Factors Affecting Economic Growth in Malaysia

This research paper examines the factors influencing economic growth in Malaysia, including unemployment, inflation, FDI, and export. It analyzes the relationship between these factors and GDP growth and provides estimation results through regression analysis.

Running head: APPLIED ECONOMETRICS
Applied Econometrics
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Table of Contents
Introduction......................................................................................................................................2
Problem statement (case study)...................................................................................................2
Research aim and objectives........................................................................................................2
Data source..................................................................................................................................2
Research questions.......................................................................................................................2
Literature Review............................................................................................................................2
GDP growth and unemployment.................................................................................................2
GDP growth and inflation............................................................................................................3
GDP growth and FDI...................................................................................................................3
GDP growth and export...............................................................................................................3
Hypotheses...................................................................................................................................3
Estimation Result.............................................................................................................................4
Descriptive statistics....................................................................................................................4
Correlation coefficient.................................................................................................................5
Regression analysis......................................................................................................................6
Multicollinearity..........................................................................................................................7
Conclusion.......................................................................................................................................8
Reference list.................................................................................................................................10

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Introduction
Problem statement (case study)
Economic growth of a nation is measured by a steady increase in aggregate output. A
steady economic growth indicates economic prosperity. Various factors influence economic
growth of a nation. Some of these factors have a positive influence on economic growth while
some others have a negative influence (Mankiw 2016). In this connection, the problem that the
paper focuses on is economic growth in Malaysia and its determinant factors. The factors that
might affect economic growth include unemployment, inflation, FDI and export. The main
research problem is to determine significant factors affecting economic growth of Malaysia.
Research aim and objectives
The research paper aims to examine the relation between economic growth of Malaysia
and other macroeconomic variables such as inflation, unemployment, foreign direct investment
and export. The objective of the paper is to examine how different macroeconomic factors
influence economic growth of Malaysia. The specific objectives of the paper are as follows
 To find out the relation between economic growth and unemployment rate of Malaysia.
 To find out the relation between economic growth and inflation rate of Malaysia.
 To find out the relation between economic growth and FDI in Malaysia.
 To find out the relation between economic growth and export of Malaysia
Data source
In order to conduct research in the specific area data on GDP growth, unemployment rate,
inflation rate, share of FDI in GDP and share of export in GDP have been collected for past 30
years from 1988 to 2017. For purpose of the analysis all the data are collected from world bank.
Research questions
The primary research questions of the research are the following
How unemployment rate in Malaysia affects the GDP growth rate?
How unemployment rate in Malaysia affects the GDP growth rate?
How unemployment rate in Malaysia affects the GDP growth rate?
How unemployment rate in Malaysia affects the GDP growth rate?
Literature Review
Study of economic growth has always been an important area of research. Several studies
attempted to evaluate main determinants of economic growth of a nation. The section discusses
past literatures carried out on economic growth and factors similar to current research paper.
GDP growth and unemployment
Okun’s law provides a theoretical understanding for the relation between GDP growth
and unemployment. The law stated an inverse relation exists between GDP growth and
unemployment. Based on data of United State, the law predicted that GNP increased by 3%
following a decline in unemployment rate by 1% (Ball, Jalles and Loungani 2015). A study that

