An Empirical

Analysis

Article in Asia-Pacific Journal of Management Research and Innovation · June 2012

DOI: 10.1177/2319510X1200800202

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Article

Factors Influencing FDI Asia-Pacific Journal of Management

Research and Innovation

Inflow to India, China and 8(2) 89–100

© 2012 Asia-Pacific
Institute of Management
Malaysia: An Empirical Analysis SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/2319510X1200800202
http://apjmri.sagepub.com
T.R. Panigrahi
B.D. Panda

Abstract
This article attempts to find out the factors which are significantly related and influence the FDI inflow into China, India and Malaysia
during the study period ranging between 1991 and 2010. The objective of FDI is almost the same, but the factors that influence foreign
investors when deciding the location of investment are receiving importance and attention. Correlation has been used to study the
factors influencing FDI inflow. The study revealed that India and China are very similar, whereas in Malaysia the same factors do not
influence inflow of foreign investment to the country. GDP of the country, gross capital formation, capital infrastructure, external debt,
export and import volume are the major factors that significantly influence foreign capital inflow into the two highly populated, fast
growing Asian countries, that is, China and India. In the case of Malaysia, only domestic investment or gross domestic capital formation
is significantly related to its FDI inflow.

Keywords
Foreign direct investment, India, China, Malaysia

Introduction the debates, the benefit of foreign investment seems to

Foreign direct investment (FDI) can be called the net
inflow of funds in a business firm which operates in a for-
eign country to keep a lasting management interest. The
role of FDI has increased phenomenally since the last two
decades. It can provide a business firm with new markets,
marketing and distribution channels, cheaper production
facilities, skill, new technology and finance. Asian coun-
tries like China, Korea, Singapore, Indonesia, Malaysia,
Philippines and Thailand attracted FDI, which became
instrumental in their economic growth. Apart from these
countries, India has become a favourite destination for FDI
inflow. Earlier India followed a socialist approach after its
independence, with strict government control over private
sector participation, foreign trade and foreign direct invest-
ment. But this approach did not allow the country to taste
economic development. So in the early 1990s, India opened
up its markets gradually through the New Economic Policy,
thereby reducing government controls on foreign trade and
investment. Although the new economic policy was the
subject of political debate, the privatisation of publicly
owned industries and the opening up of certain sectors to
private and foreign interests have proceeded slowly. From
be more than the cost. Crespo and Fontura (2007) exam-
ined the advantages of foreign investment in the form of
technology transfer, marketing expertise, introduction of
modern managerial techniques and new possibilities for
promotion of exports. This is particularly necessary in the
changing global scenario of industrial and economic coop-
eration marked by mobility of capital. Mottaleb (2007)
found that foreign capital in the form of FDI reduces capi-
tal deficiency in the host country where domestic savings
fall short of the investment required. The government of
India therefore welcomes foreign investment in the interest
of the country’s industrial development.
In order to invite foreign investment in high priority
industries, requiring large investments and advanced tech-
nology, the government of India has approved direct for-
eign investment up to 51 per cent of foreign equity in such
industries. This group of industries is known as the
‘Appendix I Industries’, in which foreign companies have
been allowed to invest on a discretionary basis. Such a
framework has brought transparency in making Indian
policy on foreign investment and thus made it attractive for
companies abroad to invest in India.

T.R. Panigrahi, Assistant Professor, Institute of Management & Information Science, Bhubaneswar, Odisha. E-mail: tusarr2004@gmail.com
B.D. Panda, Assistant Professor, Institute of Management & Information Science, Bhubaneswar, Odisha. E-mail: brahmadev.panda@gmail.com

