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Financial crisis in Malaysia: did FDI flows contribute to vulnerability?


  • Anita Giselle Doraisami

    (International Monetary Fund, Singapore)


To date there has been greater awareness that the sudden interruption and reversal of capital flows can cause financial crisis. However for the most part it is thought that the volatility of capital flows applies predominantly to short-term flows and not longer-term capital flows such as FDI. The Malaysian experience of financial crisis challenges the conventional wisdom and has profound implications for other developing countries seeking to attract FDI flows as a source of long-term stable financing. Malaysia succumbed to crisis in spite of the fact that FDI flows accounted for the bulk of financial flows on average. This paper argues that FDI flows in Malaysia contributed to vulnerability to crisis by causing chronic current account deficits and was associated with a slowdown in export growth prior to the crisis. This suggests that when assessing a country's vulnerability to financial crisis, emphasis should not only be placed on the reversibility of flows but also on the macroeconomic impact of these flows. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Anita Giselle Doraisami, 2007. "Financial crisis in Malaysia: did FDI flows contribute to vulnerability?," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(7), pages 949-962.
  • Handle: RePEc:wly:jintdv:v:19:y:2007:i:7:p:949-962 DOI: 10.1002/jid.1358

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    References listed on IDEAS

    1. Ajit Singh, 2003. "Capital Account Liberalization, Free Long-Term Capital Flows, Financial Crises and Economic Development," Eastern Economic Journal, Eastern Economic Association, vol. 29(2), pages 191-216, Spring.
    2. Eduardo Fernández-Arias & Ricardo Hausmann, 2000. "Is FDI a Safer Form of Financing?," IDB Publications (Working Papers) 1318, Inter-American Development Bank.
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    6. Tilak Abeysinghe, 2000. "Electronics and growth cycles in Singapore," Applied Economics, Taylor & Francis Journals, vol. 32(13), pages 1657-1663.
    7. Rupa Duttagupta & Antonio Spilimbergo, 2004. "What Happened to Asian Exports During the Crisis?," IMF Staff Papers, Palgrave Macmillan, vol. 51(1), pages 1-4.
    8. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies; How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion," IMF Working Papers 99/88, International Monetary Fund.
    9. Corsetti, Giancarlo & Pesenti, Paolo & Roubini, Nouriel, 1999. "What caused the Asian currency and financial crisis?," Japan and the World Economy, Elsevier, vol. 11(3), pages 305-373, October.
    10. Jomo, K S, 1998. "Malaysian Debacle: Whose Fault?," Cambridge Journal of Economics, Oxford University Press, vol. 22(6), pages 707-722, November.
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    Cited by:

    1. A. Yasemin Yalta, 2012. "Uncovering the channels through which FDI affects current account: the case of Turkey," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(2), pages 158-167.
    2. Masahiro Kawai & Shinji Takagi, 2010. "A Survey of the Literature on Managing Capital Inflows," Chapters,in: Managing Capital Flows, chapter 2 Edward Elgar Publishing.
    3. Jaydeep Mukherjee & Debashis Chakraborty & Tanaya Sinha, 2013. "How has FDI influenced Current Account Balance In India? Time Series Results in presence of Endogenous Structural Breaks," Working Papers 1317, Indian Institute of Foreign Trade.

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