Impact of investment and government expenditure on economic growth of lesser developed stated 1980-2005

The requirements for capital and government role are among the important factors in generating economic growth.The main objective of this study is to analyse empirically the impact of capital factor which is made up of foreign direct investments (FDI) and domestic investment (DI); as well as the state government development expenditure (DEV) on the states’ real gross domestic product (KDNK) for lesser developed states in Malaysia by employing the time series data for years 1980-2005.Result of study shows that Sarawak recorded the highest nominal KDNK among the lesser developed states,followed by Sabah, Terengganu, Kedah and Pahang.Kelantan and Perlis are the lowest contributors to nominal KDNK as compared to other states.The statistical analysis result shows that FDI has no significant relationship on economic growth for Sarawak, Sabah, Terengganu, Kelantan, and Perlis except for Kedah dan Pahang.Domestic investment is positively related and significant to the Sarawak and Pahang’s KDNK.The state’s government development expenditure is also positively and significantly related to the real KDNK of Sarawak, Pahang and Kedah.The regression analysis shows that DEV influences economic growth of Sarawak, Kedah, Sabah and Pahang.Meanwhile, the foreign direct investment is unable to explain significant variation on real KDNK of the lesser developed states.The Granger causal analysis indicates that real KDNK has unidirectional relationship with FDI and DI for Sarawak.However, all independent variables have unidirectional relationship with real KDNK for most of the lesser developed states