The role of environmental, social, and governance (ESG) in attracting foreign direct investment: a comparative study of Malaysia and Singapore

Tan, Kai Ying (2026) The role of environmental, social, and governance (ESG) in attracting foreign direct investment: a comparative study of Malaysia and Singapore. Final Year Project, UTAR.

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Abstract

The research investigates how the Environmental, Social, and Governance (ESG) performance and major macroeconomic factors impact Foreign Direct Investment (FDI) inflows to Malaysia and Singapore. The general objective of the study is to examine the role of Environmental, Social, and Governance (ESG) factors and other key macroeconomic determinants in attracting Foreign Direct Investment (FDI) for a comparative analysis of Malaysia and Singapore. Against an increasing FDI differential between the two economies, this study explores the role of sustainability governance, institutional credibility, and macroeconomic stability in instilling investor confidence in a more sustainability-oriented overall global investment environment. Based upon Stakeholder Theory and Legitimacy Theory, ESG is positioned as a proxy for the quality of national governance and legitimacy, serving to complement the existing economic drivers of FDI. The study utilizes Panel Data model and Vector Error Correction Models (VECM) with co-integration to analyze the long and short-run relationships among FDI inflows with, ESG performance, GDP growth, exchange rate, inflation rate, as well as trade openness, with secondary data collected over the 10-year period from 2014 to 2023. The comparative framework emphasizes Malaysia's developing sustainability efforts in comparison to Singapore's established governance and regulatory systems. The results should suggest governance-related ESG dimensions are significant in supporting FDI inflows, and macroeconomic variables are the reinforcing driving factors. Through assessing model performance and producing ex-post predictions, the study offers evidence-driven guidelines to policymakers towards improving national investment competitiveness. This research extends the general FDI literature by incorporating ESG into traditional FDI models and providing a detailed comparative analysis of Malaysia and Singapore. Keywords: Foreign Direct Investment (FDI), Environmental Social and Governance (ESG), Macroeconomic Determinants, Comparative Analysis, Sustainability √ JEL: F21, Q56, O16, C23, C32

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