An SUMMARY OF Military Expenses Economics Essay

Military expenses and foreign immediate investment have interrelationship between one another. Military costs has both positive and negative result to the overseas investment as it depend on countries cases. Among the consequences of military costs to the market of the countries is investment result. The tradeoff between military services expenses and investment can be an increase in the security spending make higher government borrowing and so absorb the account that federal government used to investment would reduce. This is named an opportunity cost that countries need to simply accept in order for them to allocate more finances to the military services sector. While the positive effect of military expenditure are the advantages of modern skills, fortify financial infrastructure and reduce the unemployment rate.

How military costs can decrease the FDI? That is through the less elegance of the country because high armed forces expenditure indicates the country spending less on development and development. If so, foreign investors won't invest their profit that country. The consequences are it will affect economic progress as FDI is a primary engine motor for the producing countries to funding their investment for the intended purpose of expanding their market.

There is no consensus among analyst to date the interrelation of armed service expenditure and overseas direct investment as it deliver mixed result. Muhammad Khan, et. al (2011), general population spending which protection spending can retard the effect of FDI on financial progress if the ratio of protection spending is beyond 6% because of the higher engagement of administration role in market activity.

1. 2 A SYNOPSIS of Government Expenditure

Military costs can be define as all cost that the countries used for military services activities such as armed forces, equipped for military operation, armed forces space activities, procurement, armed forces research and development, and armed service aid (SIPRI). All countries need to assess their military expenditure in order to discover the burden of military spending in the economy. Moreover, the federal government can provides more priorities to the industries that should be focus more such as education and health by compare the armed forces spending with the other sector. Armed service spending can gauge the degree of peaceful for the countries and also can indicate the power of the countries. For the analysts, they can study the effect of military shelling out for economy like the impact on expansion and economic variables, the tradeoff and the determinant of armed forces expenditure.

In 2010, world military services expenditure is increasing 1. 3% in a genuine term over 2008. typically, for season 2011 about sixty two countries increase in their armed service spending while sixty two countries are lowering. For the time 2002 until 2011, the style for armed forces spending shows an instant growth in THE UNITED STATES which increasing almost 109% of the true term. Out of this figure, 75% of computer is accounted by Algeria. From season 2000 until 2011, the increasing of military services spending for East Asia is 69% while Central and South Asia is just 62%.

In the United Express, the military costs show a decreasing trend due to withdrawal US forearms make from the Iraq and Afghanistan. Furthermore, US government wants to reduce the burden of personal debt. So US have to cut the budget for military services sector. While in European countries, for their economic crisis, most countries have to cut down their protection spending. In American Europe, the majority of the country begin to slice that budget since 2010 while the majority of the countries in central and Eastern European countries, they start slicing that budget since 2009 as they are the weaker economies in European countries.

Figure 1. 0 Biggest decrease in Europe military services spending. Resources from SIPRI Press Material, 2011

Russia is the 3rd most significant of world armed forces spenders and the budget for military services spending is increasing 9. 3% in 2011. Russia also designs to increase this defense spending about $749 billion on military services accessories, R&D and biceps and triceps power. Furthermore, Russia packages to replace 70% of Russia's generally Soviet-era armed service equipment with modern weaponry by 2020 (SIPRI Press Material, 2011).

Military spending in Parts of asia saw a growing trend specifically for China which more likely to overtake European countries. The increasing of armed service spending in Parts of asia is more than 3% in real term for 12 months 2011. Matching to John Chipmant who is director general of the International Institutes for Strategic Studies (IISS) this is due to rapid economic progress and strategic uncertainty. China shows the immediate increase in armed forces spending by 170% in real term since 2002. This spending at least gives some good impact to China such s increase in salary and provide a much better condition for the defense sector in term of equipment and quality of hands force.

This condition plays a part in the increasing India's military services spending by 66% in real term since 2002. Taiwan can also increase their armed service spending but in small level while Japan shows a decline development. In average, the other Asian countries like Philippines, Vietnam, Thailand and Cambodia tend had a similar upward pattern of military expenditure (SIPRI Press Materials, 2011)

Figure 1. 1 Talk about of World Navy Spending for the most notable 10 Spenders, 2011. Resources from SIPRI Press Materials, 2011

The figure above shows the stocks of world armed forces spending for the very best 10 spenders in calendar year 2011. 41% of world military spending is accounted for USA while China is the second most significant which is 8. 2% then accompanied by Russia (4. 1%), UK (3. 6%), France (3. 6%) and others.

Malaysia was ranked moderate to low in the protection budget transparency compared to others developing countries that scored average and low like Indonesia, China and Pakistan. Ministry of Defence in Malaysia is a forth greatest that financed by government after Ministry of Education, Ministry of ADVANCED SCHOOLING and Ministry of Health. In Malaysia budget 2012, the budget spending for military services expenditure will reduce by RM100 billion if compared to time 2011 amounted RM13. 823 billion.

Figure 1. 2 Malaysia's Military Expenses (% of GDP)

The figure above shows the armed forces expenditure in percentage of GDP for Malaysia from 12 months 1988 until 12 months 2010. Every year, the government attempts to slice the spending on this sector. In time 2009, Malaysia slice the military expenditure almost 50% because of the economical downturn. Navy is damaged from the reducing budget where the budget for arm procurement decreased from RM811. 12 million to RM100 000 and followed by Army where in fact the amount of decreasing was RM1167. 77 million. Meanwhile, Air Pressure having an increase budget because of purchasing of new kind of utility helicopters.

There have a connection between military costs and military potential but there may be other factor that intervene the hyperlink between both of them. High military expenses can donate to high military ability for the countries. Even though the country has higher level of military costs nonetheless they use that for keeping excessively large army, this would not contribute to the advanced of ability. If the united states try to reduce the size of arm push nevertheless they give better training and have equipment that appropriate in the present day conflict, the country can develop high military capacity. This shows how well the mixture between staff and equipment costs in military. Beside that the military capability also will depend on efficiency on controlling the military costs. If the united states has poor planning on that expenditure or has problem in the management, that spending won't generate military functionality.

