Fatin research proposal

Research proposal

The Effect of location advantage theories toward

economic growth in Malaysia.

Student’s name Fatin Anis Nabilah bt Abd RazakMatrix number 2012644512Program Business economicGroup ABM 230 5ACourse code MGT 648Course name Research MethodologyLecturer’s

name

Sir Zarul Azhar b Nasir

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Table of content

no Content Page1 Introduction

1. Background of study

2. Problem statement

3. Research question

4. Research objective

5. Scope of study

6. Significance of study

7. Define the variable

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2 Literature review 9-123 Research methodology

1. Research framework

2. Hypothesis

3. Research design

4. Population and sample size

5. Method of data collection

6. Variable and its measurement

7. Data analysis

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4 References 16-18

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Introduction

1. Background of the study

In 2007, Malaysia economy is 29th largest in the world

and its economic growth in consistent since 1970 to 2005

which averaging about 7 percent per annual (Karimi and Yusop

2009). Malaysia’s economy is very competitive among other

nations. This support by the statement in Malaymail online

(2014) which state that Malaysia competitive rank is 12th

ahead of develop countries like United Kingdom, Japan, New

Zealand, Finland, South Korea and Australia. According to

Malaymail online (2014) also state that Institute of

Management and Development (IMD) list Malaysia as 2nd rank

among ASEAN economies and 13th in Asia-pacific followed by

countries like Hong Kong and Singapore. Besides that,

Malaysia also ranked among top 10 in economic performance

and business efficiency, and improved tremendously in their

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international investments that place Malaysia in 7th place

in this year from 14th place last year.1

Good economic performance can give many benefits

towards a nation especially to convinced investor to invest

in our country. Economic growth can help to increase the

living standard and decrease the rate of poverty. In order

to attract foreigners or investor to invest in our country

require domestic skilled worker that can be improved with

human capital development, financial development and good

exchange rate.

The purpose of study is to investigate the relationship

between economic growths with the location advantage theory

in Malaysia. This research is about to investigate how the

location advantage theory that can boost economic growth in

Malaysia. According to Tanggapan and Others (2011), the

location advantage theory comprises of human capital

development, financial development and environmental

condition in Malaysia. This is the reason why this research

is to study factor of location advantage that have impact

towards Malaysia economic growth. Location advantage can be

advantage towards firm, industry or country because they can

get access into resources compare to others (Tanggapan, &

others, 2011).

1 http://www.themalaymailonline.com/malaysia/article/malaysia-beats-uk-australia-for-12th-place-in-world-competitiveness-ranking#sthash.OXi9qpzI.dpuf

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Human development: in order to produce a productive worker,

government needs to focus on their human capital development

especially in education and training in terms of skill.

Concept of human development will enable help individual to

be productive worker especially in global market (Hershberg,

1996).

Financial development:

According to Fitzgerald (2006) financial systems can be

divided into 5 broad functions which are:

Produce information about any possible investment.

Mobilize savings, pool savings and allocate capital.

Monitor investment and provide finance after applying

corporate governance.

Manage the trade, diversification and risk management.

Exchange in goods and services can be more convenient.

Besides that, Fitzgerald (2006) also states that there are 3

basic characteristics for the financial system to have

impact on economic growth based on financial function. The 3

characteristics are:

Financial intermediation’s level.

Financial intermediation’s efficiency.

Financial intermediation’s composition.

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Higher availability of financial can increase the positive

ability of economy to external shocks; help to smooth the

consumption and investment patterns.

Environmental condition:

Environmental condition in this research is determined by

exchange rate. According to Mun & others (2009), key success

for foreign direct investment towards contribution in

Malaysia’s economic growth is good environment. Investor

face less problem when they invest in a good environment and

help the investor to gain profit. (Tanggapan & others,

2011).

2. Problem statement

Human capital development

Foreign direct investment in Malaysia is among major

contributor in economy growth. In 1980, the contribution of

foreign direct investment start to decline because according

to Mahani Zainal Abidin (2010), human capital’s shortage,

corruption and low level level of technology capacity causes

decreasing in Foreign Direct Investment in Malaysia. Thus,

the problem statement for this research on human capital

development is low skilled labor will give bad impact toward

economic growth as no employer will employed labor. When

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labor is not employed, they will not money to spend and less

money to circulate in economy.

