Following De Mello and Zhang, the spillover related to the incorporation of FDI stock can be by and large modeled through an augmented Cobb-Douglass production map in the followers:

## Y = Af ( L, Kp, E ) = ALI± KI? E1-I±-I?

where Y represents existent end product, Kp represents the private capital stock, L represents labour, and E is the outwardness created by the add-ons to the FDI stock. I± and I? are the portions of local labour and private capital severally, and A captures the efficiency of production. Besides, I± and I? are assumed to be less than one. In other words, there are decreasing returns to the labour and capital inputs.

The outwardness, E, can be captured by the undermentioned type of a Cobb-Douglas map:

## Tocopherol = ( L, Kp, ) I? ,

( 2 )

where I? and I? are, severally, the fringy and the inter-temporal snaps of permutation between private and foreign capital. Let I? & gt ; 0, such that a greater FDI stock creates a positive outwardness to the economic system. If I? & gt ; 0, inter-temporal complemetarity exists and, if I? & lt ; 0, add-ons to the FDI stock crowd out capital over clip and deteriorate the growing potency of the host state.

Uniting equations ( 1 ) and ( 2 ) , the followers can be obtained:

## Y = ALI±+ I? ( 1-I±-I? )

( 3 )

A standard growing accounting equation can be derived by taking logarithms and clip derived functions of equation ( 3 ) to bring forth the undermentioned dynamic production map:

## gray = tabun + [ I± + I? ( 1 – I±- I? ) ] gL + [ I?+ I? ( 1- I± – I? ) ] gKp + [ I? I? ( 1 – I± – I? ) ] gKf,

( 4 )

where Gb is the growing rate of I = Y, A, L, Kp, and Kf. Equation ( 4 ) provinces that ( provided I? and I? & gt ; 0 ) add-ons to the FDI stock will augment the snaps of end product with regard to labour and capital by a factor I? ( 1 – I± – I? ) .

In footings of FDI spillovers, MNCs are important drivers of engineering and accomplishments, direction methods, and preparation that serve great stimulation of economic growing and development in recipient states. Investing made by MNCs in developing states can ensue in the transportation of best patterns, selling accomplishments, every bit good as cognition to domestic houses ( Musonera, 2007 ) . Then, all these could ensue in quality and productiveness growing, every bit good as in other positive outwardnesss.

Foreign investing affects the recipient state ‘s economic growing through different channels. One of them is: MNCs bring their best engineerings, direction techniques, and selling expertness to the domestic market, and could impact GDP growing in a favourable mode. In add-on, because MNCs intend to maximise their net incomes by viing and trying to surpass domestic and planetary rivals, they besides stimulate competition in the receiver state. This increased competition is normally followed by spillover consequence in the fabrication industries. Last, MNCs could heighten the productiveness of domestic houses via supplying proficient and developing aid to better a provider ‘s merchandise quality and other status ( Smarzynska, 2004 ) . The cognition or technological transportation ( Caves, 1974 ) and the preparation of labour ( Buckley & A ; Casson, 1976 ) raise fabrication productiveness. MNCs besides assist in increasing the productiveness and merchandise quality of domestic providers, and therefore contribute in better usage of economic systems of graduated table for local houses ( Ozawa, 1975 ) . Ozawa besides indicated that MNCs convey cognition and engineering accomplishments, which serve as accelerator for economic development and societal sweetening, and states could reciprocally profit from interactions with each other in the facet of trade and investing chances.

However, based on Dunning ‘s ( 1981 ) informal model, there are three compulsory conditions needed to pull FDI viz. the ownership of knowledge-based assets ; the presence of locational advantage ( entree to consumers, low input monetary values, conveyance costs, duties, quotas ) ; every bit good as some advantages to bring forthing internally alternatively of via licensing agreements ( uncomplete contracts, plus specificity, bounded reason, imperfect information, dealing costs, corporate administration ) . Markusen ( 1995 ) have formalized portion of these constructs by stressing that knowledge-based assets could function as a joint factor across workss, giving economic systems of graduated table at the degree of the house alternatively of at the works degree.