1. 3 An Overview of Foreign Direct Investment

Countries need investment to be able to build up their own countries as well as economy which may be obtained through public and private financing. However, this amount is not enough and need to get the other financial options outside the country's restrictions. Therefore, foreign immediate Investment becomes very important to the development of the countries. Many empirical studies have proven that to people countries that opened to FDI has higher expansion rate and present positive impact to economical development. To create this happen, federal need to attract foreign shareholders by made changes in their insurance policies. There have two kind of FDI that happen to be

Direct Investment: investment made by the international countries in order to have affect on the introduction of a firm's long term strategy.

Portfolio Investment: investment made through relationship, share to be able to obtain short term profitability.

As mentioned before, FDI can brings benefits to the economy such as can firm the capital movement, become more effective as there have many challengers, generate employment, copy of technologies and can load the saving space between your required cash for progress and the internal saving capacity of the country. Additionally, FDI is essential factor of the country's amount of monetary globalization and integration into world market (Marial et al. , 2009). Demekas et al. (2005) says that FDI can be the vehicle for the country to financing their external current deficit as FDI are a non arrears creating financial commitments.

The amount of raises of FDI inflow for three sub areas including East Asia, South-East Asia and South Asia was 24% this year 2010. Amount 1. 3 below shows FDI inflow to ASEAN countries for yr 2010 where Malaysia was the third largest receiver after Singapore and Indonesia. FDI inflow into Singapore was increased from US$15. 3 billion to US$38. 6 billion in 2010 2010 while for Indonesia, the country also had a strong progress from US$4. 9 billion in '09 2009 to US$13. 3 billion in 2010 2010. A growing trend for everyone ASEAN countries in their FDI inflow was because of the growth in local demand and strong growth in private sector activities (MalaysiaInvestment Performance, 2011)

Figure 1. 3 FDI Inflows to ASEAN Countries in 2011. Options: MIDA

Foreign direct investment (FDI) is part of Malaysia engine unit of economic growth. In 1980s, Malaysia is one of the countries on the planet that produce the principal product such as tin, rubber and palm essential oil. Then, calendar year by time Malaysia starts to expend the marketplace in heavy market sectors. Relating to Prempeh (2003), Malaysia becomes more attractive in term of the stream of FDI because of several factors like the undervalued of Malaysia's Ringgit, low cost of labor source and low inflation rate.

Malaysia inflow of FDI has an increasing trend begin from 1970 until 1994. After that, the quantity of FDI inflow shows a decreasing rate because of the great downturn in 1994 and it commence to recovery in overdue 1978. In 1983, Malaysia FDI drop due to the world downturn and electronic problems and the amount of reduction was saved about RM500 million set alongside the time 1982. After Administration of Malaysia put into practice Industrial Get better at Plan (IMP) in 1986- 1995, FDI inflow has increased by RM126 000 million in 1993. Malaysia faces a drop in FDI again in 1994, 1997 and 2001 due to the Asian financial meltdown and occurrence of Sept 11, 2001 respectively.

According to Minister of International Trade and Industry, Datuk Seri Mustapa Mohamed, the FDI for this past year (2011) is the highest where the amount is RM32. 9 billion has been saved. This is because of the Economic Transformation Program (ETP) which drawn many foreign shareholders to invest in Malaysia. The major overseas investment is result from Japan, Singapore, Netherlands and Taiwan. Even in 12 months 2010, there's been a wave of FDI moves into Malaysia amounted RM20. 3 billion where almost all of this characters is go to the manufacturing industries. There have strategy to increase FDI and investment that federal already done. Part of them are empowering Malaysia Investment Development Expert (MIDA) to appeal to investment, benchmarking Malaysia's elegance, reducing commercial and personal taxes to selected companies, easing regulator burden and providing industry tailored incentives.

All these implies that buyers' confident toward Malaysia's opportunity business and Malaysia is on track to attain the investment aim for by time 2020 where the goal is RM1. 2 trillion under ETP. Out of this, the employment opportunities can be create where about 149 496 careers can be offered to the citizen. From the total investment, 55. 4% is come from home investment and the others (44. 3%) is from FDI. The number below shows the Malaysia's FDI inflow from year 1980 until 2009. In yr 2009, the FDI in Malaysia dropped sharply due to the United State financial meltdown that took place in 2008 which have negative impact to the inflows and outflows of FDI. But it recovery in 2010 2010 after federal government released the liberalization actions aimed at luring investment.

Figure 1. 2 Malaysia FDI Inflows

Figure 1. 3 below shows total investment approved in Malaysian economy for the year 2011. The full total investment approved was amounted RM148. 6 billion and about 4964 jobs was approved in Malaysia due to the Economic Transformation Program (ETP) and also New Economic Model (NEM). This is expected to create 149496 job opportunities in Malaysia including all investment that approved operating, manufacturing and main areas. For service sector, there's a growing rate up to 75. 5% and the amount was RM64. 4 billion. This can generate about 43, 784 careers out of this sector. For the manufacturing sector, the amount of investment increase to RM56. 11 billion compared to 47. 2 billion in this past year (2010) as well as for the primary sector, it contributes 18. 9% of total investment in Malaysia.

Figure 1. 4 Total Investments Approved in the Malaysian Overall economy in 2011.

Sources: MIDA

Figure 1. 5 below symbolize the investment and work in task approved for 12 months 2006 until 2011. From year to time, Malaysia was record higher international investment compared to the domestic investment. This revealed that Malaysia was a competitive investment location for foreign shareholders. From 100% of total investment approved in Malaysia, 61% was international investment. There have decrease in total investment in '09 2009 but yet still foreign investment greater than home investment.

Figure 1. 5 Investment and Job in Task Approved, 2006-2011.

Sources: MIDA

The major sourced of overseas investment were result from Japan, Korea, USA, Singapore and Saudi Arabia. Japan was the major entrepreneur with RM 10. 1 billion and mainly in E&E products. Korea was the next largest investors with RM5. 2 billion and mainly in make of lithium ion batteries. Unites Point out was the third largest buyers with RM2. 5 billion and mainly in diversification project for make of gadgets, bio and substance. Singapore was focus in the meals developing and E&E industries while Saudi Arabia was target in creation of polycrystalline silicon.

1. 4 Problem Statement

Questions have been raised about the result of military costs on economic expansion. The opportunity cost for military services expenditure is definitely an important thing that countries must be take note in order to be aware of the effect of this spending to the progress of the countries. There has to be a tradeoff or a chance cost for the countries if indeed they target more on military costs as it can be an unproductive expenditure. The explanation for this debate is government will need some part of resources away from the other economical activities like investment, health and education which those are the productive expenditure. But from the other perspective, military expenditure also offers their own role to the financial such can strengthen monetary infrastructure, reduce unemployment and can encourage completely utilization of the existing development facilities.