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investigated the relation between unemployment and economic growth of South Africa for the
period from 1994 to 2016 supported Okun’s proposition. The paper found a negative long term
relation economic growth and unemployment rate in South Africa (Banda, Ngirande and Hogwe
2016). A literature on Nigerian economy considering urban unemployment also found similar
result. Estimated result of the paper confirmed existence of a negative relation between economic
growth and urban unemployment rate (Fatai and Bankole 2013). Another study on
unemployment and economic growth of South Africa however gave a contradictory result. The
paper showed that economic growth is positively related with unemployment rate.
GDP growth and inflation
Different theories examining relation between GDP growth and inflation often give
contradictory results. Early theories as supported by Mundell and Tobin suggested that there
exists a positive association between inflation and GDP growth of nations (Kremer, Bick and
Nautz 2013). Modern endogenous growth theory however raised the concern that inflation has an
adverse effect on GDP growth through penalizing human capital. A study on industrialized and
non-industrialized nations found an insignificant relation between inflation and GDP growth
(Ruzima and Veerachamy 2016). The paper found that threshold limit for inflation in developed
countries are relatively smaller than that of developing nations. A study by Osuala et al. in 2013
based on the data of Ghana found a positive significant association between economic growth
and inflation (Osuala, Osuala and Onyeike 2013).
GDP growth and FDI
Foreign Direct Investment is likely to have a positive effect on economic growth of a
nation. Study found that foreign capital inflow in Zambia created significant employment
opportunity in the nation (Libanda, Marshall and Nyasa 2017). As employment expands,
productivity increases resulting in an increases in aggregate output. FDI therefore should be
encouraged for supporting a higher growth (Dogan 2014). Many scholars however opposed the
view claiming that the quality of jobs created from foreign investment is generally poor and
therefore, in such instances countries should discouraged foreign investment. In case of
developing countries, FDI plays a very crucial role in promoting a higher growth especially in
times of financial crisis (Azam and Ahmed 2015).
GDP growth and export
In connection to economic growth and export, most scholars though agreed the view that
export has a positive influence on economic growth there are some studies that contradicted this
proposition (Nguyen 2016). A study conducted on 13 Asian economies found a direct
proportional relation between GDP growth and export. Several other studies also found similar
impact of export on economic growth. These findings have useful implications in designing
export led growth policies especially for developing countries (Trost, M. and Bojnec 2016).
Hypotheses
Depending on the previous studies in this research area, in order to address the particular
research questions of the paper following hypotheses are formed
Hypothesis 1

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Null hypothesis (H10): Rate of unemployment does not have any statistically significant
influence on economic growth of Malaysia.
Alternative hypothesis (H1A): Rate of unemployment has a statistically significant influence on
economic growth of Malaysia.
Hypothesis 2
Null hypothesis (H20): Rate of inflation does not have any statistically significant influence on
economic growth of Malaysia.
Alternative hypothesis (H2A): Rate of inflation has a statistically significant influence on
economic growth of Malaysia.
Hypothesis 3
Null hypothesis (H30): Share of FDI in GDP does not have any statistically significant influence
on economic growth of Malaysia.
Alternative hypothesis (H3A): Share of FDI in GDP has a statistically significant influence on
economic growth of Malaysia.
Hypothesis 4
Null hypothesis (H40): Share of exports in GDP does not have any statistically significant
influence on economic growth of Malaysia.
Alternative hypothesis (H4A): Share of exports in GDP has a statistically significant influence
on economic growth of Malaysia.
Estimation Result
Descriptive statistics
Table 1: Descriptive measures for GDP growth, unemployment, inflation, FDI and export
EXPORT FDI
GDP_GROWT
H INFLATION
UNEMPLOYME
NT
Mean 91.45983 4.135002 6.115141 2.789078 3.561800
Median 90.28402 4.153509 6.072167 2.703538 3.420000
Maximum 121.3106 8.760533 10.00270 5.440782 7.260000
Minimum 66.41550 0.056692 -7.359415 0.583308 2.450000
Std. Dev. 17.61288 1.881741 3.700499 1.215627 0.916183
Skewness 0.231828 0.401054 -1.865031 0.413241 2.649020
Kurtosis 1.644235 3.757962 7.359851 2.597786 10.80131
Jarque-Bera 2.566344 1.522353 41.15207 1.056059 111.1621
Probability 0.277157 0.467116 0.000000 0.589766 0.000000
Sum 2743.795 124.0500 183.4542 83.67234 106.8540
Sum Sq. Dev. 8996.196 102.6876 397.1170 42.85472 24.34234
Observations 30 30 30 30 30