Knowledge-based assets consist of firm-specific procedures and merchandises, every bit good as intangibles like managerial and selling accomplishments. These are all channels through which FDI can supply productiveness sweetening. Knowledge-based assets increase the hazards related to functioning a market via licensing, because possible rivals may derive entree to proficient secrets, and merchandise quality may non be maintained as the licensee can be a free-rider on the house ‘s repute ( Barrell & A ; Holland, 2000 ) . Therefore, if a company ‘s competitory advantage relies on knowledge-based assets, it is more likely to put itself than licence ( Barrell & A ; Pain, 1997 ) . This is important if we were to travel from a production based on mass assembly of indistinguishable merchandises to one that is more customized. Therefore, FDI has become an progressively critical channel in footings of cognition transferring.

Specifically, FDI could impact domestic fabrication houses in two ways viz. the end product ( fabricating ) growing, and pay growing. For the first instance, FDI bring in benefits that can non be wholly captured by the house, like engineering. Although engineering transportation exists via many different channels, FDI can play a important in a few contexts. New engineering may non be commercially available and R & A ; D houses may be loath to sell their engineering through licensing understandings. Therefore, collaborating with R & A ; Five hundred houses or closely linked to them may be the best manner to larn new engineering. Besides, FDI may besides excite competition mandatary to spur engineering diffusion, particularly if domestic houses are protected from the import-substitution policy. FDI may besides supply a type of employee preparation which can non be conducted by local houses or purchasing overseas, like managerial accomplishments. Technology diffusion could be via labour turnover when local labours switch from MNCs to local houses ( Harrison, 1994 ) . All these will in bend consequence in the betterment in the labour productiveness, and therefore the fabrication end product growing.

In add-on, the process of perforating into abroad markets is really difficult. In order to export, houses have to acquire information sing foreign penchants and form distribution channels in abroad market. A clear means for houses to larn about export markets is to detect other exporters that are already experienced in selling overseas. These exporters could be other local houses, or MNCs. MNCs brings information sing export markets to domestic manufacturers, supplying them the way to perforate abroad market ( Harrison, 1994 ) . As consequence, the local manufacturers can spread out their production ( economic systems of graduated table ) and therefore addition in footings of fabrication end product growing.

On the other manus, through what channel FDI influences host state ‘s pay degrees? Theories suggest two ways viz. the ‘wage differential consequence ‘ and the ‘wage spillover consequence ‘ . The ‘wage differential consequence ‘ is that rewards offered by MNCs may be well different from those of domestic houses and therefore the changing proportion of foreign houses in the domestic economic system may act upon domestic pay degrees. MNCs may pay higher rewards than domestic houses as they are bigger, more capital-intensive, run in a more skill-intensive industry or engage more educated labours than domestic houses. There are besides a few grounds why MNCs tend to pay higher rewards than domestic 1s for the same quality of worker. First, MNCs may confront metameric worker markets and greater labour costs because of assorted regulations in the recipient state. There may be asymmetric information on domestic labour markets and have to pay higher rewards to find and bring on labours with quality. Second, there may be a complicated set of issues to make with comparison of wage across states. Internal fairness policies in MNCs may avoid immense wage-gaps between workers based on different topographic point and hence addition worker payment in parts with low pay degrees. Third, MNCs may offer higher rewards to counterbalance for specific disadvantages of transnational employment. For case, employees may prefer domestic houses and the employment uncertainness may be greater than that in autochthonal houses. Fourthly, transnational labours may hold entree to the ‘knowledge capital ‘ of MNCs and these engineering or direction accomplishments will leak out to local rivals when workers switch occupations. To cut down escape, MNCs tend to pay higher rewards to diminish employee turnover. Besides, it is possible that MNCs pay lower rewards than domestic houses if an MNC creates a monopsonist purchaser of worker in a domestic labour market after herding out the domestic houses.

