How Sustainable is the Foreign Direct Investment? In the Case of Malaysia

Foreign Direct Investment (FDI) is one of the economic indicators of a country. Having a sustainable FDI would lead to a sustainable economy. In order to sustain the FDI, its determinants and how the changes in those determinants affect the FDI must be analyzed carefully. Once the impact of the determinants is known, then the next steps of making decisions or policies related to sustainable FDI, could easily and effectively be done. Different from previous studies, this paper examines to what extent the inflows of FDI would be related and affected by the environment, social and governance (ESG) factors, the vital sources for sustainable investment. The environment, social and governance factors include natural environment, natural resources, human capital, population, infrastructure, trade openness, and corruption. Those annual time series data were analyzed by using the ordinary least square regression and Granger causality analyses. The findings show that majority of the changes in those determinants have significant relationship with the FDI inflows. Many of the determinants are positively related to the FDI except for trade openness which is having negative relationship with FDI. However, changes in natural resources and infrastructure have no significant relation with the inflows of FDI. The result suggests that an emerging country like Malaysia, must continue enhancing those social, environmental and governance factors in the country to encourage the incoming of sustainable FDI, thus to develop sustainable economy.