Training, Research and Development, and Spillover Effects of Foreign Direct Investment: A Study on Labour Productivity in Malaysian Manufacturing Industry

Abstract

Using 2-digit levels of panel data set from 16 manufacturing industries during the period of 2000-2014, the present study adds to the literature by presenting new evidence at the industry level. We investigated the impact of training and research and development (R&D) investments jointly with the spillover effects of Foreign Direct Investment (FDI) in influencing labour productivity in Malaysian manufacturing industry. We employed the ordinary least square (OLS) estimator using regression with a robust standard error to estimate the labour productivity model. Our results clearly showed that investment in training is important in increasing labour productivity. It is interesting to highlight that when FDI spillovers from both “learning†and “technology†effects are taken into account in the labour productivity function, R&D investment showed a positive and significant impact on labour productivity. However, more important findings to be reported is that the spillover effects of FDI appear to be quickly assimilated by workers in the Malaysian manufacturing industries through the "learning effect" as opposed to “technology effect†and that the fast pace is biased towards higher labour productivity. Findings from this study can help the FDI attraction policy to be carried out not only to increase Malaysian labour productivity, but most importantly to ensure the function of FDI transfer of knowledge to labour takes place, which must be based on Key Performance Indicators (KPIs).