Deger and Sen (1995), Devarajan et al. (1996), Glomm and Ravikumar (1997), Shieh et al. (2002), Luca Pieroni (2004) cases that higher level of military costs can retard the development as the resources can not be allocated to the better use. Regarding to Collier (2001) on the globe Bank Insurance policy Research Working Newspaper, found that on average the country progress rate will reduce which lead to lessening about 20% level of income when the united states double the armed forces expenditure. Relating to Hamid Davoodi et. al (2001), decrease in international pressure will lead to lessen in armed forces spending and therefore boost the nonmilitary spending in total spending.

However, the planet still continues to spend more from the total budget on armed service sector. As increase in military expenditure will reduce the cutting down and reduce the investment because higher defense spending make higher federal government borrowing thus absorb money that would otherwise have gone partially to investment. Degar (1986) discovered that military expenditure and investment have negative impact as increase in military spending may cause higher inflation and taxation. In the long run, it can impede the growth of Malaysia market. By reducing extreme defense spending, the country can make use of it to provide short-term economical stimulus where it can be as a safety measures when the country facing recession. Furthermore, reducing military expenses will not cause job loss (in term of military).

All these factors above can affect the Foreign Direct Investment (FDI) come to countries. One of the main reasons the reduction of FDI inflow is the united states is less attractive and not offer better return to them. If the countries spend more on armed service, the foreign investors feel that the country has less attraction once we spending less on economical development. Furthermore, less resources that will contribute to the introduction of human capital in which this factor has a good impact on inflow of FDI. Less human being capital development implies that the country has less way to obtain skilled labor even though they have abundant of work force. This view is reinforced by Sharma and Gani (2004) who state, "increase in FDI are associated with moderate improvement in human development. " Thus, it may lead to other consequences because FDI inflow played out as one of the main engines of monetary growth. The majority of producing countries face scarcity of capital to funding their investment. So, to solve that problem they have to attract up to FDI with their countries. This is called crowding out result or opportunity cost to be able to increase armed forces expenditure.

In Malaysia, armed forces expenditure is reducing over time while FDI is fluctuate over calendar year, but starting 2009 FDI is plumped and already go beyond the investment aim for. All these can give positive impact to the Malaysia monetary growth theoretically. The relationship between military expenses, FDI and economical growth has attracted interest for the economist to investigate since it yielded blended final result on different conditions of countries and there is absolutely no specific prediction about the partnership between them.

As such, in the case of Malaysia, this review wants to know whether there have long run relationships between armed forces expenses, FDI and economical growth and causal effect between them.

1. 5 Research Objective

The study should have purpose because it is important things to researcher in guiding her to be able to attain the reason why and reason for doing the research. The goal of this review is dividing into two categories

The general goal is to study the long term relationship between military services costs, FDI and financial growth.

The specific target is to determine the causal result between military costs and FDI.

1. 6 Research Question

There are several research questions that has been developed regarding the problem statement occurred. The study questions can be

What is the long term relationship between armed forces expenditure and FDI on economical growth?

What is the causal effect between military costs and FDI?

1. 7 Significance of the Study

The impact of armed forces expenditure on economic growth can be an arguable issue that is increasing in armed forces spending may absorb fund that would usually have gone partially to investment which lead to inefficient resources allocation. The correlation between military expenses, FDI and economical growth is an essential issue since navy is important to safeguard the security of country and FDI also very important to growing countries like Malaysia.

This study makes a contribution to the existing studies on military expenditure and economical growth. Regardless of the value of causal romantic relationship between military expenditure and growth, security spending also has an impact on the investment of the united states. Therefore, analyzing the interwoven between military services expenses, FDI and progress is the contribution in this study.

1. 8 Business of the Study

The paper is organized as follow. In section 2, there provide the literature overview of the effect armed service costs on FDI and development. Section 3 will explain the methodology found in this studies. Section 4 will describe about the results and previous section (section 5) will describe about conclusion and recommendation for this study.

CHAPTER 2: Books REVIEW

There are various empirical studies on the military services expenditure and FDI on economic growth.

2. 1 Military services Expenditure

The first serious discourse and analyses of the relationship between military expenditure and GDP expansion emerged during the 1970s by Emile Benoit (1973). His research was give attention to forty four less developed countries (LDCs) and discovered that military expenditure has positive romance with economic development. However, Nicole Ball (1983) argues that armed service expenditure cannot donate to higher growth. From then on, Benoit (1978) revise back again and found two aftereffect of military expenditure on growth which is favorably and adversely. The negative result is military costs absorb the resources from productive activities as the positive effect could it be can reduce the unemployment, improve infrastructure and involve in research and development (R&D).

Deger (1981) points out that increase in military expenditure reduce the fund that needs to be used for the forming of individuals capital. This view is backed by Muhammad Khan, et. al (2011) who studies a time series research of public spending, FDI and monetary growth for Pakistan from 1975- 2008. He declare that public spending give negative impact to financial growth scheduled to large proportion of budget is use for defense spending, thus it can neglected the real human capital. As the result, it can impede the growth.

Deger and Smith (1983) traces that the higher armed service spending can retard the economic growth of that countries. It is because the armed forces spending will need some of capital equipment that will use for utilization and investment as these can decrease the expansion of market. In less developed countries, Deger (1986) cases that there is negative relationship between both parameters as military services spending can provide bad impact to investment and also can not generate conserving for the countries. Additionally, Dunne et al (2002) looked into the relationship between armed service spending, investment and financial development in small industrializing economies. He used -panel data method and found that military spending can harm expansion by give negative impact to investment.

According to Dunne (2010), who investigates about armed service expenses spending and economic growth in Sub Saharan, he found that military services spending give negative impact to monetary expansion in both short run and long run. For the situation of Egypt and Israel, minimizing the military spending can improve the economic growth. Within the circumstance of Syiria, the shifting resources from military to civilian spending won't enhance progress unless the civilian can produce productive activities (Suleiman Abu-Bader, 2005).