Financial development

Financial development is another important factor that will

cause economy growth. Non-competitive, bidding practices by

the government because of corruption and tax fraud is among

unmeasured revenue loss that cost a high cost towards the

government (9th Malaysia plan, 2009). Domestic loan with

high rate will not help to boost economy growth because high

rates will cause loss gain towards the investor.

Environmental condition

In order for Malaysia to keep competing in nowadays fastest

growing economy, better enhancements in innovation,

technological advancement and value addition are needed for

Malaysia to enhance their competitive advantage (Tanggapan &

others, 2011). China is number one world economy become

number one because they keep enhance and improve their

environmental condition like technological advancement to

attract other countries especially United States to invest

in China. Instability of exchange rate might cause investor

from inside and outside of the country afraid to run their

business.

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Therefore, location advantage needs to see as serious

matters that contribute economic growth in Malaysia.

3. Research question


To identify on the relationship between economic growth in

Malaysia and human capital development. How government

expenditure on education and training can affect the economy

growth in Malaysia. Are human capital development help to

increase the economic growth in Malaysia?


To identify on the relationship between economic growth and

financial development. How total loans/GDP can influence


Environmental condition

To identify on the relationship between economic growth and

environmental condition can influence economic growth in

Malaysia.

4. Research objective

General objective

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To investigate on economics growth in Malaysia.

Specific objective

To investigate the effect of human capital development

towards economic growth in Malaysia.

To identify the effect of financial growth towards

Malaysia’s economic growth.

To investigate the effect of environmental condition

towards economic growth in Malaysia.

5. Scope of study

The research scope of study is in Malaysia. The human

capital development is measured by government expenditure on

education and training. The financial development is

measured with domestic credit provided by financial sector

(% of GDP). While, environmental condition is measured with

exchange rate in Malaysia. This study use annual data for

government expenditure on education and training, total

loans or GDP rate and exchange rate. The data are collected

from indexmundi for human capital development, World Bank

data for GDP and Federal Reserve USA for exchange rate. The

data taken for this research is annual data starting from

1980-2013.

6. Significant of study

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Economic growth can be stimulated by location advantage in

the long run.

Human capital development and environmental condition are

positively significant while financial development is

negatively significant (Tanggapan & others, 2011). This

study is significant to determine the importance of location

advantage towards economic growth in Malaysia. According to

Tanggapan and others (2011), location advantage comprises of

human capital development, financial development and

environmental condition.

Human capital development is significant to be study

because good quality of human capital can help to generate

economic growth by attracting many investor to invest in the

country and also high level of knowledge or skills can

generate higher income.

Financial development is significant to be study

because through this research it can determine whether

financial development do progress the economy growth or not.

Meanwhile, for environmental condition like inflation,

economic crisis, exchange rate and many more is important to

be study because it can influence the economic growth in

Malaysia.

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7. Definition of key terms.

Economic growth:

According to Deviga and Madhavan (2007) economic growth is

expansion of production possibilities. This study used GDP

in order to determine the economic growth. Gross Domestic

Product (GDP) is the value of total market at all final

goods and services in a given time period within the country

(Deviga & Madhavan, 2007).

Human development:

Human development is defined as enlargement of people’s

choice especially in ability to get healthier, lead longer

and fuller lives (Ranis & others, 2000).

Financial development:

For financial development in this research is measure by

domestic credit provided by financial sector. According to

World Economic Forum (2012), financial development reports

is use to measures and analyze the factor that enable the

development of financial in economies around the world.

Environmental condition:

Environmental condition is measure by exchange rate in

Malaysia. Price of a country’s currency in terms of other

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country currency is known as exchange rate (Deviga and

Madhavan, 2007).

Literature review

Malaysia has shown to the world their ability to compete

with other countries. Malaysia economy is among the best economy

in developing country. Malaysia also not only become a good

competitor towards developing countries but Malaysia also become

a good competitor for develop country like United Kingdom, South

Korea, Japan, New Zealand and Australia. This statement also

supported by Malaymail online (2014), Malaysia rank is at 12th

rank ahead from developing countries for world competitive

ranking. Malaysia economy is not only good in compete but

Malaysia also has list itself to be rank among top 10 in the

world for economic performance and business efficiency (Malaymail

online, 2014).