Downloaded from abr.sagepub.com at University of New England on June 6, 2015

90
Now even the FDI Policy permits FDI up to 100 per
cent from foreign/non-resident Indian (NRI) investors
without prior approval in most of the sectors, including the
services sector, under automatic route. FDI in sectors/
activities under automatic route does not require any prior
approval of either the government or the Reserve Bank of
India (RBI). The investors are required to notify the
regional office concerned of RBI of the receipt of inward
remittances within 30 days of such receipt and will have to
file the required documents with that office within 30 days
after issue of shares to foreign investors. An investor can
make an application for prior government approval even
when the proposed activity is under the automatic route.
All proposals that do not meet any or all of the parame-
ters for automatic approval need to be considered and
approved by the government. The Foreign Investment
Promotion Board (FIPB) considers all proposals for for-
eign investment, which require government approval. The
FIPB also grants composite approvals involving foreign
investment/foreign technical collaboration. Industrial pol-
icy reforms have substantially reduced industrial licensing
requirements, removed restrictions on expansion and facil-
itated easy access to foreign technology and FDI. The
upward moving growth curve of the real estate sector owes
some credit to a booming economy and liberalised FDI
regime.
Similar to India, each and every country wants FDI, and
it framed its policy accordingly to attract foreign investors.
But the response of foreign investors is not alike; rather, it
is very much different in the volume of investment. Various
economic factors are responsible to attract FDI like interest
on loans, market size or GDP, GDP per capita, external
debt, inflation rate, trade openness, government consump-
tion, etc. The inward FDI in Asia is concentrated in a few
countries like China, Hong Kong, Singapore, Korea,
Malaysia, Thailand and India. This depicts wider dispari-
ties in terms of net FDI among Asian economies. The major
portion or bulk of net FDI has been confined to four
nations, namely, China, Hong Kong, Singapore and India.
Such trends and situation put the Asian continent in gen-
eral, and various economies in particular, in lopsided
development and may affect the degree of growth and
development. In this article, we will examine the deciding
factors of FDI inflow to India, Thailand, China and
Malaysia as FDI is one of the most important forms of
international capital flows. These countries are now at the
phase of transition and so they look forward to a rapid
growth opportunity, whereby they can adopt the advanced
technology of the developed world to their industries.
The study is conducted for data from India, China and
Malaysia, as the common factor in these three countries is
that they have undergone the economic transformation in
Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100
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T.R. Panigrahi and B.D. Panda
the 1980s and 1990s. Since 1957, Malaysia has got an
average growth rate of 6.5 per cent per annum and in the
period between 1980 and mid-1990s, it grew at an average
rate of 8 per cent per annum. In 2010 its GDP grew at 7.2
per cent, which is quite similar to the GDP growth rate of
India and China in the first decade of twenty-first century.
But when we look at FDI inflow to these three countries in
the global context, Malaysia ranks 79th, whereas India and
China rank 9th and 3rd position, respectively. Here a ques-
tion comes to mind: What are the factors responsible for
attracting less FDI to Malaysia and the highest FDI among
Asian countries to China? Further the GDP per capita in
Malaysia is the highest, and GDP is the lowest among these
three Asian countries. In the global ranking of GDP, China,
India and Malaysia have the 3rd, 8th and 39th rank, respec-
tively, according to the world development indicator data-
base (World Bank, 2010). But the GDP per capita is very
much opposite in case of Malaysia and China. China, India
and Malaysia ranked 90th, 130th and 61st in GDP per cap-
ita in the global context in 2009. As the size of population
in India and China is very large, the GDP per capita is rela-
tively very less in these countries compared to the moder-
ately populated Malaysia. This created one attraction for
the authors to find out whether GDP or per capita GDP
plays a strong role in deciding FDI inflow or whether there
are some other factors other than GDP and per capita GDP
that attract FDI to these countries under study.
Review of Literature
Many studies have stressed the role of GDP growth, domes-
tic investment, inflation, real interest rates, wage rate, exter-
nal debt and trade rate in attracting and influencing FDI.
Kashibhatla and Sawhney (1996) have studied a cause and
effect relationship between GDP and FDI for the US econ-
omy. They found that FDI follows GDP as an indicator of
market size. Naeem et al. (2005) conducted a time series
study from 1970–1971 to 1999–2000 in Pakistan and found
that economic factors like market size, domestic invest-
ment, trade openness, indirect tax, inflation and external
debt play an important role in determining FDI in Pakistan.
The work of Dunning (1993) describes an ownership-
location-internalisation (OLI) theory for the choice of
country by multinational enterprises. Dunning’s location
advantage theory explains three main factors that influence
FDI inflow, which are (a) economic factors, (b) social and
cultural factors and (c) political environment.
Cheng and Kwan (2000) studied the influence of deter-
minants like labour wage, infrastructure level, per capita
income, education level, policy designs and regional
income on FDI inflow to China. In his study, he found
that infrastructure, policy designations (that is, special
Factors Influencing FDI Inflow
economic zones [SEZs]) and regional income positively
affect the inflow of FDI to China, whereas the wage cost
has a negative impact on FDI.
Zhang (2001) used panel data for direct investment
in China from Hong Kong and Taiwan from 1977 to 1997.
He opined that the education levels did not significantly
affect FDI inflow to China in the two decades of the period
of study since the FDI inflow to China has been substan-
tially determined by its market size, rapid economic growth
and liberalised FDI regimes. The foreign direct investment
from Hong Kong and Taiwan were encouraged by the
liberalised trade policy, cheap labour and political stability
in China.
Asiedu (2002) documents that the variables, that is,
openness, return on investment, GDP and market size are
significant for FDI promotion and infrastructure develop-
ment. Using the Least Square Method, he found political
risk as insignificant. Howard and Banik (2001) discovered
two broad determinants of private foreign direct invest-
ment and put in plain words the variables, in terms of
‘domestic pull’ and ‘external push’ factors. In domestic
pull factors, they took market size and gross domestic
investment of the host country, and in the push factors, they
used exchange rate and degree of openness of the home
country. Their analysis has uncovered that the ratio of
exports to GDP was the single economic determinant of
