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1.0       AN OVERVIEW

This chapter will discuss mainly about the introduction, background of the study, problem statement, objectives, scope of study, significant, limitations involved and concern on the definition of key terms used in this research study.


In the Southeastern Asia, Malaysia is located and the capital city of Malaysia is Kuala Lumpur. There are two parts in the Federation of Malaysia. There are Peninsular Malaysia and East Malaysia that also known as Malaysian Borneo. There are 11 states in Peninsular Malaysia while there are consists of 2 states in East Malaysia.

The economy of Malaysia is an open economy. If anything happens in global such as financial crisis, it was affected economy of Malaysia. The economic activities involve both domestic community and international community. That means the Malaysia involve in domestic and international activities like export, import and foreign direct investment that also involve the other countries as their partner of trade. The economy of Malaysia is also a state oriented market economy. Every state in Malaysia has their own economy structure by using the budget the government gave every year. So, the most effective usage the budget can influence the state has higher income and then can contribute towards economy of Malaysia. This situation can affect the economic growth in Malaysia.

Malaysia has a fast growing economy as the economy of Malaysia is ranked 3rd largest among the South East Asia countries and 29th largest among the world in 2007. As Malaysia is situated nearby with the Strait of Malacca, it can give advantage for Malaysia to connect with the Far East to Asia, Middle East and Europe and it can increase the foreign trade towards Malaysia. This situation can affect the economy growth in Malaysia.

The government has established five economic growth corridors to promote free trade and business incentives. This situation can influence to further develop economy of Malaysia. The five economic growth corridors in Malaysia are Northern Corridor Economic Region (NCER), Iskandar Malaysia in Southern Johor (IRDA), East Coast Economic Region (ECER), Sarawak Corridor of Renewable Energy (SCORE) and Sabah Development Corridor (SDC). So, the region for each corridor can be developed where many investors come to Malaysia in order to invest and do businesses by attracted with the free trade and business incentives that offer by government of Malaysia. This situation can affect the increase in economy of Malaysia.


1.2.1 Overview of Economic Growth

Central Bank of Malaysia Governor, Tan Sri Dr Zeti Akhtar Aziz in the Star Online (November 23, 2010) said that Malaysia will see moderate growth in first half of 2011 and then the stronger growth in the second half. Malaysia sees that the GDP growth in third quarter of 2010 is 5.3% rather than 8.9% in the second quarter. It also distinguish that there are kind of moderate growths in the next two quarters and then stronger growth in second quarter as well distinguish the outlook for the first of quarter of 2011. The Governor also said that in 2010, Malaysia was likely to have a growth of 6% to 7% by supporting by domestic demand.

Source: Department of Statistic Malaysia

Figure GDP Growth Rates


1.2.2    Overview of Government expenditure

Nowadays, Malaysia most concern with the ICT. The government expands a lot of money to ICT expenditure. According industry watchers, in this year, the Malaysia’s ICT spending is expected growth as well as driven the several emerging technological trends. According research firm IDC, IT spending in Malaysia will grow in 2010 by 9 percent from US$5.9 billion to US$6.5 billion this year. Purchases of hardware and packaged software are the main total spending in Malaysia in 2010. According Roger Ling, research manager for IDC Asean, in 2011, the growth in IT spending will increase due the increase in level of broadband penetration, outsourcing initiatives by organizations looking the IT, continued adoption of system infrastructure software to operate and manage computing resources. In telecommunication sector, the spending expected to hit US$7.3 billion in 2011 rather than in 2010 by 5.3 percent. This situation can affect the government expenditure increase by year to year to fulfill the needs and wants like broadband by people in Malaysia.

1.2.3   Overview of Foreign Direct Investment

According the Star Online (March 25, 2010), foreign direct investment is the main contributor to the economic growth in Malaysia. It involve establish new industries, employment, enhance production and technological capability and trade. In recent decade, there are steady inflows of net FDI that average 3% of GDP per annum while in 2007, there are a peak of 4.5% of GDP. In 2001 and 2009, FDI inflows were recorded relatively lower as well as following the technology bubble and the global financial crisis. During the period 2000 until 2009, the net FDI inflows in Malaysia recorded RM152 billion rather than in 1990 until 1999, the net FDI inflows only recorded RM134 billion. So, it shows that the FDI in Malaysia increase drastically by year to another year and this situation can affect increase in economy of Malaysia.

1.2.4    Overview of Inflation Rate

According Ranjeetha Pakiam in Bloomberg News Survey (September 22, 2010), inflation rate in Malaysia climbed in August to the highest level in 15 months. With the awareness of this situation, central bank is considered to resume interest rate increases after pausing before this. Based on Department Statistic of Malaysia, the consumer prices increase by 2.1 percent from a year earlier after gaining in July by 1.9 percent. According Kristina Fong as an economist at RAM Holdings Bhd, accelerating inflation is a signal of more robust economic activity and stronger consumer sentiment.

