Fdi oriented exports and role of free industrial zones In Malaysia

Abstract EN

FDI is crucial in the process of development, and offers wide scope for backward linkages to the broader economy.

In expectance of such role and benefits, governments all over the world have engaged in various kinds of productive policy measures including Export Processing Zones (EPZs) or Free Industrial Zones (FIZs).

However, the costs of races to the bottom to integrate and accommodate foreign entrepreneurs and potential investors may outweigh the benefits.

This study used a vector autoregressive (VAR) model to empirically investigate the creation of linkages from FDI within Malaysia’s FIZs, and finds that without a broader supportive policy environmental thrust; such a policy may lead to enclave development rather than provide a foundation for broad-based economic development.

Hence countries need to develop strategies that attract firms that seek competitiveness on the basis of factors beyond low costs and tax breaks.