Many studies about this issue were discovered that the higher armed forces expenditure resulted in lower economic expansion (Deger and Sen, 1995; Devarajan et al. , 1996; Glomm and Ravikumar, 1997; and Shieh et al. , 2002). This is reinforced by Luca Pieroni (2004) that the economic expansion will down if the public expenditure is getting increase because there are potential that federal government using the resources for unproductive open public sector such security spending. In average, increase in military expenditure will certainly reduce the growth of economy specifically for poor countries. This is because they transfer the military services equipment so when they increased the spending, the chance cost that they may carry is less development for his or her countries (Paul Collier, 2006).

Kalakech et al. (2009) cases that defense costs and development has negative correlation over time and insignificant in the brief run. Regarding to Shieh et al (2002), who studied about the impact of military burden on long haul progress and welfare, there have three programs that military make a difference the private investment. First is through budgetary crowding out effect. Increase in military services spending can cause the finance that use for having better infrastructures become less. As the quality of infrastructure cut down, it can lower the creation of private outcome and reduce the sources of investment. Skabic and Orlic (2007) and Botric and Skuflic (2006) found that the development of infrastructure is important to attract more inflow of FDI to the number country but it contrary in the case of Africa. Nnadozie and Osili (2004) research on United State's outflow of FDI to Africa, they explain that the functions of infrastructures have less important to get FDI. Second is through spin off impact. Higher military costs can increase the home tool stock. Thus, it does increase the private creation and also can promote investment. Third is through resources mobilization impact. It can increase private investment by minimizing consumer current utilization in order to have higher future power.

High military spending significantly retard the economical growth if the country reduces the spending, it could not have an effect on the security of the united states (Khilji, 2005). Beside that, Henderson (1988) says that advanced of military spending can lead to poverty through unemployment and inequality. This view is support by Tang et al. (2009), who discover that the unemployment rate in low and middle income countries increasing when the armed service spending increase. Numerous studies have attempted to explain that upsurge in military spending can cause income inequality anticipated to different income payment to workers in armed forces and civilian sector (Abell, 1994; Melman, 1974; Carson, 1987). This is because workers in hi-tech business can get high income and shelling out for hi-tech weaponry produces relatively fewer occupation gains, specifically for minorities and other disadvantaged individuals who do not have the requisite education or skills to work in the protection industry or related research activities (Carson, 1987).

It can not be conclude that increase in military expenditure can harm the economic expansion. As examined by Deger and Sen (1983), armed service expenditure have favorably and negatively correlation with progress. For positive relationship, military costs can increase aggregate demand and creating new complex improvement while for the negative correlation, military expenditure can affect investment, keeping and balance of repayment. This is consistent with Hassan et al. (2003). He investigates the effect of military shelling out for growth and FDI in five Southern Asian Regional Cooperation Council (SAARC) countries from yr 1980 to 1999. He found positive romance between armed forces spending and economic growth.

Baker (2007) looked into the impact of the Iraq conflict and higher armed forces shelling out for US economy. The result shows that armed forces spending can boost the economy in the brief run by maximizing demand, providing more career and increasing in outcome. The bad impact for high military services spending is seen in the long run which after a decade the country enforced higher protection spending. High inflation can lead to increasing the long term interest rate and these can cause reduced investment. Moreover, high real interest helps to force up the dollars currency which can lead to lower export and higher transfer as the imported goods become relatively cheaper than their own goods. In this case, the government will face much larger current bank account deficit and business lead to larger overseas debt.

In the truth of USA, the federal government increase their military spending following the 11 Sept 2011 attack and give impact to the economy. Advanced of military costs increasing the united states debt and reduce the profitable capital. Beside that, the bringing up of interest can lower the private investment. Even though the increasing in military services expenditure can contribute the right impact such as the stimulate aftereffect of government purchase and high overseas cutting down through high interest rate, but each one of these cant recover the loss from impose higher level of military expenses (Edward, 2011).

Military spending did not directly damage the economical such as disturb the federal government to provide better health and education but it can induced financial stimulation. This is because armed forces spending not only as a source for increasing an aggregate demand but as a protection for international investment and present profits for security contractors (Baran and Sweezy, 1996). Military spending can boost the security of the countries, thus it can promote more international investment come to that countries. Within the other cases Silver (2005) reported that military spending can improve the demand stimulation but in a small ratio and it happen by coincidence alternatively than by volition.

Higher level of military costs can retard the human development. Nabe (1983) review about the result of military costs on social development (in term of education and health) for twenty-six African countries from 1967 to 1976, he cases that military expenditure give negative impact to interpersonal development. However, Verner (1983) carried out an investigation on the effect of military expenses on education in 18 Latin America and the effect showed that only one country has negative tradeoff, ten countries have positive tradeoff and the other seven countries haven't any significant tradeoff. This means that not all countries have the same conditions and it's really depending on how the spending of military services sector has been used. Armed service expenditure can builds human being capital if parts of the spending are being used for education and training for army, discipline and so on. Furthermore, it can improve welfare and output if this spending is used for revamping the economy during problems such as floods, tsunami, problems from terrorist and so on.

Sharma and Gani (2004) study about THE RESULT of FDI on Man Development for midsection and low income countries for the time from 1975 to 1999. They anticipate that military expenses has negative relationship with real human development that plays a part in less FDI. It is because of higher level of military expenses indicates less activity for improving individual welfare and output. Thus, it will cause decrease in FDI inflow as overseas buyer less interested to that country. However, the result implies that the positive romantic relationship between both variable. The reason is protection sector provide major career and the income result raise individual development. Thus, attract the FDI inflow to that country.

Labor resources are one of the importance factors to create more FDI. Zenegnaw (2010) analyze the determinant of FDI from the demand area, he claims that the greater African countries devote to human capital, the more FDI they can entice to flow with their countries. Li and Liu (2005) pin tips that the discussion of strong real human capital with FDI can provide strong impact to economic growth for the country.

Borensztein et al (1998) shows that a country can get fully advantages from FDI when the united states achieves certain level of individual capital and FDI are a complementary with individual capital. In addition they claim that FDI creates more growth compared to domestic investment. This is because human capital takes on an important role as an absorptive capacity to take advantages from FDI. Nunnenkamp and Spatz (2003) remember that better organizations and educated workforce are important factors for a country to attract FDI nonetheless they claim that the benefit from FDI is quite skeptical, therefore the contribution of FDI on development is quite poor.

