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The international markets have been the major influence spurring economic growth and development in the Malaysian economy even until today. There were two sources of growth, namely foreign capital and exports of commodities. The government particularly beginning in 1971 moved to develop human capital stock by investing a large amount of public capital in the education sector. However, the growth of human capital did not become a significant catalyst for economic growth. Public and private expenditures for research and development (R&D) remained low compared to neighboring countries such as South Korea and Singapore. This paper examines the effects of Foreign Direct Investment (FDI) and Human Capital (HC) development on economic growth in Malaysia. This paper will also discuss the contribution of these two factors to Malaysia's economic growth for the period of 1980 - 2010 from three angles: Gross Domestic Products (GDP) growth, GDP per capita growth and technological change.
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1.Introduction
The considerable economic expansion of Malaysia since the 1970s until today has enhanced the living standards of the country's citizens. The living standards of Malaysians seem to be fairly high relative to its neighbours. The impressive economic growth and steady development is related to the diversification of the production sector by the government. The government reduced reliance on primary natural resources and agricultural products, and strengthened the manufacturing sector's development since the mid-1980s. Since 1990 Malaysia has become one of the fastest growing economies in the Southeast Asian region and is the third richest state after Brunei and Singapore. Malaysia has also become the world's third largest producer of integrated circuits and one of the leading producers of domestic (electrical) appliances.
The impact of the catastrophic financial crisis of 1997 - 1998 was a turning point in Malaysia's economic performance. The GDP slowed down considerably in the post-crisis years. Previous to this crisis, Malaysia had a consistent GDP growth record over the period of 19701997, on average of over 8% per year. During the period of 1998 to 2011 the country recorded annual GDP growth rates lower than 5%. The high degree of economic openness caused a major, negative impact to Malaysia's economic performance. The external shocks such as the oil crisis in 1973 and 1978-79; the collapse...