Malaysia's rapid economic growth has given rise to the realization of distributional objectives for achieving its ultimate goal of national unity. Reducing poverty and income disparities among races, income groups and regions is continuously emphasized by the Government of Malaysia in the country's series of national development plans. This paper concentrates on the significance of Foreign Direct Investment (FDI) in poverty reduction across the states of Malaysia. In the econometric analysis, a set of panel data covers eight sub-periods over the period 1984-2005. All the 13 states and 3 federal territories of Malaysia are taken into account in the analysis. The FDI-poverty model selected is in the log-linear form and the FDI inflows into the manufacturing sector is the only explanatory variable. The empirical results show that the FDI coefficient has a statistically significant negative sign, suggesting that the poverty incidence could be reduced by increasing FDI inflows into the Malaysian states.

The performance of Malaysia's economy has been remarkable from the late 1980s because the country's implementation of economic policies, strategies and programs has worked well. The existing unequal distribution of economic growth across states, however, needs to be narrowed. Therefore, Malaysia continues to emphasize on distributional agenda in its series of national development plans.

In Malaysia's First Outline Perspective Plan (OPP1) (1971-1990) under the New Economic Policy (NEP), industrialization was aimed at achieving the twin objectives of eradicating poverty irrespective of race and restructuring society with economic function. Manufacturing was selected as a strategic economic sector to achieve the objectives (Malaysia Government, 1971). During the period, the real economic growth in Malaysia took an average annual rate of 6.7% (Malaysia Government, 1991). Later, during the Second Outline Perspective Plan (OPP2) (1991-2000) under the National Development Policy, it further grew at an average rate of 7% per annum. The rapid economic growth was a result of the strengthened manufacturing base that underwent structural transformation. The Third Outline Perspective Plan (OPP3) (2001-2010) under the National Vision Policy, continues the distributional objectives for achieving the ultimate goal of national unity (Malaysia Government, 2001a).

In Malaysia's regional development plan, a poverty alleviation program is implemented to reduce socioeconomic imbalances between more and less developed states. Under the program, three sectors—manufacturing, services and agriculture—are identified to generate faster economic growth during the OPP3 period. In the manufacturing sector, domestic and foreign firms are encouraged to diversify their industrial activities across all states. In order to promote Foreign Direct Investment (FDI) inflows into Malaysia, various kinds of investment options, tax incentives as well as liberal equity policies have been established.

Applied Economics Journal, Foreign Direct Investment , FDI, New Economic Policy , NEP, Gross Domestic Product, GDP, International Monetary Fund, IMF, Socioeconomic Development, Marketing Autonomy, Ordinary Least Squares, OLS, Socioeconomic Growth, Malaysian Industrial Development Authority, MIDA.