Malaysia is becoming attractive for investment because of

their sustainability in economic growth (Kogid & others, 2012).

In this research, Malaysia economy is dependent on the location

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advantage theory. Location advantage theories are human capital

development, financial development and environmental condition

that can attract investor to invest in Malaysia and boost

economic growth in Malaysia (Tanggapan & others, 2011).

In order for the employer or individual to a productive

worker, extra attention towards human capital development is

needed so the individual can compete in this globalization world

(Hershberg, 1996). Positive effect of human capital development

has help the economic growth especially in developing

countries(Li and Liu, 2005). Human capital development is very

important to attract investor because lack of human development

can cause shortage in skilled labor or shortage in human capital.

This support by Mahani Zainal Abidin (2010), shortage in Human

capital cause a decline in foreign direct investment in Malaysia

and to make it worse another problem like corruption and low

level of technological capacity also cause investor to not invest

in Malaysia. According to Jan Du Plessis and BOSMAN (2010), the

basic objective of human capital development can create an

environment that enable people to enjoy their life longer and

healthy. When the age of people are longer and healthy, they will

work efficiently as they have experience and skills which then

can help to generate economic growth.

An improvement towards human capital and quality of labor

force can give benefit to economic growth (Ranis & others, 2000).

Besides that, according Ranis and others (2000) also state that

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economic growth can help to generate to increase the quality of

labor force by using resources. According to Romer, Economic

geography is important to generate economy growth through

knowledge and human capital (Tanggapan & others, 2011). Thus,

human capital development is important to increase the economic

growth in Malaysia. According to Oluwatobi and Ogunrinola (2011),

there are 3 pillars that need to be considered in order to have

sustainability development which consist of economic development,

social development and protection on environment. These 3 pillars

are important because it help to maintain and generate the

capacity, enhance the ability of future generations in meeting

the needs of present generations. Thus, it is important to

increase the human capital development in order to increase the

economic growth.

According to Fitzgerald (2006) in order for the economic to

remain sustain in long term, it must depend on the rise of human

capital development, efficiency in using productive asset and

ensure the population have access towards the asset. Financial

institutions help the household and foreign saving to mobilize in

investment to the firm (Fitzgerald, 2006). Better mobilization in

saving and investment only can achieve if financial system is

well developed (Tanggapan & other, 2011).

Tanggapan and others (2011), also state that financial

system can benefit economic growth because it helps to speed up

the technological innovation. Other than human capital

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development, financial development also helps to increase

economic growth because through financial development, technology

can be improved. Technology improvement can help to increase the

production processes (Tanggapan & others, 2011).

Productive sectors can help to reduce constraint on capital

accumulation, encourage savings and improvements in efficiency of

investments (Fitzgerald, 2006). Tanggapan and others (2011) used

total loan/GDP to indicate financial development which this

research also used total loan/ GDP as a measurement for financial

development. Financial institution plays an important role in

order to attract more investor to invest. According to Greenwood

and Jovanovic (1990), economic growth helps to generate

investment in organizational capital which will help to generate

growth. They also state that financial institution can help bring

the trading in an economy by:

High expect return to investment can be earn by permission

of trading organization.

Trading organization play role of pooling risk across large

number of investor because people can earn high and safe

return by investing in intermediate structure.

When many investing occur in the country, it means people will

be employed and they have revenues to spend. Demand for goods and

services also will increase. Thus, good financial development

will help to increase the economic growth in Malaysia. In 2013,

according to Bank Negara Malaysia, domestic demand in Malaysia is

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affected by the poor performance of external sector and the

domestic financial system in Malaysia remain flexible even the

world is facing high volatility in global and domestic financial

markets. Impact in financial development is different across

countries based on their economic development (Fitzgerald, 2006).

According to Qin and Ndiege (2013), they conclude that growth in

financial development and domestic investment are handful in

economic growth as they indicate the growth of domestic loan

provided by private sector. Thus, it is important to investigate

the determinants of financial development in economic growth.