FDI. The strategic geographical position of some countries
and the prospect of marketing their products to a global
market attracted foreign investors.
Sahoo and Mathiyazhagan (2003) found that export
plays a comparatively greater role in the growth and devel-
opment of Indian economy and FDI. They suggested that
there is a need to cautiously step towards opening up the
export-oriented sectors in terms of the FDI policy, which
will take the economy towards a higher growth.
Ho (2004) revealed that the large market size in China
attracts inward foreign investments in both China and the
Guangdong province, whereas the labour cost and level of
state ownership negatively affect the dependent variable,
that is, inward FDI.
Mottaleb (2007) found a high degree of correlation
between FDI and economic growth in developing coun-
tries. In his study he considered the FDI inflows to 60 low-
income countries for the years 2003, 2004 and 2005. With
high GDP and growth rate, investment-friendly policies
and well-established communication systems, developing
countries can attract more FDI.
Vani, Nayak and Basu (2007) revealed that India is not
only cost-effective for doing production but also that it is a
hot destination for research and development (R&D) activ-
ities. Cost-effectiveness and R&D are the main significant
factors determining FDI inflows to most of the industries
Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100
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91
in India. The study also revealed a strong negative influ-
ence of corporate tax on FDI inflows.
Kamath (2009) conducted a study of Asian countries
for the period between 1985 and 2005, by taking world
investment data from the World Investment Report (2006).
Using regression analysis for the dependent variable, that
is, FDI inflow, and the independent variables, namely,
GDP, exchange rate, interest rate, human capital, techno-
logical factor and openness of the economy, he discarded
the relevance of the model in the Indian context as the
Indian liberalisation of FDI inflow and outflow has a long
way to go. In India only the human capital has a significant
role in FDI inflow and other factors are insignificant to
drive FDI inflow. Kamath’s findings are exactly opposite
to the findings related to the FDI determinants in devel-
oped countries, where exchange rate and GDP are the most
important determinants (Krykilis, 2003).
Mottaleb and Kalirajan (2010) observed that small
developing countries across the world adopt a more out-
ward-oriented trade policy to attract substantial amount of
FDI by providing a more business friendly environment to
the foreign investors.
Azam and Lukman (2010) examined the effect of vari-
ous economic factors on FDI inflow into Pakistan, India
and Indonesia during the period from 1971 to 2005. Their
study revealed that the economic determinants in India and
Pakistan are very similar, except two determinants, namely,
trade openness and government consumption. The result of
Indonesia does not match the results of Pakistan and India.
Objective of the Study
The objective of this study is to analyse the factors encour-
aging and discouraging FDI inflow to countries like India,
China and Malaysia. Further, during the study period it
examines the trend of FDI inflow to the above-mentioned
countries. It compares the relative importance of the fac-
tors deciding FDI inflow to these three different Asian
countries.
Database and Methodology
The present study is based on secondary time series data
ranging from the year 1991 to the year 2010. The data used
for this study have been taken from the world development
indicator, world investment reports and other published
information considered reliable and authentic.
Sample Size
Three Asian countries have been taken as a sample for the
analysis. These countries are India, China and Malaysia.
92
Methodology
Correlation analysis is used as the methodology for this
study to specify the various factors that influence FDI
inflow into India, China and Malaysia. Here, number of
years (that is, n) is taken as 19 for this study. Further, we
have taken variables such as inflation, deflator, real inter-
est, energy, domestic investment, external debt, GDP, per
capita GDP, export and import volume, as independent
variables to explain the relative importance.
FDI Evidence in India
India, like other developing countries, is eager for better
economic prospects, which compelled it to seek foreign
investment, as FDI plays a significant role for a robust
economy. According to UNCTAD (2007), India has
emerged as the second-most attractive destination for FDI
after China and ahead of the USA, Russia and Brazil. The
historical background of FDI in India can be traced back to
the pre-independence period of India, and establishment of
East India Company of Britain. At that time, British capital
flowed into India. Further after independence, the first
Prime Minister of India not only considered FDI as neces-
sary but also to secure scientific, technology know-how
and capital equipments. In fact, in the early 1990s, India’s
focus on liberalisation increased a lot due to the severe bal-
ance of payment crisis, the Gulf War, which led to rise in
oil prices, and to boost its export. These issues left India
with a very low level of foreign exchange reserves and a
negative balance of payment. At the time, India was also
suffering from political uncertainty and high inflation. All
these unfavourable factors led to the fall of India’s credit
rating in the international market and it was on the verge of
defaulting on external debt payment. In this phase, the
Indian government had to take some drastic steps in order
to overcome these problems. The then finance minister
Dr Manmohan Singh introduced the macroeconomic stabi-
lisation and structural adjustment programme with the help
of the World Bank and International Monetary Fund which
opened India’s door to FDI inflows. The economic reform
and liberalisation policy in 1991–1992 lured many devel-
oped economies to invest in India. If we analyse India’s
position in 2011, it can be said that India is now the hottest
destination for FDI inflow.
FDI Evidence in China
During the Maoist period (1949–1976), China rejected for-
eign investment and paid back all its overseas loans (mostly
to the Soviet Union) by 1965. But in late 1978, Deng
Xiaoping opened up China to foreign trade and investment
with the help of an economic policy meant to reform, and
Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100
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T.R. Panigrahi and B.D. Panda
in the early 1980s for the first time, Special Economic
Zones (SEZs) were set up to attract direct investment from
Hong Kong and elsewhere.
The foreign investment policy of China can be divided
into three phases of reform after 1979. In the first phase
(1979–1985), a number of laws and regulations were
relaxed to attract foreign investors into China. Through the
new investment policy, China permitted foreign corpora-
tions and enterprises to start their business in the territory
of China. In 1980, four SEZs were established with
preferential treatment for foreign investors (Fu, 2000;
Zhang, 1999). In the 1980s, FDI inflows grew steadily but
remained comparatively small, as it was confined largely
to joint ventures with Chinese state-owned enterprises.