There is strong empirical grounds reenforcing the claim that oversea houses pay higher rewards than local houses, even after commanding for graduated table, labour quality, industry and regional characteristics. The predicted pay inequality between MNCs and domestic houses are about 10 to 15 per centum in the US ( Lipsey, 1994 ) ; approximately 6 to 26 per cent in the UK ( Girma, Greenaway, & A ; Wakelin, 2001 ) ; etc.

While the ‘wage spillover consequence ‘ is that the being of MNCs may act upon the pay degree of domestic houses. First, the competition of MNCs in both merchandise and input markets may do the pay degrees of domestic houses to fluctuate. The competition may raise worker demand and this leads domestic houses to raise rewards in order to bring on workers with quality. However, if the competition drives domestic houses under the minimal efficiency graduated table, or even crowds out them, so the pay spillover consequence is negative. Second, MNCs could make a positive cognition spillover to domestic houses who may follow new engineerings introduced by MNCs via imitation. The labours antecedently work for the MNCs may alter to domestic houses and therefore reassign information to them. MNCs may reassign engineering to houses that are possible providers of intermediate goods or buyers of their ain merchandises. These technological spillovers may positively act upon the productiveness of domestic houses and therefore heighten their pay degrees.

However, the pay spillover consequence has slightly assorted empirical grounds. Aitken, Harrison and Lipsey ‘s ( 1996 ) consequences showed a deficiency of pay spillover, but significant pay derived functions between oversea and local houses in Mexico and Venezuela. In the US, there is a little pay differential, but some grounds reenforcing the pay spillover consequence. In add-on, Girma et Al. ( 2001 ) based on UK, failed to happen overall pay spillover consequence on pay degrees, but a negative consequence on pay growing. In contrast, Driffield and Girma ‘s ( 2003 ) consequence showed positive wage-spillover consequence, but this consequence is confined to the part where FDI take topographic points.

Policy shapers may be more interested in the aggregative consequence of FDI on regional mean pay degrees. Uniting the ‘wage spillover consequence ‘ and the ‘wage differential consequence ‘ , there is unsure anticipation on the way of the domestic pay consequence of FDI. There are merely a few empirical researches available on the aggregative consequence of FDI on regional mean pay degrees. For case, Aitken et Al. ( 1996 ) found that FDI tended to increase mean industry rewards in Mexico and Venezuela. Figlio and Blonigen ( 2000 ) studied country-industry informations from South Carolina and found that foreign investing had increased domestic industry rewards much more than local investing. Generally, the grounds is in favour of the positive consequence of FDI on mean pay degrees.

However, the way of the causality relationship between FDI and recipient state rewards is equivocal. The causality connexion between FDI and recipient state rewards may travel in reverse way. First, recipient pay degrees may act upon the location determination of FDI. The theory of MNCs suggests that the motivation of perpendicular FDI is to work the international difference in input monetary values and to bring forth in a location with low input costs, proposing that domestic pay degrees may be one important factor of FDI. Empirical research of the function of worker costs in FDI location pick show assorted grounds ( see: Wheeler & A ; Mody, 1992 ; Billington, 1991 ; Head, Ries & A ; Swenson, 1999 ) . However, as these research do non command for the difference in labour productiveness, a positive impact of rewards on FDI may still be tallied with MNCs being attracted by low costs for a certain labour productiveness. After commanding for labour productiveness, there is grounds that high labour costs significantly and negatively influence FDI ( see: Culum, 1988 ; Friedman, Gerlowski, & A ; Silberman, 1992 ) .

Second, domestic houses with high rewards are more likely to go ‘foreign ‘ if MNCs ‘cherry choice ‘ the most efficient domestic houses. A few empirical research reinforce this statement. For case, Harris and Robinson ( 2002 ) found that MNCs take over the most efficient workss antecedently operated by UK endeavors and that productiveness deteriorate after acquisition. The positive connexion between FDI and recipient state rewards may simply because of MNCs ‘ acquisition of high-wage ( productiveness ) houses, while FDI has no consequence on receiver state rewards.

