World Applied Sciences Journal 15 (11): 1576-1583, 2011 ISSN 1818-4952 © IDOSI Publications, 2011 Corresponding Author: Hossein Nezakati, Department of Management and Marketing, Faculty of Economics and Management, University Putra Malaysia (UPM), Serdang, Selangor, 43400, Malaysia. Tel: +60173724245, Fax: +60389486188. 1576 Do Local Banks Credits to Private Sector and Domestic Direct Investments Affect FDI Inflow? (Malaysia Evidence) Hossein Nezakati, Farzad Fakhreddin and Behzad Mahmoudi Vaighan 1 2 3 Department of Management and Marketing, Faculty of Economics and Management, 1 University Putra Malaysia (UPM), Serdang, Selangor, 43400, Malaysia Graduate School of Management (GSM), UPM, Malaysia 2 Faculty of Economics and Management, UPM, Malaysia 3 Abstract: This study analysis the factors affecting foreign direct investment inflow in manufacturing sector in Malaysia in between 1974 to 2009, mainly focused on two determinants; domestic credit to private sector by local commercial banks and domestic direct investment. Growth Domestic product and the Trade Openness are also included in the model respectively; the results indicate that Gross Domestic Product of manufacturing, Trade openness, domestic credit to private sector and domestic direct investment significantly influenced the level of foreign direct investment inflow into Malaysia. This study manipulate the cointegration test method and Vector Auto Regression Granger causality between logarithm of foreign direct investment, domestic credit to private sector and domestic direct investment respectively which illustrates both variables are cointegrated and also Granger caused of foreign direct investment. Key words: Foreign Direct Investment (FDI) %Domestic Credit to Private Sector (DCPS) %Domestic Direct Investment(DDI) %Growth Domestic Product (GDP) %Trade Openness(TO) INTRODUCTION Take a backward look on history of FDI inflow in Foreign direct investment (FDI) has been FDI per annum flow into manufacturing sector was about identified as a major concept which leads to the strong RM2.3 billion (roughly US$1 billion), however in 1980, it economic growth by the Malaysian economy. During was just over RM 0.7 billion equal to (US$0.34 billion), last decades the early openness to foreign direct nevertheless in the year of 1990, it enormously surged to investment, resulted in Malaysia’s industrialization just over RM17.5 billion. This happened while rapidly. Before Malaysia’s independency in 1957, manufacturing sector was experiencing more than half of Malaysian FDI flow was concentrated in plantation, the share of inward FDI; the share was hardly over 40 % mining, commercial enterprises, agriculture and utilities. in 1980 [3]. In three years time in 1993, United States Then, after independency, pattern of FDI changed; (USA) and Japan were the overriding players of FDI government expands existing activities and diversifies which granted half of aggregate FDI inflow in Malaysia FDI inflow to agricultural crops and manufacturing. manufacturing sector. This continued till 1997 when the During 1960s, Malaysia’s policy for attracting FDI, Asian financial crisis happened, immediately Malaysian concentrated on the development of import-substituting government changed its policy to a severe fortifications industries (ISIs). But after one decade 1970s, their policy which causes a plummet in inward FDI figure. During 1996 switched to more export-oriented industries (EOIs) to 2000, the aggregate amount acquiesce in FDI in particularly, labor-intensive industries, at that period of manufacturing sector was well over RM 70 billion. This time Malaysia were a labor abundant and consider as was around half of total proposed capital investment educated work force country, it fulfilled the needs of (TPCI) by local and foreign investors reported by foreign firms [1-3]. Malaysian Industrial Development Authority [4]. Malaysia shows, during the 1980s decade, the average