Military costs can be associated with problem. In 2001, Gupta et al. investigated the partnership between corruption and military expenditure for up to 120 countries from year 1985 to 1998 and she build two hypothesis. First, the corruption has positive romantic relationship with the share of defense outlay in both GDP and total authorities spending. Second, corruption has positive relationship with armed forces procurement with regards to both GDP and total administration spending. Her hypothesis was fact when the result exhibited that the corruption was correlated with high military services expenditure. The reasons for this discussion ware less transparency in the security sector and high competition between forearms producer make them holiday resort to bribes in order to obtain a contract.

Beside that, the partnership between corruption and authorities spending has been completed by Mauro (1997) and he remarks that military expenses donate to high corruption. Corresponding to Hines (1995), mostly corruption was recorded in military aircraft trading.

The impact of low individuals development and high problem because of higher level of military expenditure is distracting the FDI come to countries. Sharma and Gani (2004) found that human development is an important tool to draw in more FDI come especially for low income countries. This is because a better individuals development means a better quality of education, health and skills that can boost the growth and development of market. In the mean time, Wei (1997) boasts that corruption give negative impact to the inflow of FDI as corruption shows how well the quality of authorities itself.

This is reinforced by Habib et al. (2002), Zhao and Du (2003), Skabic and Orlic (2007). They boasts that the existences of problem and low transparency have negative marriage with the inflow of FDI and so hampering monetary development.

Most researcher remarks that FDI have positive effect to economic development through many factors. Lee and Tcha (2004) demonstrates as the FDI inflow of the countries increase, the GDP and total factor production of the countries also increase and the contribution of FDI to monetary growth is greater than the home investment. That is consistent with Borensztein et al. (1998) that promise, FDI is very important to moving technology and add more to growth rather than local investment does. In a related work, Bashier and Bataineh (2007) discovered that domestic cutting down is increase as FDI increase which is another ways for the local investment to increase.

In OECD country, armed forces expenses and FDI has positive relationship while in non OECD country both two variables have negative relationship (Gilady et al 2002). Li (2008) discovered that FDI and armed forces turmoil have negative romantic relationship scheduled to high armed forces conflict boost the armed service spending. Thus, it disattract FDI come to that country.

2. 2 Administration expenditure

Government expenditure can be explained as the spending that produce by government to take last product or services, copy repayment and the other expenditures. Matching to Vilde (2001), federal government expenditure is likely to have negative romantic relationship with FDI. It is because increase in authorities expenditure may masses out the private utilization expenditure, thus negatively affect productivity. Beside that, for the truth of Philippine overall economy, the government expenditure can crowd out private investment including overseas investment and thus reduce the economical growth.

Le and Sugra (2005) state that the overused of general public spending can lower the role of FDI to improve economic growth for the countries. Hasen (2007) found negative marriage between government costs and FDI inflow in his research by using -panel data in AMU countries. His reasons is large part of government expenditure can lead to misuse of that fund by federal government officials and it also may crowding out investment in critical sector of current economic climate. In addition, Filipovic (2005) concludes that high authorities expenditure can cause a complex bureaucratic composition that make that country becomes less attractiveness to be a location for foreign investment. Beside that, it can also increase the degree of corruption and bureaucratic red tape.

In contrast, Tanzi (2000) claims that in order to appeal to capital freedom or foreign investment, federal government have to invest towards productive consumer input such as education, health, research and development, training and infrastructures. This view is in line with Zenegwa (2007) that investigate factors impacting on FDI from the demand side in Africa. He found that government final ingestion give positive result to draw in more FDI come compared to that country. It is because as more authorities invests money for infrastructure, education and other things that can broaden the introduction of country, it'll draw in more FDI inflow.

2. 3 Trade openness

Trade openness can be explained as the openness of the overall economy in order to engage in trading activities with others economies. It is the total of export and transfer to GDP that can be one of the top variables to cause FDI inflow. Yasmin et al (2003) points out that trade openness positively significant impacting FDI in the low and upper middle class group as increase in openness will increase the opportunities to trade set alongside the countries with limited trade procedures, thus it entice foreign investors to invest compared to that countries.

The impact of trade openness to FDI is depends on the types of FDI itself. Upsurge in trade openness may reduce FDI inflow if the goal of investment is to provide the neighborhood market. This is due to the tariff jumping where in fact the foreign organizations feel difficult to export their products to the variety country, thus they create subsidiaries in that country. On the other hand, upsurge in trade openness may contribute good impact to the FDI inflow if the overseas firms take part in the export focused activities since increase in openness will reduce the transfer cost (Jordaan, 2004).

There have many analysts discovered that trade openness give positive impact to the inflow of FDI as the countries more take part in international trade (Velde D. W, 2001; Aizenman and Noy, 2006; Noorbakhsh et al. , 2001; Imran et al. , 2012; Nonnemberg et al. , 2004; sahoo, 2006; Botric et al. 2006; Durham, 2002; Eicher, 2002; Ismail and Yussof, 2003). Kamaruzaman et al. , (2011) says that trade openness is a important determinant of FDI in Malaysia as they found two way causality both in a nutshell run and long run.

For the truth of Sub-Saharan countries, one of the macroeconomic factors that can entice FDI inflow come to the countries is trade openness (Asiedu, 2002). Yih Yun et al, (2000) found that trade openness has positively significant for the FDI inflow in Australia's market. Besides that, trade openness can be view from the point of view of economic integration among countries. Rahman et al, (2008) highlights that in the case of Canada, free trade contract has significant effect for inflow and outflow of FDI of the united states.

Reduction in tariff or restriction in trade will lead interest of FDI inflow as the countries have advantageous condition as the expense of trading is low. Banga et al, (2007) analyze the impact of trade liberalization on FDI in Indian sectors by using panel data for 78 sectors from 1991 to 1998. They found that trade liberalization promote the FDI flow in India as the higher level of international trade can get a big amount of FDI. In the majority of rising economies, trade and FDI are complementary, thus the effect show that trade openness has positive impact to FDI (Martens, 2008). Beside that, the complementary between them can also grow the importance of MNE creation network and intra-industry and intra-firm trade (Globerman, 2002)

This view is consistent with Rose (2002). She says that the countries which have high trade openness will encourage overseas investor to invest in those countries. This is because of the countries having less potential to default on the international debt. In addition, Rasekhi (2011) state that trade liberalization has a good influence on FDI as removal in tariff obstacles can reduces cost in multinational businesses and trade liberalization can expands the marketplace thus absorb FDI inflow to number country.