During the continuous development era (1986–1991),
China extended its open-door policy towards more coun-
tries. In the mid-1980s, the state promulgated the ‘Law in
Enterprises Operated Exclusively with Foreign Capital’ and
‘Provision on Encouraging Foreign Investment’, which
motivated and removed uncertainty in relation to invest-
ment in China. A noticeable inflow of foreign capital surged
into China during the period of high growth. After the
Beijing Massacre in 1989, Western and Japanese companies
withdrew their investment in China, but the momentum was
maintained, partly by a new entry of capital from Taiwan.
In the third phase, the central government of China
started withdrawing its ban on foreigners from entering
into joint ventures. The open policy in the 1990s shifted
from coastal regions to the western inland area. The
Chinese government began to open more inland cities
and regions for foreign investment. In the late 1990s, China
continued to open up more markets and reduce barriers
to foreign investors in an effort to enter the World
Trade Organization (WTO). The reforms include the
following:
1. boosting transparency in both legal and administra-
tive systems;
2. improving intellectual property protection;
3. reducing tariffs and tax;
4. privatising state-owned enterprises (SOEs).
In the first decade of the twenty-first century, the FDI in
China had significantly increased due to the confidence of
foreign investors to invest in China which was again due to
the reforms within the nation and the entry of the country
in WTO. In early 2002, the contracted and realised FDI
inflows grew strongly and reached US$50 billion.
FDI Evidence in Malaysia
In South-east Asia, Malaysia is one of the most successful
nations in terms of attracting FDI because of its impressive
Factors Influencing FDI Inflow
economic growth since the 1960s. Many policy instru-
ments were set up by the Malaysian government in the
1980s.
Foreign investors began to come to Malaysian soil with
the introduction of the Investment Incentives Act (1968),
followed by the establishment of the Free Trade Zones
(FTZs) during the Second Malaysia Plan (1971–1975).
Since then, Malaysia has attracted a large portion of the
investment in dollars that flowed into Asia. Malaysia
was the second-largest FDI recipient among Asian econo-
mies at US$5.8 billion in 1995 (World Investment Report,
1996).
Since the 1960s, Malaysia had been attracting compa-
nies in labour-intensive industries. The objective of the
government was to reduce the unemployment problems of
Malaysia as well as to restructure the economy from its
over-dependence on the agricultural sector. That is why
much of the FDI that came to Malaysia in the 1960s and
1970s was in the electrical and electronic industries, and
the textile industry (Fong & Lim, 1984), which were
known to be labour intensive. Many Fortune 500 compa-
nies established their operations in Malaysia due to cheap
labour resources. The companies include Motorola, Texas
Instruments, Matsushita and Philips.
FDI Trends of China,
India and Malaysia
Table 1 furnishes the FDI inflow trends of China, India and
Malaysia during the period between 1991 and 2010. Here
it can be clearly seen that the FDI inflow to China and
Malaysia is US$4,366 million and US$3,998.44 million in
the year 1991, respectively, whereas India stood at US$73
million only. The FDI figures with respect to China and
Malaysia were much higher than India since their eco-
nomic reforms happened in the early 1980s and India’s
reforms began in 1991. So India had a low FDI inflow, but
it picked up with a good growth rate in the coming years. It
can be seen from the table that India was at US$73 million
at 1991, but just within a span of six years the FDI inflow
jumped to US$3,577 million, which is nearly 50 times the
1991 FDI inflow. There was a slow growth or negative
growth in the Asian region from 1997 to 2000 due to the
Asian Financial crisis that occurred in the year 1997.
Because of the crisis, China, India and Malaysia faced a
negative growth in FDI inflow from 1998 to 2000. But
among these three countries, India performed well in com-
parison to Malaysia and China due to strong consumer
demand. India’s robust growth and liberalisation attracted
many investors around the world. In the year 2001, India
received more FDI than Malaysia and since that time, India
has continuously dominated Malaysia in terms of FDI
Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100
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93
receipt. If we compare India and China in terms of FDI, it
can be seen that China has attracted more FDI than India,
but if we talk about the annual growth trend of FDI of India
and China, we can say that the growth rate of India is
higher than China in many years. For instance, in the year
2000 China saw a negative annual growth, whereas India
saw a positive growth rate of 65 per cent. This clearly indi-
cates that though China is a strong player in attracting FDI,
India, which started with a very low figure in 1991, grew at
a faster rate as compared to China. Still China is the highest
FDI recipient of the world due to its optimum utilisation of
its recourses, low cost and huge export. If we compare both
in 2010, China’s FDI inflow is 7.5 times more than that of
India. Again there is a downtrend in terms of FDI inflow to
China, India and Malaysia from 2008 to 2010 due to the
global financial crisis.
The figures in the table are put in a graph showing the
trend of FDI inflow to these three countries in the men-
tioned period of 19 years. The resultant graph in Figure 1
shows that FDI in China has been of the highest volume
among these three countries and the trend for China is the
most steep than any other country’s FDI trend. Similarly,
the trend of Malaysia happens to be the least steep in our
study. Moreover, when the FDI growth rate is analysed in
Table 1, it is observed that the average growth rate of FDI
happens to be highest for Malaysia, though it has got the
highest number of fluctuations in its growth rate in the 19
years of our study. But in absolute volume of FDI inflow
China is very much ahead of India and Malaysia.
Empirical Results and Discussions
We have shown the correlation of FDI with some of
the factors influencing FDI inflow to India, China and
Malaysia in Tables 2, 3 and 4, respectively. The correlation
coefficient table for India (Table 2) shows that FDI inflow
to the country is significantly related to its domestic invest-
ment, external debt, GDP, per capita income, energy infra-
structure, export and import volume. As Table 2 shows, the
external debt and import volume have the maximum impact
on the FDI inflow to India. The reason is very clear that
external imbalance of the Indian economy has compelled
India to frame policies friendly to foreign investors. The
objective of attracting FDI is to reduce the balance-of-trade
(BoT) deficit and foreign debt service payment. We can
also mark that export volume has a strong correlation
with FDI inflow, from which we can predict that the export
level is positively affected by the FDI as domestic produc-
tion increases in the country. A clear understanding is
possible by regression analysis of the variables. Similarly,
domestic investment, GDP, energy or infrastructure are
also significantly related to the FDI inflow to India.
94 T.R. Panigrahi and B.D. Panda