The changes in inflation rate can affect adversely towards economy of Malaysia. The food prices that account for about 31 percent of Malaysia’s inflation index has increase in August by 3.1 percent. The cost of housing, utilities and fuels also gained 1.3 percent and transport increase by 2.7 percent due to changes in inflation rate.


The Malaysian economy already faced the financial crisis and financial recovery from 1990 until 2010. In 1997 until 1999, Malaysia was hard hit by regional financial crisis after nearly decade of strong economic growth averaging 8.7% annually. The Asian financial crisis was a financial crisis that started in July 1997 in Thailand. It adversely affects the currencies, stock markets and other asset prices of several Asian countries. The Asian financial crisis in 1997 until 1999 is also known as Asian currencies crisis or locally and also known as International Monetary Fund (IMF) crisis.

Through the Asian financial crisis, the countries that most affected are Indonesia, South Korea and Thailand. Hong Kong, Malaysia and the Philippines were also experienced by the slump of Asian financial crisis in 1997. The countries that relatively unaffected by the Asian financial crisis are Mainland China, Republic of China (Taiwan), Singapore and Vietnam. Japan also was not affected much by this crisis but faced many its own long-term economic difficulties.

During the Asian financial crisis, the large current account is deficit over 6 percent of gross domestic product (GDP). The Malaysian ringgit was attacked by speculators in July 1997. On 17 August 1997, Malaysia floated its currency and then the ringgit fell sharply. During the crisis, the economy of Malaysia is 7.4 percent while the Ringgit dropped by over 40 percent before being temporarily pegged to the US dollar. The government also takes action to reduce expenditure and delayed many large infrastructure projects. At the time of financial crisis in 1997 until 1999, unemployment and interest rates increased.

In 1999 until 2000, the economy of Malaysia has recovered strongly because of the increased government spending and robust export sector.  The Government of Malaysia also encourages Foreign Direct Investment (FDI). According to Malaysian statistics, the U.S ranked first among all countries in approved FDI in Malaysia’s manufacturing sector with approved new manufacturing investments totaling RM 5.2 billion ( US $1.37 billion) in 1999. Malaysian Investment Development Authority (MIDA) was approved that the principal U.S investment are concentrated in the chemicals, electronics and electrical sectors. 60% in the oil and gas and petrochemical sectors with the rest in manufacturing especially semiconductors and other electronic products are the cumulative value of U.S private in Malaysia that exceeds $10 billion. So, this situation shows that after economy recovery, FDI in Malaysia can affected sharply.

Since 2001, annual growth has averaged 5.9 percent (2007: 6.3 percent). Since the economy of Malaysia recovery, private consumption and investment in the service sector are the key drivers of economic growth.

In 2008, the financial crisis occurs again. At this time, the financial crisis is a global financial crisis. The crisis started where global economic development arising from the financial crisis in the US which adversely affect the Europe and Asia. Despite these adverse circumstances, in November 2008, the global financial crisis has not had a significant negative impact on Malaysia’s economy. The growth, trade and investment figures have held up well. The Malaysian economy registered a gross domestic product (GDP) growth rate of 4.6 percent for 2008.

Started in mid 2009, the economy of Malaysia is recovery again. The economy is expected to record positive growth rate in 2009. In 2009, the flat external demand, lower commodity prices and increased competition for FDI inflows is expected. As a result, the government has revised to downwards its GDP growth projection to 3.5 percent from 5.4 percent. In 2009, inflation was on the rise and has finished rising in 2010 especially after March. As a result, the prices of grocery in hypermarkets rise of 15% to 30%. Therefore, certain goods have not had an increase in price for the past 3 years that averaging out annualized to a 6% to 9% inflation rate. In 2010, the inflation was stabilized but the worst was not over yet.

The government predicts to increase economic growth in 2011. The government projected to moderate to 5.2 % in 2011 and then rising to 5.5 % in 2012.

So, with the awareness of the issue, the research about the importance of government expenditure, foreign direct investment and inflation rate towards economic growth is conduct. The researcher wants to know the relationship of the factors that can influence economic growth.

Thus, research question for this study are:

1.3.1   To what extent is the significance of government expenditure influence the      gross domestic product?

1.3.2   How significant is the relationship between foreign direct investment and gross domestic product?

1.3.3      Is there a significant correlation exists between inflation rate with

gross domestic product?

1.3.4      What is the relationship between government expenditure, foreign direct investment and inflation rate with the gross domestic product?