Blomstrom and Kokko (1997) conclude that Regional Economic Integration (REI) may activate FDI inflow as REI business lead to reduction in trade restriction (better trade openness) and reduce tariff expecting FDI. In additional, REI may improve the progress rate and efficiency of economic thus allures both foreign and home investment. Chakrabarti (2002) on his review about determinant of FDI for cross country regression declare that trade openness is the key factor of attractiveness of a location for FDI.

Portes and Rey (2005) concludes that there have strong effect of trade openness on FDI as they found the causality between them operates significantly in both ways. For the similar research, Aizenman and Noy (2006) found the causality impact between trade openness to FDI about 31 percent. Singh and Jun (1995) says that there have complementary relationship between trade and FDI inflow as export orientation is vital to catch the attention of the FDI go to the country. Resmini (2000) most of vertical FDI is benefit from increasing in trade openness for the truth of developing investment in Central and Eastern Europe.

Export campaign can be significant factor to entice more FDI inflow alternatively than promoting the import substitution. Out of this it can boost the trade relation between home and sponsor country, thus this is positive determinant for FDI. Liu et al. (2001) claims that strong trade connection between host and home countries can induce the FDI to the sponsor countries. Singh and Jun (1995) discovered that export orientation can get more FDI come compared to that country. This view is consistent with Akinkugbe (2003). He is convinced that trade liberalization and export orientation plan can be the critical indicators why foreign shareholders invest to the number countries.

Onyeiwu (2003) conclude that limitation of trade openness is an integral part of the reasons less FDI inflow in the MENA region. Grossman and Helpman (1990), Rivera-Batiz and Romer (1991), Barro and Sala-i-Martin (1997) highlights that trade openness may contribute to economic development through spillover aftereffect of FDI. This is because, trade openness may revealed and improve knowledge for hi-tech products by importing it from others countries.

There have overdue review about the determinant of FDI and found that trade openness has non result to the FDI inflow (Schmitz and Bieri, 1972; Wheeler and Mody, 1992).

CHAPTER 3

METHODOLOGY

3. 1 Introduction

The purpose of this section is to go over the theoretical framework, method and methods that are being used to perform this study. The time series data and econometric technique is employed in order to analyze the relationship between military costs and foreign direct investment. The testing are Augmented Dickey Fuller (ADF) to test the stationarity of the info and ARLD bound test to test the co-integration of both armed service and FDI factors. Beside that, this chapter also provides explanation of the data that is employed in this review.

3. 2 Theoretical Framework

There are several ways that military expenditure may influence overall economy and there are grouped into demand effects, supply effect and security results.

3. 2. 1 Demand Effects

From the Keynesian point of view, increase in military expenditure can increase demand as well as decrease the unemployment, boost the income and raise the purchasing electric power. Under consumption ideas, military costs has crowding out impact in which it can absorb fund or resources from the other effective expenditure such as investment. This budget constraint cause by increasing in military expenses will be money through increase taxation, increase borrowing either internal or external and also boost the supply of money. This can lead to help expand impact such as increase in interest rate and when government wishes to funding the budget constraint by increase borrowing, it'll increase the authorities debt. Each one of these may affect the inflow of foreign direct investment to the country as well as decrease the growth.

3. 2. 2 Supply Effects

Military expenses may have an effect on the supply aspect of market through the factor of production such as labor, resources and technology. The factor of development that will use by the armed forces sector is comparable to the factor of development that use by the civilian to produce potential output. Broadly speaking, increasing in government expenditure automatically improve the use of factor of development for armed forces sector while decrease the resources for the ability of economy to create new products. Beside that, armed forces priorities may have qualitative impact on civilian innovation.

3. 2. 3 Security Effects

Increase in security may protect the civilian and country from inside and external threats. This is essential the market to operate, as an incentive to invest and generate end result. For instance, the less developed countries the major obstacle to reinforce their current economic climate is war and insufficient security. However, military expenditure isn't just for the purpose of security so that it will not bring positive security result.

3. 3 Model Specification

The model specs to look at the impact of impartial variables to centered factors can be displayed as follow

FDI = f (MILEX, GE, TO)

Where,

FDI = international direct investment, GE = administration expenditure,

MILEX = military expenditure, TO = trade openness

Broadly speaking, this analysis want to research the hyperlink between FDI and MILEX and the other unbiased variables (GE and TO) which will be the control factors that can provide some impact to the based mostly variables.

3. 4 Stationarity

It is important to check for the stationarity of the data in time series evaluation. A fixed time series means the info fluctuate around its frequent value, while non-stationary means the series having variables of the cycle change over time. This trend will need to have to remove in order to avoid that development to impact or dominate the other features of data. Beside that, non-stationary time series can spurious regressions by having a higher R-squared even a set of factors are unrelated or causal marriage. If the time series data is non-stationary, it is important to transform it to fixed by doing first difference. It means it must be differenced d times to convert it become fixed.

Yt = Yt-1 + ‹˜t ------------------------- (1)

The equation above is an initial order. If the coefficient of Yt-1 is equal to zero or I(0), this means the series is a fixed in case the coefficient of Yt-1 is equal to 1 or I(1), this means the series contain one device main. The series have two unit roots or I(2) when the coefficient of Yt-1 is equal two. In that case, it need to differencing double to convert into stationary but the majority of the series only need a single device root.

3. 5 Product Root Test

The non-stationarity can turn the effect into unreliable results. Thus, there is a need to eliminate the non- stationary data. This is done by performing the Augmented Dickey-Fuller (ADF) assessments. Augmented Dickey-Fuller (ADF) test is an expansion from the Dickey- Fuller (DF) test. The DF test is applicable if the ˜t is white sound but if the error term is autocorrelated, the ADF test is more suitable as it already takes into account the autocorrelation in ˜. The mistake tem is reported to be autocorrelated when there is autocorrelation in the dependent variables. The simplest form of ADF test is

‹Yt = ‹±Yt-1 + + ˜t

H0: ‹± = 0 (there's a unit main or time series is non-stationary)

H1: ‹± < 0 (time series is fixed)

This ADF test using m lags of reliant variable. If the result able to reject H0, it demonstrated that, the info is fixed and the effect produced will be reliable. However if H0 is accepted, thus it proved that the data is non-stationary (have product roots) which will make the result unreliable to be carry.

