The impact of political instability on foreign direct investment in Malaysia: a sectoral level analysis

Foreign Direct Investment (FDI) is a critical driver of economic growth and development, particularly in developing nations such as Malaysia. However, the country's recent episodes of political instability have introduced significant uncertainties regarding its ability to attract and sustain FDI. This study rigorously examines the impact of political instability on FDI inflows across Malaysia's primary, secondary, and tertiary sectors from the first quarter of 2008 to the fourth quarter of 2023. This study examines the impact of political instability on FDI in Malaysia, focusing on sectoral variations across the primary, secondary, and tertiary sectors. Using quarterly data from 2008 to 2023, the research employs the Autoregressive Distributed Lag (ARDL) model to investigate both the short-run and long-run effects of political instability on FDI inflows. Political instability, a recurring issue in Malaysia's recent history, is analysed alongside key macroeconomic variables such as GDP growth, interest rates, exchange rates, and trade openness. The findings reveal that political instability exerts a significant negative impact on FDI across all sectors, with the primary sector being the most adversely affected. In contrast, the secondary and tertiary sectors, though also impacted, exhibit less sensitivity to political volatility. The study further identifies that macroeconomic factor, particularly GDP growth and interest rates, play crucial roles in shaping FDI inflows. GDP growth is shown to positively correlate with FDI, reinforcing the notion that a robust economy attracts foreign investment. Conversely, higher interest rates are found to deter FDI by increasing the cost of capital, particularly in the primary and secondary sectors. Trade openness has a positive but varied impact across sectors, while exchange rate fluctuations show limited influence on FDI. This research contributes to the existing literature by offering a sectoral analysis of FDI determinants in Malaysia, highlighting the significance of political stability and macroeconomic management.