Finally, foreign investors tend to put in high pay industries in developed states ( Harrison, 1994 ) . Within those industries, there is merely a little difference in rewards paid by MNCs and local houses. Furthermore, MNCs tend to be comparatively immense, and large houses conventionally pay greater rewards than the little 1s. However, the pay inequality can non be depicted by the impression that foreign FDI locate in high pay industries. The pay inequality between foreign houses and local houses is great even within the same industry. It was hypothesized ( by Harrison ) that MNCs merely employ all the best labours off from their local rivals. This implies that even if rewards are higher in MNCs norm rewards do non increase with FDI influxs. Indeed, his consequences indicated that norm rewards do increase as a consequence of rises in FDI, proposing that MNCs are non merely using the best labours. The higher rewards paid by MNCs implies that they bring in new engineering and thoughts, increasing the productiveness of their employees, and hence additions their rewards degree. Besides, Harrison besides stated that MNCs tend to keep their workers from go forthing, peculiarly after doing investing in human plus specificity. Higher rewards is a mean of guaranting the trueness of the workers. As a whole, it seems obvious that states which attract FDI addition from at least one facet, viz. higher rewards for workers of MNCs.

In short, the presence of FDI additions fabricating end product growing through technological diffusion and houses ‘ larning from exporters ( some are MNCs ) . The presence of FDI besides increases fabrication pay growing via ‘wage differential consequence ‘ and ‘wage spillover consequence ‘ . As a consequence, it is expected that FDI positively influences fabrication end product growing and pay growing.

## 3.3 Model Specification

FDI influxs from assorted sourcing states may transport different consequence on receiver states ‘ productiveness due to the differences in FDI type and technological spread. Based on MIDA ‘s one-year media conference in 2012, it is noticed that Korea, Singapore and Saudi Arabia are among the largest FDI investors towards Malaysia and they are evidenced to hold a good consequence on Malaysia ‘s ( particularly in footings of making occupation chance ) . However, how the FDI originate from technological taking states like Japan and the US contribute to Malaysia ‘s fabrication public presentation is less examined although their investing in Malaysia is increasing late. To measure the possible differences in the productiveness consequence of FDI between Japan and the US, this survey incorporates the United States FDI ( US FDI ) and Nipponese FDI ( JPFDI ) in figure two of both fabricating end product growing and fabrication pay growing theoretical account.

On one manus, as explained in the old subdivision ( 3.2 ) , FDI is expected to be positively impacting growing. On the other manus, LLB, LLBP and LCAP are incorporated in the theoretical account as controlled variables. Again, all three have positive expected priori mark.

## 3.3.1 Econometric theoretical account

In order to accomplish the aims of this survey, two theoretical accounts were employed, viz. the fabrication end product growing theoretical account and the fabrication pay growing theoretical account.

## Manufacturing end product public presentation theoretical account

In the first equation, LFDI was incorporated as an independent variable in impacting the dependant variable ( LMOG ) , controlled by LLB and LCAP. In the 2nd equation, LUSFDI and LJPFDI were incorporated as explanatory variables in impacting the dependant variable ( LMOG ) , controlled by LLB and LCAP. Note that LMOG represents natural log of fabricating end product growing ; LFDI represents natural log of entire FDI influxs in Malaysia ; LUSFDI represents natural log of US ‘s FDI into Malaysia ; LJPFDI represents natural log of Nipponese FDI into Malaysia ; LLB represents natural log of figure of labour employed ; while LCAP represents natural log of entire capital investing.

LMOG = degree Fahrenheit ( LFDI, LLB, LCAP )

LMOG = degree Fahrenheit ( LUSFDI, LJPFDI, LLB, LCAP )

## Wage growing Model

In the first equation, LFDI was incorporated as an independent variable in act uponing the dependant variable ( LWG ) , controlled by LLBP and LCAP. In the 2nd equation, LUSFDI and LJPFDI were incorporated as explanatory variables in impacting the dependant variable ( LWG ) , controlled by LLBP and LCAP. Note that LWG represents natural log of fabrication pay growing ; LFDI represents natural log of entire FDI influxs in Malaysia ; LUSFDI represents natural log of US ‘s FDI into Malaysia ; LJPFDI represents natural log of Japan ‘s FDI into Malaysia ; LLBP represents natural log of fabricating labour productiveness ; LCAP represents natural log of entire capital investing.