Table 1. The Trend of FDI Inflows and Its Growth Rate in China, India and Malaysia from 1991 to 2010

Annual Annual Annual

China (Million Percentage India (Million Percentage Malaysia (Million Percentage
Year US$) Change US$) Change US$) Change
1991 4,366 73.53764 3,998.449
1992 11,156 155.5199 276.5124 276.0148 5,183.358 29.63423
1993 27,515 146.6386 550.37 99.03988 5,005.643 –3.42858
1994 33,787 22.79484 973.2715 76.83948 4,341.801 –13.2619
1995 35,849.2 6.103531 2,143.628 120.2498 4,178.239 –3.76714
1996 40,180 12.0806 2,426.057 13.17528 5,078.415 21.54438
1997 44,237 10.09706 3,577.33 47.45449 5,136.515 1.14405
1998 43,751 –1.09863 2,634.652 –26.3515 2,163.402 –57.8819
1999 38,753 –11.4237 2,168.591 –17.6896 3,895.263 80.05269
2000 38,399.3 –0.9127 3,584.217 65.27862 3,787.632 –2.76314
2001 44,241 15.21304 5,471.947 52.66784 553.9474 –85.3748
2002 49,307.98 11.45312 5,626.04 2.816042 3,203.421 478.2898
2003 47,076.72 –4.52515 4,322.748 –23.1654 2,473.158 –22.7964
2004 54,936.48 16.69565 5,771.297 33.50992 4,624.211 86.97595
2005 117,208.3 113.3524 7,606.425 31.7975 3,966.013 –14.2337
2006 124,082 5.86456 20,335.95 167.3522 6,076.12 53.20475
2007 160,051.8 28.98872 25,482.65 25.30841 8,590.185 41.37617
2008 175,147.7 9.431829 43,406.28 70.33658 7,375.908 –14.1356
2009 114,214.5 –34.7896 35,595.86 –17.9937 1,387.394 –81.1902
2010 185,080.7 62.04659 24,159.18 –32.1292 9,102.974 556.1205
Average growth
rate of FDI 29.65951 50.76376 55.23732
Source: World development indicator.

Difference between India and China inflow and energy infrastructure are significantly related,
In our study, the FDI determinants are not much different whereas in case of China energy and FDI inflow are nega-
in India and China. They are almost the same in both the tively related although the relationship is insignificant.
countries, except the energy or infrastructure. In India, FDI Export and import volumes in China have a strong positive

Figure 1. Comparison of FDI inflows into China, India and Malaysia

200000
China
FDI Inflow US $ million

150000 India
100000 Malaysia

50000 Linear
(China)
0
1990 1995 2000 2005 2010 2015
–50000
Year

Source: World development indicators (http://data.worldbank.org/indicator).

Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100

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 Table 2. Correlation Table of FDI in India

IND.FDI INFLATIO RL.INTR DEFLATOR DOM.INV EXTEDEBT ENERGY GDP PERCAPGD EXPORT IMPORT
IND.FDI Pearson 1
Correlation
Sig. (1-tailed) —
INFLATIO Pearson 0.010 1
Correlation
Sig. (1-tailed) 0.483 —
RL.INTR Pearson –0.190 –0.307 1
Correlation
Sig. (1-tailed) 0.218 0.101 —
DEFLATOR Pearson –0.139 0.771(**) –0.628(**) 1
Correlation
Sig. (1-tailed) 0.285 0.000 0.002 —
DOM.INV Pearson 0.915(**) –0.138 –0.270 –0.214 1
Correlation
Sig. (1-tailed) 0.000 0.287 0.132 0.189 —
EXTEDEBT Pearson 0.976(**) 0.000 –0.247 –0.125 0.960(**) 1
Correlation
Sig. (1-tailed) 0.000 0.500 0.154 0.306 0.000 —
ENERGY Pearson 0.889(**) 0.134 –0.291 –0.007 0.861(**) 0.932(**) 1
Correlation
Sig. (1-tailed) 0.000 0.292 0.113 0.489 0.000 0.000 —
GDP Pearson 0.891(**) –0.296 –0.187 –0.402(*) 0.966(**) 0.920(**) 0.811(**) 1
Correlation
Sig. (1-tailed) 0.000 0.109 0.221 0.044 0.000 0.000 0.000 —
PERCAPGD Pearson 0.893(**) –0.289 –0.187 –0.398(*) 0.968(**) 0.922(**) 0.814(**) 1.000(**) 1

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Correlation
Sig. (1-tailed) 0.000 0.115 0.222 0.046 0.000 0.000 0.000 0.000 —
EXPORT Pearson 0.921(**) –0.243 –0.228 –0.313 0.973(**) 0.932(**) 0.795(**) 0.985(**) 0.985(**) 1
Correlation
Sig. (1-tailed) 0.000 0.158 0.174 0.096 0.000 0.000 0.000 0.000 0.000 —
IMPORT Pearson 0.958(**) –0.122 –0.245 –0.213 0.988(**) 0.973(**) 0.856(**) 0.964(**) 0.966(**) 0.985(**) 1
Correlation
Sig. (1-tailed) 0.000 0.309 0.156 0.191 0.000 0.000 0.000 0.000 0.000 0.000 —
Source: Authors’ calculations.
Notes: ** Correlation is significant at the 0.01 level (1-tailed).
* Correlation is significant at the 0.05 level (1-tailed).
List-wise N = 19.
 Table 3. Correlation Table of FDI in China

FDI.CHIN INFLATIO REALINTR DEFLATOR DOM.INVT EXT.DEBT ENERGY GDP PERCPGDP EXPORT IMPORT
FDI.CHIN Pearson 1
Correlation
Sig. (1-tailed) —
INFLATIO Pearson –0.204 1
Correlation
Sig. (1-tailed) 0.201 —
REALINTR Pearson –0.072 –0.837(**) 1
Correlation
Sig. (1-tailed) 0.385 0 —
DEFLATOR Pearson 0.963(**) –0.937(**) 1
Correlation –0.131
Sig. (1-tailed) 0.296 0 0 —
DOM.INVT Pearson 0.876(**) –0.295 0.047 –0.248 1
Correlation
Sig. (1-tailed) 0 0.11 0.424 0.153 —
EXT.DEBT Pearson –0.368 0.088 –0.309 0.961(**) 1
Correlation 0.926(**)
Sig. (1-tailed) 0 0.061 0.361 0.099 0 —
ENERGY Pearson –0.301 0.563(**) –0.426(*) –0.08 –0.069 1
Correlation –0.164
Sig. (1-tailed) 0.252 0.105 0.006 0.035 0.372 0.39 —
GDP Pearson –0.397(*) 0.098 –0.335 0.965(**) 0.995(**) –0.086 1
Correlation 0.913(**)
Sig. (1-tailed) 0 0.046 0.345 0.081 0 0 0.364 —
PERCPGDP Pearson –0.395(*) 0.098 –0.334 0.965(**) 0.995(**) –0.084 1.000(**) 1
Correlation 0.914(**)
Sig. (1-tailed) 0 0.047 0.345 0.081 0 0 0.366 0 —

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EXPORT Pearson –0.315 –0.029 –0.217 0.946(**) 0.981(**) –0.16 0.979(**) 0.979(**) 1
Correlation 0.953(**)
Sig. (1-tailed) 0 0.095 0.453 0.187 0 0 0.257 0 0 —
IMPORT Pearson –0.292 –0.041 –0.201 0.962(**) 0.981(**) –0.157 0.980(**) 0.980(**) 0.997(**) 1
Correlation 0.949(**)
Sig. (1-tailed) 0 0.112 0.434 0.205 0 0 0.261 0 0 0 —
Source: Authors’ calculations.
 Table 4. Correlation Table of FDI in Malaysia