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As obtained from the summary statistics results, the average GDP growth rate in
Malaysia for the last thirty years is 6.11 percent. The Malaysian economic thus successfully
maintained an economic growth rate of around 6 percent. Standard deviation of GDP growth
series is 3.70. Smaller standard deviation relative to average GDP growth means variation is less
than 100 percent supporting a stable growth rate for the economy. The economy recorded highest
growth rate of 10 percent in 1996 and lowest growth rate of -7.36 percent in 1998.
The summary statistics related to unemployment rate indicates that, mean unemployment
rate in Malaysia for the last thirty years 3.56 percent. The Malaysian economic thus successfully
maintained kept the unemployment rate below 4 percent. Standard deviation of unemployment
series is 0.91. A relatively smaller standard deviation suggested that unemployment rate in
Malaysia remained relatively stable. The highest unemployment rate for the economy is 7.26
percent accounted in 1988 and that of the lowest unemployment is 2.45 percent recorded in
1997.
The summary statics result shows that the average inflation rate in Malaysia for the last
thirty years 2.78 percent. The Malaysian economic thus successfully maintained the inflation rate
between 2-3 percent. Standard deviation of inflation rate is 1.21. Smaller standard deviation
relative to average inflation rate means variation is less than 100 percent supporting a stable
price level for the economy. The economy recorded highest inflation rate of 5.44 percent in 2008
and lowest inflation rate of 0.58 percent in 2009.
The result of summary statistics suggests that the average share of export in GDP of
Malaysia is 91.45 percent. The share of export thus on an average remained 91.45 percent.
Standard deviation of export share in GDP is 17.61 Smaller standard deviation relative to the
average indicates that the series constitute less variation. The average share of FDI in GDP of
Malaysia for the last thirty years is found to be 4.13 percent. FDI therefore on average accounted
4.13 percent of Malaysian GDP. For FDI series the standard deviation is 1.88 Smaller standard
deviation relative to average share implies that variation in the FDI share is less than 100 percent
indicating a stable flow of FDI in the economy. The maximum and minimum share of foreign
capital inflow in GDP of Malaysia are respectively 8.76 percent and 0.06 percent.
Correlation coefficient
Table 2: Correlation between GDP growth and unemployment, inflation, FDI and export
Covariance Analysis: Ordinary
Date: 06/05/19 Time: 16:35
Sample: 1988 2017
Included observations: 30
Correlation
Probability EXPORT FDI
GDP_GROWT
H INFLATION
UNEMPLOYME
NT
EXPORT 1.000000
-----
FDI -0.221093 1.000000
0.2403 -----
GDP_GROWTH -0.330651 0.581019 1.000000
0.0743 0.0008 -----

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INFLATION -0.113383 0.513318 0.044110 1.000000
0.5508 0.0037 0.8170 -----
UNEMPLOYMENT -0.346453 -0.086112 0.243215 -0.027141 1.000000
0.0607 0.6509 0.1953 0.8868 -----
The correlation coefficient matrix shows that the estimated correlation of coefficient
between GDP growth and export is -0.33. The negative correlation indicates that export has an
inverse association with GDP growth. For FDI, the correlation coefficient is 0.58. The value of
correlation coefficient suggests a moderately strong positive association between GDP growth
and FDI (Chatterjee and Hadi 2015). This suggests with increase in flow of foreign funds GDP
growth increases. In case of inflation and unemployment, the correlation coefficients with GDP
growth are 0.04 and 0.24 respectively. The values of correlation coefficient suggest a weak
positive relation of economic growth with unemployment and inflation.
Regression analysis
The model to evaluate factor affecting economic growth of Malaysia is given below
Growtht =α 0 +α 1 Unempt +α2 Inf t +α 3 FDIt +α4 expt +ε t
Growth: GDP growth
Unemp: Unemployment rate
Inf: Inflation rate
FDI: Percentage of FDI in GDP
Exp: Percentage of export in GDP.
Table 3: Regression of GDP growth on unemployment, inflation, FDI and export
Dependent Variable: GDP_GROWTH
Method: Least Squares
Date: 06/05/19 Time: 16:39
Sample: 1988 2017
Included observations: 30
Variable Coefficient Std. Error t-Statistic Prob.
C 1.350135 4.757474 0.283793 0.7789
INFLATION -1.068680 0.488625 -2.187118 0.0383
UNEMPLOYMENT 1.050147 0.602736 1.742300 0.0937
FDI 1.492033 0.325959 4.577361 0.0001
EXPORT -0.023664 0.032023 -0.738984 0.4668
R-squared 0.525819 Mean dependent var 6.115141
Adjusted R-squared 0.449950 S.D. dependent var 3.700499
S.E. of regression 2.744487 Akaike info criterion 5.008077
Sum squared resid 188.3053 Schwarz criterion 5.241610