3. 6 ARDL Bound Tests Approach

In this analysis, the ARDL bound test is need to utilized to check the co-integration between armed forces expenses, FDI and development. Matching to Pesaran (2001), the ARDL test have several advantages such as small test size is reliable because of this test and no restriction enforced on the order of integration of every varying. Furthermore, it suitable when the explanatory factors are endogenous, and is sufficient to simultaneously appropriate for residual serial relationship. The ARDL destined co-integration test model is

FDI = f (MILEX, GE, TO)

FDI = inflow of foreign direct investment, % of GDP

MILEX = military expenditure, % of GDP

GE = government expenses, % of GDP

TO = trade openness

C = constant

There need several steps to done a complete test for the co-integration relationship. First, Breusch-Godfrey LM test is applied in order to make sure enough time series is free from serial correlation. The utmost lag order is (p) = 2, to avoid the over parameter problem. Different lag order can be use if the estimation reveals serial correlation and the last solution is to use Hendry's Basic to Specific model if the effect still reveal serial correlation problem.

After the time series is clear of serial correlation, the Wald Test is deciding on signify whether all the variables have long haul co-integration to the other person by imposing limitation on the estimated long haul coefficients of MILEX, FDI and GDP. The hypotheses are as follow:

H0: ܠ1 = ܠ2 = ܠ3 = 0 (no long haul relationship)

H1: ܠ1 ܠ2 ܠ3 0 (an extended run relationship prevails)

The computed F-statistic value will be compared with critical values. According to Pesaran et al (2001), if the coefficients among the list of lag 1 factors are jointly fall season above the top bound critical value, this implies that this is a long run relationship among the parameters. If it below the low bound, it indicates no long haul relationship and when it falls in between of upper and lower bound, it suggests inconclusive.

3. 8 Causality Test

To test the causality test, the ARDL bound test is use in order to learn either it's FDI and the other control variables can affect MILEX or not. This causality test is comparable with the prior ARDL destined test, but the dependent variable is change to MILEX and the independent variables are FDI, GE and TO where the relationship is really as follow

MILEX = f (FDI, GE, TO)

H0: ܠ1 = ܠ2 = ܠ3 = 0 (no long run relationship)

H1: ܠ1 ܠ2 ܠ3 0 (an extended run relationship prevails)

Again, predicated on the result of the F-test, if the computed F-test is greater than top of the bound, the null hypothesis can be rejected thus need to simply accept alternative hypothesis. If the F-test is lower than the low bound then the null hypothesis cannot be rejected thus shows that there have no long run romance between those variables. However, if the F-test comes between your lower and the upper bounds, a conclusive inference cannot be made.

3. 9 Resources of Data

This review is concentrate on the interrelationship between military services expenditure, Foreign Direct Investment (FDI) in Malaysia. This research used every year data which undertaken from 1970 until 2010 (41 years). This research is dependant on secondary data produced from several resources.

The data of armed service expenditure is gathered form Stockholm International Serenity Research Institute (SIPRI). Armed forces expenditure can be define as all spending that pertains to military operation include current and capital expenses such as arms force, costs on protection ministries, paramilitary pushes, military space activities, military aid and more. But it is not includes the expenses on civil security and current expenditure for previous armed service activities. This data is extracted from calendar year 1970 until 2010 and it is measure as a talk about (%) of gross domestic product (GDP).

In this review, FDI is employed to take the net FDI inflow. Online FDI inflow is measure as a talk about (%) of gross domestic product (GDP) and it gathered from World Standard bank from year 1970 until 2010. Data for authorities expenditure is extracted from World Loan provider and the trade openness is compute as a proportion of export and transfer of goods and services to gross domestic product.

CHAPTER 4: DATA Evaluation AND FINDING

4. 1 Product Root Test

Augmented Dickey Fuller is making use of in this paper in order to test the level of stationary. Based on Pesaran (2001) to make use of ARDL methods to are you don't need to test for product root because these approach allows the combination of I(0) and I(1). To be able to check the condition of stationary so this test is employed to know if the time series is fixed or not.

From the stand 4. 1, the FDI and MILEX series shows that they can be significant at 5% of level. Thus the test of product main could reject the null hypothesis because the p-value is significantly less than critical value. Therefore, both FDI and MILEX series were fixed at levels were included of order zero I(0). To make sure both parameters are clear of non-stationary, this test is prolong up to first difference and the result implies that the null hypothesis of the unit underlying both FDI and MILEX were rejected as these were significant at 1% level of value thus confirming that they are all fixed.

For the situation of GE also to, the null hypothesis for product root test could not be rejected as the p-value is greater than the 5% significant level. Therefore, it indicates that both variables are not stationary. Making use of the same test up to first different, the p-value are significantly less than 5% significant level thus the null hypothesis of the unit main test for both variables can be rejected. This means that that both GE also to variables are stationary after first difference.

Table 4. 1 Augmented Dickey Fuller Unit Root Test

Augmented Dickey Fuller (ADF)

Level

Variable

Constant Without Trend

Constant With Trend

LFDI

-3. 917224***

(0)

-3. 864854**

(0)

LMILEX

-3. 051264**

(1)

-3. 656734**

(1)

LGE

-1. 940502

(0)

-3. 021945

(0)

LTO

-0. 545775

(0)

-1. 858127

(0)

First Difference

LFDI

-8. 551413***

(0)

-8. 448181***

(0)

LMILEX

-5. 027701***

(2)

-4. 943434***

(2)

LGE

-7. 603343***

(0)

-4. 435261**

(2)

LTO

-5. 672100***

(0)

-5. 615053***

(0)

Note: ***, ** and * denotes significant at 1%, 5% and 10% value level, respectively. The

figure in parenthesis () signifies optimum lag span selected based on Akaike Info Critirion

4. 2 Diagnostic Test

It is important to check for the diagnostic test to be able to make sure the model is accepted. Firstly, the serial correlation test was carried out to ensure there is absolutely no autocorrelation in the rest of the. For this function, the Breusch Godfrey (BG) serial correlation LM test can be used. Based on LM test if all autoregressive coefficients are concurrently zero, there is absolutely no autocorrelation of any order. Thus, the hypothesis of BG test is

H0: 1= 2= = p= 0 (no autocorrelation)

HA: 1 2 p 0 (autocorrelation)

The result exhibited that nothing of the statistics are significant at any degree of significant as the p-value is 0. 580 thus it indicated that the null hypothesis of no autocorrelation could not be rejected. This means that that, the model is free from serial correlation problems.