LWG = degree Fahrenheit ( LFDI, LLBP, LCAP )

LWG = degree Fahrenheit ( LUSFDI, LJPFDI, LLBP, LCAP )

## 3.4 Empirical Methodology

After the theoretical accounts are being specified, stationarity trials of order of integrating were conducted to avoid specious arrested development. In this instance, unit root trials such as the Augmented Dickey Fuller ( ADF ) trial and the Philip-Perron ( PP ) trial were employed to place the stationarity belongings of the informations or to corroborate the order of integrating I ( vitamin D ) . Note that the additive combination of all variables must be I ( d-b ) . The void hypothesis of both the ADF every bit good as PP trials is similar: the series are non-stationary. Besides, the void hypothesis can be rejected in favour of stationary if the t-statistic is greater than the critical value ; otherwise do non reject the void hypothesis.

## 3.4.1 Estimation Methods

Following, appraisal methods used in this survey will be described. This survey employs clip series appraisal attack where the length of period scope from 1980 to 2010 ( 31 old ages ) , and it is intended to look at the overall consequence of entire FDI influxs, US FDI and Nipponese FDI on the Malayan fabrication end product growing and pay growing. By utilizing clip series, one can break up a tendency, a seasonal, a cyclical and an irregular constituent. The most important intent of clip series method is to hold appraisal based on economic information. This research intends to prove on how entire FDI influxs, US ‘s FDI and Japan ‘s FDI affect fabrication sector public presentation in Malaysia. There will be a farther account on the theoretical account and Bound proving attack in the following subdivision.

## Bound proving attack

To analyze any possible being of long tally relationship among the variables, autoregressive distributed slowdown ( ARDL ) bound test attack which introduced by Pesaran, Shin & A ; Smith ( 2001 ) is employed. There are several benefits in using the bounds proving process as compared to Jahansen and Juselius ( JJ ) multivariate cointegration trial. First of wholly, it allows proving for the presence of a cointegrating relationship between variables in flat signifier regardless of the variables ‘ order of integrating. Besides, it is applicable for little sample size research, unlike the JJ trial. ARDL besides can prove for both short tally and long tally relationship among the variables. The undermentioned arrested development is the building of Vector Auto-Regression ( VAR ) of order P ( VAR ( P ) ) from Pesaran et Al. ( 2001 ) for the map explained antecedently.

( 5 )

The notation of is the vector for both and, where is the endogeneous variable. It includes fabricating end product growing and pay growing. On the other manus, refers to exogeneous variable in the theoretical account. It includes FDI, USFDI, JPFDI, LB, LBP and CAP. besides serves as the vector matrix of explanatory variable. I? = [ , ] ‘ , clip variable is express in T, and is the matrix of VAR parametric quantity for slowdown i. must be I ( 1 ) variable or must be consist of 1 unit root, but the independent variables can be either I ( 1 ) or I ( 0 ) ( Pesaran et al. , 2001 ) .

The VAR ( P ) theoretical account can be rewritten in vector mistake rectification theoretical account ( VECM ) signifier as:

( 6 )

Where ( difference operator ) . The long tally multiplier matrix conformably with as below:

( 7 )

Harmonizing to Pesaran et Al. ( 2001 ) , the first premise of the roots of =0 are either outside the unit circle or satisfy Z=1. Followed by the 3rd premise, k-vector and the 4th premise is the matrix has rank ( R ) , 0a‰¤ R a‰¤ k. The matrix is transform to

( 8 )

The diagonal elements of the matrix are unrestricted, so the selected series can be either I ( 0 ) or I ( 1 ) . Provided that, so Y is I ( 1 ) , but if so y will be I ( 0 ) .

To implement the bounds proving attack, it is of import to analyze whether the long tally relationship exist in equation 1, and farther continuing to unrestricted mistake rectification theoretical account ( UECM ) is needed.