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Log likelihood -70.12116 Hannan-Quinn criter. 5.082787
F-statistic 6.930625 Durbin-Watson stat 1.960428
Prob(F-statistic) 0.000674
Following the regression result, the estimated growth model is
^Growtht =1.350+1.050 Unempt −1.069 Inf t + 1.492 FDIt −0.0237 expt
Coefficient Interpretation
1.050Unempt An increase in unemployment rate by 1%, increases economic growth of
Malaysia by 1.05%.
-1.069Inft An increase in inflation rate by 1%, decreases economic growth of Malaysia by
1.07%.
1.492FDIt An increase in FDI share by 1%, increases economic growth of Malaysia by
1.49%.
-0.023Expt An increase in export share by 1%, decreases economic growth of Malaysia by
0.02 percent
The regression result shows that value of adjusted R square is obtained as 0.45. In a
multivariate regression model, adjusted R square shows the proportion of variation in the
dependent variable that is explained by the independent variables together. The R square value
can be interpreted as unemployment, inflation, FDI and exports together explain 45 percent
variation in economic growth of Malaysia. For the model, the p value of F statistics is 0.0007. As
the p value is less than the significance value of 0.05 indicating overall significance of the model
(Carroll 2017). The regression coefficient for inflation is -1.0686. The negative coefficient
indicates that inflation adversely affects economic growth in Malaysia. P value of the coefficient
is 0.0383. The p value is less than 5% significance level meaning null hypothesis of no
statistically significant relation between inflation and economic growth is rejected. For
unemployment, the regression coefficient is 1.0501. The result thus shows that unemployment
has a positive influence on economic growth. The variable though is not statistically significant
at 5% significance level but it is significant at 10% significance level as obtained from the
associated p value of 0.0937 (Darlington and Hayes 2016). The coefficient for FDI is 1.4920.
The positive value of regression coefficient implies that FDI has a positive influence on
economic growth. That is with increase in share of FDI, economic growth in Malaysia increases.
P value of the coefficient is 0.0001. The p value is less than significant value of 0.05 indicating
rejection of null hypothesis of no statistically significant relation between GDP growth and FDI.
Share of FDI thus is statistically significant determinant of GDP growth. For export the
regression coefficient is -0.0237. Therefore, increase in share of export lowers economic growth.
Associated p value for the coefficient is 0.4668. The p value exceeds the 5% significance level
implying acceptance of null hypothesis of no significant relation between export and economic
growth.
Multicollinearity
Multicollinearity indicates a state of high inter-correlation among the explanatory
variables of a regression model. It is considered as one kind of disturbance in the data set and is

