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Working Paper No. 11-03

Exports, Imports, FDI and Economic Growth
Hang T. Nguyen
April 2011


This study analyzes the impact of trade liberalization on economic growth for Malaysia and South Korea. A four variable vector autoregression (VAR) is used to study the relationships between trade, FDI and economic growth over the time period from 1970 to 2004 (for Malaysia) and from 1976 to 2007 (for Korea). The estimated results from the Granger causality/Block exogeneity test, impulse response functions and variance decompositions confirm that exports are long-run source of both Malaysia and Korean economic growth. (2) For Malaysia, there is evidence to support the two-way causalities between each pair among the four those variables except for the absence of causality from GDP to exports. (3) For Korea, there is one-way causality from exports, imports and GDP to FDI, from exports and imports to GDP and from exports to imports. Exports are not affected by the other three variables. The differences in the estimated results are explained by the differences in the economic policies between the two countries. Although both countries implemented policies of export-orientated industrialization, the Malaysian government promoted FDI as a tool of industrialization, while the Korea government built an “integrated national economy” using “chaebol” industrial structures and minimizing the role of FDI.