Objective - The main objective of this paper is to investigate whether labor productivity is an important contributing factor to FDI inflows and in turn if FDI enhances labor productivity. Hence, this is ensured by an investigation of whether a bi-directional causality e between FDI and labor productivity exists.

Methodology/Technique - To increase the robustness of our estimation model, a few control variables such as Trade Openness, inflation and income per capita in addition to labor productivity are included as explanatory variables in determining FDI inflows. In this paper, we used annual calendar data spanned between 1990 and 2012 and employed the multiple regressions to generate the results.

Findings - The finding suggests that labor productivity (LBRPROD) and inflation (INF) have positive relationship with the FDI while income per capita (ICP) and openness (OPN) seems to be negatively related with FDI. The findings from this study are consistent with the past and existing literature where there is strong association between FDI and labor productivity. However, this study also revealed that openness seems to be insignificant towards FDI inflows contradicting past literature which argued that openness plays an important in FDI. But the negative relationship between FDI and trade openness could be addressed via implementation of provision for trade protection.

Novelty - Enhance the knowledge in the relationship of LBRPROD and INF with FDI.

Type of Paper - Empirical

Keywords: Foreign Direct Investment, Labor Productivity, Multiple Regression, Trade Openness, Malaysia.