FDI.MLSY INFLATIO REALINTR DEFLATOR DOM.INVS EXT.DEBT ENERGY GDP PERCAP EXPORT IMPORT
FDI.MLSY Pearson
1
Correlation
Sig. (1-tailed) —
INFLATIO Pearson 0.395(*) 1
Correlation
Sig. (1-tailed) 0.047 —
REALINTR Pearson –0.513(*) –0.214 1
Correlation
Sig. (1-tailed) 0.012 0.190 —
DEFLATOR Pearson 0.506(*) 0.503(*) –0.886(**) 1
Correlation
Sig. (1-tailed) 0.014 0.014 0.000 —
DOM.INVS Pearson 0.609(**) 0.064 –0.286 0.235 1
Correlation
Sig. (1-tailed) 0.003 0.397 0.118 0.167 —
EXT.DEBT Pearson 0.125 –0.401(*) –0.281 –0.034 0.424(*) 1
Correlation
Sig. (1-tailed) 0.305 0.045 0.122 0.445 0.035 —
ENERGY Pearson –0.262 –0.019 0.125 –0.146 –0.254 –0.466(*) 1
Correlation
Sig. (1-tailed) 0.140 0.470 0.305 0.275 0.147 0.022 —
GDP Pearson 0.196 –0.384 –0.347 –0.018 0.382 0.974(**) –0.405(*) 1
Correlation
Sig. (1-tailed) 0.211 0.052 0.073 0.472 0.053 0.000 0.043 —
PERCAP Pearson 0.303 –0.331 –0.348 0.000 0.559(**) 0.948(**) –0.361 0.971(**) 1

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Correlation
Sig. (1-tailed) 0.103 0.083 0.072 0.499 0.006 0.000 0.064 0.000 —
EXPORT Pearson 0.234 –0.350 –0.445(*) 0.064 0.322 0.936(**) –0.354 0.986(**) 0.947(**) 1
Correlation
Sig. (1-tailed) 0.168 0.071 0.028 0.398 0.089 0.000 0.068 0.000 0.000 —
IMPORT Pearson 0.449(*) –0.098 –0.409(*) 0.084 0.568(**) 0.844(**) –0.327 0.908(**) 0.942(**) 0.903(**) 1
Correlation
Sig. (1-tailed) 0.027 0.345 0.041 0.366 0.006 0.000 0.086 0.000 0.000 0.000 —
Source: Authors’ calculations.
Notes: * Correlation is significant at the 0.05 level (1-tailed).
** Correlation is significant at the 0.01 level (1-tailed).
List-wise N = 19.
98
correlation with the FDI inflow of the highest growing
economy. At the same time GDP and external debt have
also much significant impact to attract foreign investment
into the country. Whereas in the case of India import has
the strongest correlation with FDI inflow in comparison to
any other factor taken in our study.
Difference between India and Malaysia
The external debt level has a positive significant correla-
tion with FDI inflow to both India and China, whereas in
case of Malaysia this variable has a very insignificant rela-
tionship with FDI inflow. The correlation results of FDI
inflow with the variables under our study are completely
opposite to that of India and China. FDI inflow during the
period of this study in Malaysia is more related to the
domestic investment, real interest rate and inflation or
the general price level in the country.
The domestic investors get the investible capital at a
lower rate of interest and can charge a lower price to their
consumer. So the result is low inflation, which is very
much visible in Table 5.
Foreign investors find it difficult to gain profit by operat-
ing in the Malaysian market when they bring their capital
from their home country at a higher cost of capital (rate of
interest) and get a lower rate of return in Malaysia. In the
years 1997 and 1998, the nominal rate of interest had
crossed 10 per cent along with a higher inflation at a rate of
8.5 per cent and 8.86 per cent in 1998 and 2000, respec-
tively. The real rate of interest in these two years had been
reduced to 3.35 per cent and –1.09 per cent, respectively.
This again discouraged the foreign investment in the coun-
try. But in the succeeding years FDI inflow has increased.
By taking together Tables 1 and 5, we can mark that when-
ever there is an increase in the real rate of interest the FDI
inflow has got a favourable growth and vice versa. But in
Table 4, the correlation table showing Malaysian FDI
inflow is quite contradictory. It is marked that the real inter-
est rate and the FDI inflow are negatively related to each
other for Malaysia. There may be some other factors
involved resulting in this contradiction and those factors are
not explained in our study. In the case of India, the variables
like interest rate and inflation are very insignificant. So we
may leave these factors leading to ambiguity in the results.
Malaysia had a surplus BoT during the period from 1998
to 2003 and later it faced a BoT deficit, whereas throughout
the period of this study India has been facing BoT deficit;
the situation persists since independence of the country. It
must be a reason for which planning is done accordingly to
reduce the BoT deficit and bring it to surplus situation
which has attracted foreign direct investment by the way of
export promotion and import substitution strategy. Whereas
Asia-Pacific Journal of Management Research and Innovation, 8, 2 (2012): 89–100
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T.R. Panigrahi and B.D. Panda
in the case of Malaysia the correlations between the two
factors are insignificant, showing that the import and export
are not much related to the country’s FDI inflow. The main
factors that are considered to be closely related to one coun-
try becoming an FDI destination for foreign investors are
insignificant for Malaysia. For that reason, FDI growth rate