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responsible for giving inconsistent estimates. If there is a perfect inter-correlation between the
independent variables, then multicollinearity is a severe problem. Severe multicollinearity makes
OLS estimates biased.
One common way to detect multicollinearity is to use Variance Inflation Factor. VIF
value greater than 10 indicates presence of high multicollinearity. As a rule of thumb,
multicollinearity is said to be a serious problem if VIF is greater than 5.
VIF= 1
1−R2
The estimated result of VIF for the regression coefficients is produced below
Table 4: Eviews result of VIF
Variance Inflation Factors
Date: 06/11/19 Time: 12:09
Sample: 1988 2017
Included observations: 30
Coefficient Uncentered Centered
Variable Variance VIF VIF
C 22.63355 90.14705 NA
INFLATION 0.238754 8.755663 1.358398
UNEMPLOYMENT 0.363290 19.53065 1.174070
FDI 0.106249 8.684141 1.448510
EXPORT 0.001025 35.38944 1.224769
Looking at the centered VIF estimation, it has been observed that all the values are less
than 5. That means, there is serious multicollinearity problem for the obtained model.
Conclusion
The paper tries to identify the effect of unemployment, inflation, FDI and export on
economic growth of Malaysia. The analysis finds that inflation and share of export have a
negative influence on economic growth. In an economy if price level increases due to an increase
in production cost, the aggregate production in the economy lowers leading to a contraction of
economic growth. For export, an increase in export generally increases economic growth by
stimulating foreign demand of exported goods and services. Finding of the paper however
contradicts the traditional belief. No sure conclusion can however be made as the coefficient is
not statistically significant. Unemployment and FDI are found to have a positive significant
influence on economic growth. Increase in economic growth along with an increase in
unemployment indicates shift of the country towards capital-intensive production technique.
With inflow of foreign capital, production and employment in the economy increases
contributing positively to economic growth.
Scope of the paper is limited in the sense that the paper considers unemployment,
inflation, FDI and export as determinant factors of economic growth. There are other factors like
resource availability, state of health and education that might influence economic growth but are

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not considered in the paper. The obtained model explain less than 50 percent variation in
economic growth meaning that the paper has missed out some important factors affecting
economic growth of Malaysia.

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Reference list
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promoting economic growth: evidence from Commonwealth of Independent
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Ball, L., Jalles, J.T. and Loungani, P., 2015. Do forecasters believe in Okun’s Law? An
assessment of unemployment and output forecasts. International Journal of Forecasting, 31(1),
pp.176-184.
Banda, H., Ngirande, H. and Hogwe, F., 2016. The impact of economic growth on
unemployment in South Africa: 1994-2012. Investment Management & Financial
Innovations, 13(2), p.246.
Carroll, R.J., 2017. Transformation and weighting in regression. Routledge.
Chatterjee, S. and Hadi, A.S., 2015. Regression analysis by example. John Wiley & Sons.
Darlington, R.B. and Hayes, A.F., 2016. Regression analysis and linear models: Concepts,
applications, and implementation. Guilford Publications.
Dogan, E., 2014. Foreign direct investment and economic growth in Zambia. International
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Fatai, B.O. and Bankole, A., 2013. Empirical test of Okun’s Law in Nigeria. International
Journal of Economic Practices and Theories, 3(3), pp.227-231.
Kremer, S., Bick, A. and Nautz, D., 2013. Inflation and growth: new evidence from a dynamic
panel threshold analysis. Empirical Economics, 44(2), pp.861-878.
Libanda, J., Marshall, D. and Nyasa, L.,2017. The Effect of Foreign Direct Investment on
Economic Growth of Developing Countries: The Case of Zambia. British Journal of Economics,
Management & Trade 16(2), pp.1-15
Mankiw, N.G., 2016. Principles of economics. Cengage Learning.
Nguyen, T.H., 2016. Impact of Export on Economic Growth in Vietnam: Empirical Research and
Recommendations. Int. Bus. Manag, 13, pp.45-52.
Osuala, A.E., Osuala, K.I. and Onyeike, S.C., 2013. Impact of inflation on economic growth in
Nigeria–A causality test. Journal of Research in National Development, 11(1), pp.206-216.
Ruzima, M. and Veerachamy, P., 2016. Impact of inflation on economic growth: A survey of
literature review. Golden Research Thoughts, 5(10), pp.1-9.
Trost, M. and Bojnec, S., 2016. Export-led growth: the case of the Slovenian and Estonian
economies. Post-Communist Economies, 28(3), pp.373-383.

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