The purpose of this research is to determine whether Malaysia has perfect capital
mobility. The discussion begins by explaining the trend of domestic savings and
domestic investment. Malaysia experienced inadequate capital to finance its domestic
investment during the 1971-72, 1974-75, 1980-86 and 1989-95 periods. Usually
deficiency of capital to finance domestic investment is solved using foreign long term
capital. Whether economy depends too much on foreign long term capital, it can increase
productivity and employment in the short run but in the long run, it could lead to a deficit
in the balance of payment. To determine how much domestic investment is financed by
domestic savings, the methodology of Feldstein-Horioka (1980), Frankel (1986),
Bayoumi (1990) and Tesar (1988) is used. Further empirical test are done to determine
whether the capital mobility of Malaysia is influenced by the endogenity problem and the
interference of government through fiscal and monetary policies. Finally a forecasting
model is formulated. This is done by finding the short run and the long run equilibrium
between the domestic savings and investment. The study reveals that domestic
investment has a positive correlation with domestic savings. A large proportion of
domestic savings is used to finance domestic investment. This means Malaysia has an
imperfect capital mobility. The forecasting model formulated could not be used because a long run
relationship between savings and investment could not be established using the
co-integration analysis. Finally, since empirical tests prove evidence of correlation
between domestic savings and domestic investment, some policies are suggested to
increase the level of domestic savings in the long run