Abstract

This study attempts to examine the dynamic relationship between private domestic investment (PDI), the user cost of capital, public investment (PUB), FDI and economic growth in Malaysia over the period of 1970 to 2009. The Johansen cointegration test suggests that PDI, the user cost of capital, public investment, FDI and economic growth are cointegrated in Malaysia. The Granger causality test reveals that there is bi-directional causality between the variables in the long run. Meanwhile, there is strong evidence of bi-directional causality between PDI and economic growth. In addition, the user cost of capital, PUB and FDI show bi-directional causality with PDI and GDP in the short run. For completeness, generalised variance decomposition is also generated and the results suggest that PDI and FDI are more important than the user cost of capital and PUB in explaining the variation in economic growth. Finally, the generalised impulse response function confirms that a shock to the GDP, PUB and FDI exerts a positive effect on PDI, while the user cost capital exerts a negative effect on PDI in Malaysia.