Environmental factors like inflation, foreign exchange flow,

economics crisis will make the investor to consider investing

because if the investor do not acknowledge about these it can

cause loss towards business’s profit (Tanggapan & others, 2011).

According to Tanggapan and others (2011), researcher like Saggi

(2002) and Abdul Latib Talib (2005) have identified inflation,

trade openness, interest rate and exchange rate to represents as

environment condition. Meanwhile, poor management of exchange

rate can cause bad impact towards the economy growth of a nation.

Furthermore, according to Tanggapan and others (2011),

previous researcher, Ang (2008) has identified that economic

growth only give small impact on foreign direct investment inflow

compared to exchange rate that give big impact on foreign direct

investment thus it can help to boost economic growth. Tanggapan

and others (2011) use exchange rate to measure environmental

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condition in their research. Thus, this research will use

exchange rate as an interactive terms to investigate whether

exchange rate can influence economic growth.

Based on literature, there is relationship between economic

growth and location advantage theory. The study will use

econometric method like Ordinary Least Method, F-test, and T-test

to investigate the significance relationship between location

advantage theory on economic growth in Malaysia.

Research methodology

1. Development of research framework

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-measured by government spending oneducation and training


-measured by domestic credit provided by financial sector (GDP

Environmental condition d

-measured by exchanged rate

Economic growth

Measured by GDP.

This research is to investigate the relationship of dependent

variable with independent variable. Dependent variable in this

research is economic growth while independent variable in this

research is human capital development, financial growth and

environmental condition. This is research is done for economic

growth in Malaysia.

Human capital development is measure by using government

spending on education and training in Malaysia. The data is

collected from indexmundi and world economic data. There is

relationship between human capital developments with economic

growth. When human capital development is increase, it will help

to increase the quality of labor and increase the knowledge thus

it can create higher job opportunity and lead to economic growth.

Second independent variable is financial development. Good

financial development will attract investor from inside and

outside of the country to invest thus it can generate economic

growth because when many investors to invest in country it will

create job opportunity and higher wages. Environmental condition

is measure by domestic credit provided by financial sector (GDP%)

. The data is collected from data world bank.

Third independent variable is environmental condition.

Environmental condition is measure by exchange rate in Malaysia.

Good and stable rate of exchange rate will attract investor to

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invest in Malaysia. The data collected for exchange rate is from

United States federal reserved.

2. Hypothesis development

The better the human capital development, the higher

the economic growth.

The higher the GDP, the better the economic growth in

Malaysia.

The higher the exchange rate, the lower the economic

growth in Malaysia because less foreign investor want

to invest in Malaysia.

3. Research design

i. Purpose of study

This research uses causal study to investigate the

relationship between location advantages with economic

growth. Location advantage are comprises of human

capital development, financial growth and environmental

condition are uses to investigate the relationship with

economic growth in Malaysia. Answer can be found by

relating the independent variable and dependent

variable.

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ii. Extent of researcher interference with the study

This research uses minimal interference because

the purpose of the study is only to investigate the

relationship between human capital development,

financial growth and environmental condition with


Here the data for human capital development is

measure with government expenditure on education and

training is collected from indexmundi and world

economic data. The data collected is annual data

starting from 1980-2013.

Meanwhile for financial development is measure

with total loans/GDP. The data is collected from data

world bank. The data is annual data starting from 1980-

2013.

For environmental condition is measure with

exchange rate in Malaysia. The data is collected from

federal reserved and it also annual data starting from

1980-2013.

iii. Study setting: field experiment

This research is field experiments because it

wants to investigate the cause and effect between human


condition with economic growth in Malaysia. According

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to previous study done by Tanggapan and other (2011),

it found that human capital development and

environmental condition are negatively significant

while financial development is positively significant

to be test.

iv. Research strategies: mixed method

This research use mixed method for research

strategies. Data triangulation is been used to collect

data from several resources and different time periods

in order to study the relationship between human


condition with economic growth in Malaysia.

v. Unit of analysis: countries as the unit analysis

Unit of analysis in this research is country of

Malaysia. This study is to investigate the relationship

between human capital development, financial growth and

environmental condition and their significance with

economic growth in Malaysia. The data will show

aggregate impact of location advantage theories with

economic growth.

vi. Time horizon: Time Series data

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Data are collected from various resources like

indexmundi for human capital development, data world

bank for financial development and Federal Reserve for

environmental condition. Data were collected from 1980

to 2013 for all independent variable and dependent

variable.