( 9 )

The long tally relationship can be estimated through the theoretical account above, and therefore the statistical trial to be used under the edge proving attack is F-test. The void hypothesis and alternate hypothesis are expressed as holla:

Null hypothesis indicates that there is no long tally degrees relationship in the theoretical account ; in contrast the alternate hypothesis shows that the being of long tally degrees relationship in the theoretical account. The determination regulation is reject the void hypothesis when the computed F-statistic ( Wald trial ) is greater than the upper edge critical value ; otherwise do non reject the void hypothesis ( when F-statistic is lower than the lower edge critical value ) . Harmonizing to Pesaran et al. , the lower edge critical value assume that the independent variables are integrated of order nothing, or I ( 0 ) , while the upper edge critical value assume that the independent variables are integrated of order one, or I ( 1 ) . As a consequence, if the computed F-statistic falls between the lower edge and upper edge critical values, it can be concluded that the consequence is inconclusive.

There are two sets of critical value viz. generated from Pesaran et Al. ( 2001 ) and Narayan ( 2005 ) . Due to the little sample size in this survey ( merely 31 observations ) , using the critical value generated by Narayan ( 2005 ) is more appropriate.

In order to prove the consequence of assorted FDI ( viz. entire FDI influxs, US ‘s FDI, Japan ‘s FDI ) on fabrication public presentation, the following unrestricted mistake rectification theoretical accounts ( UECM ) of ARDL theoretical account is estimated:

## Manufacturing Output Growth Model

( 10a )

( 10b )

## Fabrication Wage Growth Model

( 11a )

( 11b )

where represents disturbance term of ADRL theoretical account. The void hypothesis for proving long tally relationship is: =0, and for equation 10 and 11 severally. In contrast, the alternate hypothesis ( which contradicts with the void hypothesis ) indicates that at least one variable is non equal to zero.

Besides, a conditional error-correction theoretical account ( ECM ) is the dynamic accommodation of the thoughts coevals procedure, which can be used to prove the being of long tally relationship utilizing the ARDL edge trial ( Pesaran et al, 2001 ) and besides trial of the short tally relationship. The ECM equation can be express as below:

## Manufacturing Output Growth Model

( 12a )

( 12b )

## Fabrication Wage Growth Model

( 13a )

( 13b )

The ECT ( error-correction term ) in both theoretical account explained the velocity of accommodation of toward the equilibrium, the regulation of pollex of ECT must be in negative and important in order to explicate the short tally kineticss toward the equilibrium. Furthermore, the equation of 14 and 15 is the long tally ARDL degree theoretical account ( P, Q, R, S, T ) .The optimal slowdown length for the ARDL degree theoretical account is based on the SBC information standards.

## Manufacturing Output Growth Model

( 14a )

## Fabrication Wage Growth Model

( 15a )

( 15b )

The long tally snap for both theoretical accounts can be formulated as holla:

( 16 )

## 3.5 Data Description

For the comparative analysis, FDI ( influxs ) informations from the US and Japan were collected. There are two grounds for taking these two states. First of all,

Variables

Definition

Beginning of informations

MOG

Manufacturing end product growing in Malaysia ( fabricating value added )

World Bank

WG

Fabrication pay growing in Malaysia ( pay )

Department of Statistic ( DOS ) Malaya

FDI

Entire foreign direct investing influxs of Malaysia, divided by nominal GDP

UNCTAD, universe bank

USFDI

Malaysia ‘s FDI inflows from the United States

Malayan Industrial Development Authority ( MIDA )

JPFDI

Malaysia ‘s FDI influxs from Japan

Malayan Industrial Development Authority ( MIDA )

Pound

Number of employed individual in Malaysia fabrication sector

Department of Statistic Malaysia ( DOS )

LBP

Manufacturing labour productiveness in Malaysia ( value added divided by labour )

World Bank, Department of Statistic ( DOS ) Malaya

Cap

Entire Capital Investment in fabrication sector

Malayan Industrial Development Authority ( MIDA )