International Capital Inflows and Labour Immigration: A Heterogeneous Panel Application in Malaysian Manufacturing Industries
Posted: 26 Oct 2012
Date Written: October 24, 2012
The paper examines the relationship between inward FDI and unskilled migrants for a panel of 23 industries using the new trade theory multivariate model framework for the period 2000-2009, and compares the links with 1985-1999 (first-subperiod) and 1985-2009 (overall period) in a univariate context. Based on heterogeneous panel cointegration tests, there is a long-run equilibrium between inward FDI, unskilled migrant share, output growth, export intensity and market concentration. The long-run cointegrating coefficient based on the FMOLS estimator suggests the presence of unskilled workers a significant location determinant for inward FDI for the first sub-period and the overall period. The results of the panel vector error correction model further attest to causal links between unskilled migrant worker presence and inward FDI in the short- and long-run. Bidirectional causality between inward capital and labour flows is present in the first sub-period and unidirectional causal links from unskilled migrants to inward FDI is evident for the overall period. The observed FDI-immigration (unskilled) links in manufacturing support the argument that inward FDI is induced by unskilled migration. Overall, unskilled immigration increases FDI inflows or rather “capital chases labour” in terms of international factor mobility. This has profound implications for public policy as the government seeks to reduce its dependence on migrant workers. Policy coordination is therefore needed between regulating inflows of foreign capital and foreign labour so that implemented policies do not pull in different directions and undermine Malaysia’s attractiveness as a destination for FDI.
Keywords: inward FDI, unskilled immigrants, panel cointegration, FMOLS, panel causality
JEL Classification: F20, F21, F22, O15
Suggested Citation: Suggested Citation