1.4.1    To determine the factor that influences the gross domestic product.

1.4.2    To examine the relationship between independent variables (government

expenditure, foreign direct investment and inflation rate) with the

dependent variable (gross domestic product).

1.4.3    To investigate the main factors that contributes towards gross domestic product.


This research investigates the importance of government expenditure, foreign direct investment and inflation rate towards economic growth. The scope of this study is between 1991 until 2010.

To study the effect government expenditure, foreign direct investment and inflation rate towards economy growth, the researcher used the data from each independent variable from DataStream Advance 4.0, Ministry of Finance (MOF), Department of Statistic Malaysia and Malaysian Industrial Development Authority (MIDA). The purpose of this study is to investigate the importance Government Expenditure, Foreign Direct Investment and Inflation Rate towards economic growth which is relationship between gross domestic product and three variables such as Government Expenditure, Foreign Direct Investment and Inflation Rate.


Significant for this study can be clearly explained as follow:

1.6.1    To the researcher

By doing this research, the researcher get more exposure, experience and knowledge on how to conduct a proper research.

1.6.2    To academic field

This study could be added to the faculty and library. The outcomes of the study can be used for future references for other students. In addition, this research might help the other students to gather information and references. The students are able to use this study as additional readings apart from text books and lectures.

1.6.3       To government

The findings of this study can be the references to the government to know the direction of economy of Malaysia. The government is able to make the right decision making towards economy of Malaysia by review the findings of this study. The government can know either government expenditure or foreign direct investment or inflation rate can affect adversely towards economic growth.

1.6.4    To other researchers

The information and findings for this research can be used as guidelines for other researchers to conduct their research. The secondary data also can help the other researchers to complete their research.


This research should be conducted properly in order to get the right information. Due to several limitations, the researcher should make properly preparation besides a good planning to face with any problem arises during the beginning until the completion of this research.

In order to complete this research, the researcher has to face many limitations such as:


The researcher is facing the time constraint because the time given to finish this study is limited for several months only which are only four months. The researcher should divided the time between complete the tasks given by the company where the practical training is held as well as the researcher should complete the research. By considering this factor, it seems that there are some difficulties in carrying out a good and comprehensive study.


This research needs a lot of budget to finish the research. The researcher should use their own money to complete the research. The costs that include in this study are printing cost, photocopy cost, transportation cost and other costs that are relevant.


This is the first time that the researcher encounter with the research environment that was conducted outside from the university. In case lack of knowledge, it make the process to conduct this research became difficult. The researcher is hard to determine a very reliable data for this study. However, this problem can be resolved by putting more effort, concentration and commitment in conducting this study. The guidance, supporting and constructive criticism by advisor, supervisor, family and friends will help the researcher to conduct the research with confident and get the best result in this study.


The researcher confronts some problem in accessing data that needed. Researcher use DATASTREAM to collect the certain data. It becomes difficult because to get this data, the researcher must go to library only to access the DATASTREAM.

1.8              DEFINITION OF TERMS

1.8.1    VARIABLE

A variable is anything that can take on differing or varying variables. The values can differ at various times for the same object or person, or at same time for different object or person.


A dependent variable is variable that measure in the research and what is affected during make research. The dependent variable is related with independent variable. It is because dependent variable depends on the independent variable and it cannot make research if one of this variable not existing. The dependent variable of this study is gross domestic product.


An independent variable is the variables that will be control over, what can be choose and manipulate. Normally, independent variables is what we think will affect the dependent variable. In this study, a researcher found three independent variables that are government expenditure, foreign direct investment and inflation rate.


Economic growth is the increase of per capita gross domestic product (GDP) or   other measure of aggregate income. Economic growth is concerned with the long run. The business cycle is the short-run variation of economic growth.


Government expenditure is the government spending. Government expenditure is financed through a variety of methods. Governments use taxes to fund programs and expenditures. Governments engage in deficit spending where government may borrow based on future projected budgets in order to fund programs. Governments may also choose to take loans from foreign countries to finance expenditure. The main component in a government’s fiscal policy are how money is spent and from what source.


Foreign direct investment is the long term participation by one country into another country. It involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI. There are outward FDIs and inward FDIs.


Inflation rate is a measure of inflation. It is also as the rate of increase of a price index for consumer price index. Inflation is a rise in consumer prices and increasing the cost of living. It is also the percentage rate of change in price level over time. The inflation rate is one of the most important economic forces consistently weighing on the value of a nation’s currency.

Some inflation is caused because a country has printed too much money or experienced tremendous financial disaster, causing its currency to plummet. Other sources of inflation can be higher input or transportation costs such as gas, which makes it more expensive to ship good to the store. When the pressures get too great, retailers often pass these costs on to consumers.

There are five types of inflation. There are demand pull inflation, cost push theory, money supply, effects of inflation and deflation.



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