in the country has the maximum fluctuations in comparison
to the two other countries in this study.
Conclusion
This study tries to investigate the association between FDI
inflow to China, India and Malaysia and selected macroeco-
nomic determinants, namely, GDP, domestic investment,
external debt, per capita income, energy infrastructure,
export and import volume income. Empirical outcomes
depicted that GDP, domestic investment, external debt,
per capita income, export and import volume have a signifi-
cant relationship with FDI inflow to both India and
China, whereas in case of Malaysia its FDI inflow is signifi-
cantly related to only domestic investment. Again the lower
inflation rate and relatively constant real interest rate dis-
courages foreign investors from investing in Malaysia as
domestic investors rule the market.
From the study of FDI inflow to the three countries in
this study, it is seen that Malaysia is quite different in its
approach to attract foreign investment than that of China
and India.
Limitations and Further
Scope for Research
The economic data taken in this study are limited to the
belief that they expose the authenticity and an accurate pic-
ture. This study suffers from some limitations. The study is
based upon 19 years’ data, that is, from the year 1991 to the
year 2010, which may restrict the generalisation of the
results. This article is focused on the post-reform era in
India, due to which we have taken data from the year 1991.
Our study is limited to only three Asian countries. The results
may differ with the increase in the number of countries and
time period of investigation. Further in this study, certain
qualitative factors are not taken into consideration like trade
openness, exchange rate, government expenditure.
The study we have done is based on three countries and
19 years on some limited factors. The result we obtained
can be more representative if number of years is increased
with more number of factors. Here the researchers and
writers can make a study on factors influencing the FDI
inflow of developed nations like Japan, Germany and
USA. Simultaneously, those factors can be adopted in case
of India to attract more FDI inflow.
 Table 5. Economic Performance of India, China and Malaysia
China India Malaysia
Gross
External External Capital External
Gross Capital Inflation, Debt Stocks, Gross Capital Inflation, Debt Stocks, Formation Inflation, Debt Stocks,
Formation Real GDP Total (DOD, Formation Real GDP Total (DOD, (Current Real GDP Total (DOD,
(Current US$ Interest Deflator Current US$ (Current US$ Interest Deflator Current US$ US$ Interest Deflator Current US$
Year 1,000,000) Rate (%) (Annual %) 1,000,000) 1,000,000) Rate (%) (Annual %) 1,000,000) 1,000,000) Rate (%) (Annual %) 1,000,000)
1991 137,073.18 1.68 6.85 60,259.18 58,791.682 3.64 13.73 86,864.154 18,568.053 5.56 3.58 17,079.76
1992 158,340.66 0.37 8.24 72,427.95 58,374.879 9.12 8.97 89,661.738 20,917.406 7.56 2.41 20,017.87
1993 195,949.53 –3.60 15.12 85,927.70 58,576.143 5.87 9.81 93,055.389 26,211.879 5.81 3.99 26,148.47
1994 236,011.23 –7.98 20.61 100,456.86 76,108.807 4.32 10.00 99,608.172 30,687.804 4.64 3.94 30,335.88
1995 305,005.55 –1.47 13.74 118,089.79 94,752.136 5.85 9.08 95,173.606 38,766.569 4.92 3.63 34,342.56
1996 346,213.69 3.42 6.44 128,817.09 85,904.749 7.82 7.55 94,910.351 41,832.348 6.04 3.68 39,673.26
1997 361,504.51 7.02 1.51 146,696.96 98,212.556 6.93 6.46 94,700.961 43,045.643 6.91 3.48 47,228.24
1998 378,231.91 7.31 –0.86 143,981.96 94,218.766 5.15 7.98 98,774.22 19,253.003 3.35 8.50 42,409.22
1999 398,046.69 7.20 –1.25 152,064.38 117,582.8 8.42 3.80 99,128.169 17,715 8.51 0.05 41,903.34
2000 420,888.07 3.71 2.06 145,710.50 111,199.67 8.47 3.53 100,242.89 25,198.948 –1.09 8.86 41,873.74
2001 480,476.90 3.72 2.05 184,803.31 115,541.84 8.79 3.03 98,643.035 22,637.632 8.85 –1.58 45,088.94
2002 550,504.22 4.70 0.58 186,114.10 128,006.23 7.82 3.80 104,815.55 24,986.842 3.30 3.13 48,272.11
2003 676,123.62 2.63 2.61 208,431.30 160,488.86 7.63 3.56 117,872.43 25,085.79 2.91 3.30 48,556.97

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2004 835,690.12 –1.25 6.91 247,679.30 236,808.77 2.04 8.70 122,586.62 28,754.211 0.03 6.01 52,155.63
2005 950,133.63 1.59 3.93 283,985.95 289,093.91 6.31 4.18 120,224.47 27,550.132 1.26 4.63 51,980.69
2006 1,165,802.54 2.25 3.79 325,259.63 339,346.12 4.49 6.41 158,492.65 32,013.896 2.51 3.88 55,025.71
2007 1,458,339.80 –0.12 7.60 373,773.03 473,887.57 6.87 5.75 202,792.89 40,233.43 1.37 4.97 61,565.55
2008 1,991,696.30 –2.31 7.80 378,244.55 418,994.6 6.20 6.69 224,712.77 42,799.102 –3.75 10.21 66,180.69
2009 2,376,238.65 5.94 –0.59 428,442.24 503,589.1 4.32 7.54 237,691.64 27,973.295 12.59 –6.66 66,390.39
2010 2,654,459.46 –0.03 5.84 561,291.54 9.62 9,102.9745 –0.14 5.17
Source: World development indicator.
Note: DOD = details of data.
 100
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