PROSIDING PERKEM VII, JILID 2 (2012) 1356 - 1361 ISSN: 2231 – 962X Persidangan Kebangsaan Ekonomi Malaysia ke VII (PERKEM VII), Transformasi Ekonomi dan Sosial Ke Arah Negara Maju, Ipoh, Perak 4 – 6 Jun 2012 FDI in Real Estate, FDI in Manufacturing and Economic Growth: Evidence from Developing Countries Tajul Ariffin Masron 1 (tams@usm.my) Hasssan Gholipour Fereidouni (hassanhgf@gmail.com) School of Management, Universiti Sains Malaysia, Penang, Malaysia. ABSTRACT FDI is well known to play a complementing role in economic development of host economy which in the later period will foster economic growth. Nonetheless, we observe two phenomena that tend to contradict the previous finding. The two are: (1) the drop of FDI in manufacturing sector in many countries and (2) the increasing amount of inflows of FDI in services such as in real estate. Combining both, this study attempts to examine the implication of inflows of FDI in real estate and FDI in manufacturing sector on economic growth in the selected developing countries. Keywords: FDI; Real Estate; Manufacturing Sector and Economic Growth INTRODUCTION During the past two decades, foreign direct investment (FDI) has become increasingly a key element of the global economy. FDI is an engine of employment, productivity improvements, technological progress and ultimately economic growth in the host countries. FDI provides physical capital possibilities that may not be available in the host market. More importantly, FDI (in contrast to short- term capital inflows) is much more resilient to crises because direct investors involve long-term commitments to a country thus making them more resistant to herd behavior in possible economic and financial crises. Due to these important benefits, attracting FDI has become one of the integral parts of economic development strategies in most developing countries (Jensen, 2003; Alfaro, Chanda, Kalemli-Ozcan and Sayek, 2004). Accordingly, there is a rising competition from among developing countries to attract more FDI in services, manufacturing and primary sectors. Given the growing importance of services in global gross domestic product (GDP) and the limited tradability of many services, FDI in services has risen more quickly than FDI in manufacturing and primary sectors (UNCTAD, 2006; Kolstad &Villanger, 2008). According to UNCTAD (2004), on average, services accounted for about two-thirds of total FDI inflows over 2001-2002. Similarly, UNCTAD (2007) reported that services accounted for the most of the world inward FDI stock in 2005 (about two-third) compared with 49 percent in 1990. In contrast, manufacturing’s share declined from 41 percent in 1990 to 30 percent in 2005, while the share of the primary sector was less than 10 percent of world inward FDI stock (UNCTAD, 2007). Evidence of this trend is clearly shown in Figures 1. Source: UNCTAD (2009). FIGURE1: FDI stock in primary, manufacturing and services sectors (in billion USD) 1 Corresponding author’s address: School of Management, Universiti Sains Malaysia, 11800 Minden, Penang, Malaysia. E-mail: tams@usm.my . Tel no: +604-6535158. Fax no: +604-6577448. 0 5000 10000 15000 Service Manufacturing Primary