4. Population and sample size

This study is to investigate the economic growth in

Malaysia. Due to that this study uses Malaysia as a

population for the research.

5. Data collection method

This study is used time series data from 1983 to 2013 in

order to obtain more accurate data. The data are obtained

from data world bank, federal reserved, world economic data

and indexmundi. Meanwhile, location advantage theories are

divided into human capital development, financial growth and

environmental condition.

6. Variable and measures

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Dependent variable for this study is economic growth in

Malaysia which measure by Gross Domestic Product (%).

First independent variable is human capital development

which measure by government spending on education and

training (% of GDP).

Second independent variable is financial development which

measure by domestic credit provided by financial sector (%

of GDP).

Third independent variable is environmental condition which

measure by exchange rate (%).

7. Data analysis

This study use Ordinary Least Square Estimation (OLS), while

multiple coefficient of determination R2 is use to analyze

the fitness of sample regression in the data. Meanwhile, F-

test is used to measure overall significance of estimated

regression. To identify whether the null hypothesis is true

of null, this research use T-test. Furthermore, Durbin

Watson is used to detect correlation in Least Square

Regression.

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References Karimi,M.S. and Yusop,Z. (2009) Foreign Direct Investment and

Economic Growth in Malaysia.

MPRA paper No. 14999. [Online] http://mpra.ub.uni-

muenchen.de/14999/.

Malaymail online. (2014, May 21). Malaysia beats UK, Australiafor 12th place

in world For competitiveness ranking. Retrieved November10th,2014, from

http://www.themalaymailonline.com/malaysia/article/malaysia-beats-uk-australia-

for-12th-place-in-world-competitiveness-ranking#sthash.OXi9qpzI.dpuf

Tanggapan,D., Geetha,C., Mohidin,R., & Vincent,V. (2011). TheRelationship between

Economic Growth and Foreign Direct Investment in Malaysia:Analysis Based on

Location Advantage Theory. International Journal ofEconomics and Management

Sciences, 1 (2), 24-31.

Hershberg.T. (1996). Human Capital Development: America’sGreatest Challenge. ANNALS of

The American Academy of political and Social Science. of 26



FitzGerald,V. (2006). Financial Development and Economic Growth:A Critical View.

Oxford University: World Economic and Social Survey 2006.

Mun,H.W., Ling,L.Z., and Yi,L.K. (2009). Malaysia West AsiaRelations and Foreign Direct I

Investment: The Journal of International Social Research 2/6Winter. Pp. 434-445.

Mahani Zainal Abidin. (2010). Institute of Strategic andInternational Studies Malaysia.

Deviga,V., and Karunagaran,M. (2007). Principle of Economics.Kuala Lumpur: Oxford

University Press.

Ranis,G., Stewart,F., & Ramirez,A. (2000). Economic Growth andHuman Development

Journal of World Development. 28 (2), 197-219.

Kogid,M., Lily,J., Asid,R., & Mulok,D. (2012). Economic Growthand Foreign Direct

Investment in Malaysia: Evidence from Empirical Testing.

Li,X. & Liu,X. (2005). Foreign Direct Investment and EconomicGrowth: An Increasingly

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Endogenous Relationship. World Development. 33 (3), 393-407.

Oluwatobi, S.O. & Ogunrinola, I.O. (2011). Government Expenditureon Human Capital

Development: Implications for Economic Growth in Nigeria.Journal of Sustainable

Development. 4 (3): 2011

Bank Negara Malaysia. (2013). Economic and Financial Developmentsin Malaysia in the

Second Quatetr of 2013. Reference no: 08/13/03

Greenwood, J. & Jovanovic, B. (1990). Financial Development,Growth and Distribution

Of Income: Journal of Political Economy. 98 (5) : pp 1076-1107

Qin, X. & Ndiege, B. O. (2013). Role of Financial Development inEconomics Growth:

Evidence from Savings and Credits Cooperative Societies inTanzania. International

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