UNITAR E-JOURNAL Vol. 1. No. 1 June 2005 8 FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT IN THE MALAYSIAN SERVICES SECTOR: A THEORETICAL FRAMEWORK 1 Manjit Singh Sandhu manjit@unitar.edu.my Universiti Tun Abdul Razak (UNITAR) Leo J. Fredericks leo_fredericks@hotmail.com Senior Advisor, CSU-DBA Programme Over the past few years, Foreign Direct Investment (FDI) has played an enormous role in the development and growth of the Malaysian economy. At the initial stage, most of these FDI flowed into the manufacturing sector due to the availability of cheap and abundant manual labour. The pro-active strategies of the Malaysian government that came up with numerous incentives and open door policy further attracted Multnational Corporations (MNCs) to locate their production plants here. However, as Malaysia grew rapidly over the last few years, the scenario slowly shifted when labour cost started to rise rapidly in the 1990s. Malaysia became less attractive for FDI in labour intensive manufacturing and some MNCs even decided to relocate their plants to neighbouring countries such as Indonesia, Thailand, Vietnam and even China that offered much cheaper labour. Since the financial crisis hit Malaysia in 1997, the slowdown of FDI inflows has been a key concern. In the mid 1990s, due to accelerating labour costs, the government started to emphasise more on the service sector and has identified it as a key area of growth in the future. This was in line with plans to shift away from a production-based to a knowledge-based economy. The service sector is now poised to be the main engine of growth in the future. The proliferation of the information and communication industry, and continuing deregulation and liberalisation have further spurred the consumption of services, particularly in finance, transport and telecommunication sectors. The factors influencing FDI into the manufacturing sector may not be the same for the services sector. As such, it is imperative that more emphasis is given to FDI research in services since there is scarcity of theoretical frameworks in this area. In fact, theory seems to be lagging behind practice in the internationalisation of services research (Clark et al. 1996 cited in Gronroos 1999, p.9).The main objective of this research is to examine and analyse FDI by MNCs in the Malaysian services sector. This paper attempts to develop a theoretical framework for identifying the factors influencing FDI in the Malaysian service sector. Although there are many factors influencing FDI by MNCs in general, it is still not clear if these factors also apply to the service sector. Key Words: Foreign direct investment, Multinational Corporations 1 A prelimenary version of this paper was presented at the International Borneo Business Conference, Kota Kinabalu, Sabah, Malaysia, 9-11 th December, 2004.This paper is part of the authors doctorate dissertation.