Factors Affecting Economic Growth in Malaysia

Running head: APPLIED ECONOMETRICS
Applied Econometrics
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1APPLIED ECONOMETRICS
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

2APPLIED ECONOMETRICS
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

3APPLIED ECONOMETRICS
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