Next, to learn if the model is well specified, the Ramsey RESET test is performed. Evidently, the effect confirmed that the p-value was 0. 515 which is more that 5% level of significance and thus it could be concur that the useful form was clear of misspecification. For the changed R-squared, the value 0. 52790 means 52. 79% of variation in FDI can be explain by all self-employed variables (MILEX, GE also to).

The balance test can be displayed by CUSUM and CUSUMSQ in shape 4. 2. 1 and amount 4. 2. 2 below and it implies that the blue collection does not surpass the low and higher bound, thus it indicates that there surely is no structural instability are present in this review.

Table 4. 2 Diagnostic Checking

Diagnostic Test

R-bar-squared

0. 52790

S. E. of Regression

0. 45022

LM test

030595***

(0. 580)

RESET

0. 42394***

(0. 515)

Note: ***, ** and * denotes significant at 1%, 5% and 10% significance

level, respectively. The shape in parenthesis () signifies the p-value

Figure 4. 2. 1 CUSUM

Figure 4. 2. 2 CUSUMQ

4. 3 ARDL Bound Test

The result of bound test to check for cointegration under Narayan (2005) is given in the desk 4. 3. The computed F-test (4. 92281) is greater than the critical upper value (4. 803) as tested at 5% degree of significance. Therefore, it could be concluded that there is a long-run relationship between FDI and the explanatory parameters that happen to be MILEX, GE, and TO as the null hypothesis of no cointegration is be rejected.

Table 4. 3 ARDL Bound Test

Level of

Critical value

Computed F-statistic for country

significant

Lower

Upper

Malaysia

1% Significance

5. 018

6. 610

5% Significance

3. 548

4. 803

4. 92281**

10% Significance

2. 933

4. 020

Note: The critical values are taken from Narayan (2005), Desk Case II, restricted intercept no trend.

** denote significant at 5% degree of significance.

4. 4 Long-run Relationship

The results in desk 4. 3 show long-run marriage for foreign immediate investment (FDI) and the self-employed factors which is MILEX, GE also to. In this stand, we used the identified lag length based on the appropriate lag span criteria based on 'Specific the order of ARDL model yourself'. In cases like this the constrained model is been used and the most effective lag length is (1, 0, 1, 1) is chosen.

The result implies that MILEX significantly has a long run romance with FDI at 1% significant level. The positive coefficient of MILEX means that the upsurge in military expenditure (MILEX) by 1% in the long run will improve the foreign immediate investment (FDI) in Malaysia by 1. 1279%. This effect differs from the expected sign where MILEX supposedly has negative relationship with FDI. It is because for the situation of Malaysia, the costs of military weren't used for the war purposed and this spending were target more on protect our country's place and also enhance the security of the country. Beside that, the annual budgets for military services expenditure was used for the purpose of wages, allowance and procedure cost. The ministry of security will used part of the portion of total cover military to give training in order to improved the skilled of arm causes and also to employed more biceps and triceps. This view is in line with Sharma and Ghani (2004) as their explain that there have positive human relationships between military costs and FDI because the protection sector provides major employment. Beside that, the income result could increase individual development for those countries thus draw in the FDI movement to the countries.

Furthermore, to be always a develop countries in yr 2020 Malaysia need to diversifying the defense doctrine, reinforce its security and armed forces system, expend military services development, and have a modern and sophisticated defense equipment. So Malaysia is ready enough to handle any threat from aggressors which can make Malaysia as a competitive location for the overseas buyer to make investment. This is due to the efficiency in economical and also in term of the security of the country.

For GE and TO, the result shows that both control parameters are insignificant with FDI as the p-value is greater than 5% significant level. This indicate that GE also to are not contribute to FDI inflow in Malaysia and international traders don't take these factors as an important things to purchase Malaysia.

Table 4. 4 ARDL Long-run Result

Regressor

(1, 0, 1, 1)

LMILEX

1. 1279***

(2. 8290)

LGE

-1. 0170

(-0. 70544)

LTO

-0. 66355

(-1. 0924)

INPT

3. 2342***

(0. 83056)

Notes: ***, ** and * denote relevance at 1%, 5% and 10% levels, respectively

4. 5 Short run romantic relationship and quickness of adjustment

This study is further estimating short-run romantic relationship and the mistake correction model. The result are offered in table 4. 4 where it showed that military expenditure (MILEX) has a good relationship with international immediate investment (FDI) in the brief run at 5% level of value. For both control factors (GE also to), the effect show that they are insignificant as the p-value is higher than critical value. Thus, it could be concludes that only MILEX has positive marriage with FDI in the brief run and this implies that increase MILEX by 1% in the short run increase FDI by 0. 87118% in Malaysia.

As mentioned in desk 4. 4, the mistake modification model (ecm-1) gauge the speed of modification to restore equilibrium in the active model and the negative register the error correction model (ECM) model is statistically significant at 1% significant level and therefore confirming a long run relationship are present among variables. The swiftness of adjustment implied by the ecm coefficient is 77%. The brief run model provides information about how the based mostly variable which is FDI adjusts to revive long run equilibrium in response to the disruption. Approximately, 77% of the disequilibrium from the prior year's surprise converge back again to the long run equilibrium in the current year.

Table 4. 5 Mistake Modification Representation of ARDL model

Regressor

(1, 0, 1, 1)

dLMILEX

0. 87118**

(2. 5397)

dLGE

-1. 1882

(-1. 0113)

dLTO

3. 0659*

(1. 9322)

INPT

2. 4980

(0. 79014)

Ecm(-1)

-0. 77239***

(-5. 2315)

Notes: ***, ** and * denote relevance at 1%, 5% and 10% levels, respectively

4. 6 Causality Test

This test is apply to be able to verify whether FDI, GE and TO have causal effect with MILEX. For this function, ARDL bound test is used in order to check the cointegration between those factors.

Table 4. 5 implies that computed F-test (2. 1578) is leaner than top of the bound for just about any significant level. Therefore it indicate that 3rd party factors (FDI, GE and TO) have no cointegration with MILEX and it can be concludes that the causality effects runs a proven way which is from MILEX, GE, TO to FDI rather than the other way.

Table 4. 6 ARDL Bound Test

Level of

Critical value

Computed F-statistic for country

significant


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