The Future of Korea- ASEANrelations:
Trade Linkages between Malaysia and South Korea: Empirical Evidence Based on
Gravity Model
Abdul Rahim Anuar*
Naziruddin Abdullah†
Rizaudin Sahlan‡
[Abstract]
Malaysia launched the Look East Policy in 1982, followed by the Look East Policy 2.0
in 2014, aiming to strengthen trade relations with East Asian countries, particularly South
Korea. Malaysia, a small and open country, generates economic growth by leveraging
international trade networks. South Korea, like Malaysia, has also strengthened trade ties with
Southeast Asian countries, including Malaysia, as part of its New Southern Policy, which was
launched in 2017. Foreign trade policies in both Malaysia and South Korea have influenced
bilateral trade flows between the two countries. Malaysia and South Korea are also members
of the ASEAN-South Korea Free Trade Zone, which went into effect in 2010 and has had a
positive impact on the development of bilateral trade between the two countries. Both countries
are also members of the Regional Comprehensive Economic Partnership (RCEP). This trading
bloc, comprising 15 Asia Pacific countries, came into effect in January 2022. There are also
proposals to create a bilateral Free Trade Area between Malaysia and South Korea. As such, it
is very intruging to investigate how have the Malaysia-Korea trade relations fared. Hence,
using a gravity model, this paper investigates the determinants that influence Malaysia's trade
with South Korea. Two pertinent results are worth highlighting; of the seven determinants
specified in the Malaysia-Korea gravity model, only Gross Domestic Product per capita and
foreign exchange (Won/Ringgit) have a significant and positive effect on Malaysia-South
Korea trade relations.
Keywords: Gravity Model, Malaysia, South Korea, Look East Policy, New Southern
Policy
*
Associate Fellow, Research Institute for Indonesia, Thailand and Singapore (UUM-ITS)
Universiti Utara Malaysia. abdulrahim5796206@gmail.com
†
Professor, Economics Section, Universiti Kuala Lumpur Business School. naziruddin@unikl.edu.my
‡
Senior Lecturer, School of Economics and Banking, Universiti Utara Malaysia. riz@uum.edu.my
1
I.
Introduction
Malaysia and South Korea established diplomatic relations on February 23, 1960. Former
Malaysian Prime Minister Dr. Mahathir Mohamad introduced the "Look East Policy" (LEP) in
1982 as a way to learn and benefit from Japan, South Korea, and Taiwan’s development
success. Since the LEP's implementation, Malaysia and South Korea's bilateral economic
relationship has grown stronger, particularly in trade and investment. Malaysia and Korea's
participation as Association of Southeast Asian Nations (ASEAN) and Korea Free Trade Agreement
(AKFTA) member countries since 2010 further strengthened the two countries' partnership.
Under the present leadership of Prime Minister Dato’ Sri Ismail Sabri Yaakob, Malaysia
continues to promote a forward-looking and pragmatic foreign policy that facilitates trade,
foreign investment as well as to promote Malaysia as a stable and peaceful country (MOFA
Malaysia 2022).
President Moon Jae-in launched South Korea's New Southern Policy (NSP) in 2017.
The NSP's main goal is to strengthen economic and diplomatic ties with ASEAN countries and
India. As Seoul's new regional strategy, the NSP focuses on the Three Pillars (3Ps) - People,
Prosperity, and Peace - which correspond to ASEAN's Political-Security Community (APSC),
Economic Community (AEC), and Socio-Cultural Community (ASCC). The NSP emphasizes the value
of building regional peace and security as well as sociocultural and economic partnership (Choe, 2021).
Malaysia and South Korea are also signatories to the AKFTA, which was signed in 2010. The
signing of the FTA has strengthened and deepened ASEAN-South Korean economic integration,
enabling more Korean investment in ASEAN (MITI Malaysia, 2022a). Apart from being members of
the AKFTA, Malaysia and South Korea are also members of the Regional Comprehensive Economic
Partnership (RCEP) together with Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos,
Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. The RECP is a free trade
pact that took effect on January 1, 2022 (MITI Malaysia, 2022b),
The agreement would cover 2.3 billion people or 30% of the world’s population,
contribute $26 trillion or about 30% of global GDP, and account for $13 trillion, over a quarter
of global trade in goods and services, and 31% of global FDI inflows (World Bank 2022a). The
RCEP aims to make it easier for each nation's goods and services to be accessible across the
entire region by merging the markets of 15 nations.
Taking into account the preceding key development indicators, this paper attempts to
examine the factors affecting Malaysia's trade with South Korea using a gravity model.
2
The paper is structured as follows: In section one (I), there is an introduction, followed
by a review that looks at the Malaysia-Korea trade relationship within the development context.
In section three (III), the model adopted for analysis purpose is outlined, while the findings and
discussion are elaborated in section four (IV). The paper ends with a conclusion.
II.
Development Context
In comparison to Malaysia, which has an upper middle-income economy, the World Bank
categorized South Korea as a high-income economy in 2021 and a global leader in innovation
and technology South Korea's Gross Domestic Product (GDP) was five times larger than that
of Malaysia in 2021. In the same vein, the South Korea's GDP per capita was three times greater
than that of Malaysia (Table 2.1) (World Bank 2022b).
<Table 2.1> Key Economic Indicators of Malaysia And South Korea
1980
1990
2000
2010
GDP (constant 2015, $ billion)
Malaysia
41.8
74.6
148.3
232.7
Korea, South
154.6
401.4
798.8
1,261.2
GDP per capita (constant 2015, $)
Malaysia
3,026.37
4,139.11
6,392.58
8,247.78
Korea, South
4,055.79
9,365.39
16,992.48
25,451.00
Population, total (million)
Malaysia
13.8
18.0
23.2
28.2
Korea, South
38.1
42.9
47.0
49.6
Trade (percentage of GDP)
Malaysia
112.6
146.9
220.4
157.9
Korea, Rep.
65.5
50.8
66.1
91.4
Source:
World
Bank.
2022b.
Data
Bank:
World
Development
https://databank.worldbank.org/source/world-development-indicator (Accessed August 18, 2022)
2021
354.9
1,689.2
10,827.33
32,644.67
32.8
51.7
130.7
79.8
Indicators.
Figure 2.1 depicts the two countries' GDP and GDP per capita growth rates from 1980
to 2021. South Korea's GDP grew at an average rate of 5.9 percent annually during the period,
compared to Malaysia's growth rate of 5.5%. As for GDP per capita, South Korea experienced
5.1% annual average growth in GDP per capita during the same period, while Malaysia
experienced a slower growth rate at 3.3%. Thus, the GDP and GDP per capita growth trends
bring to light the economic size disparities between Malaysia and South Korea.
3
15.0
10.0
Growth rate, %
5.0
0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42
-5.0
-10.0
-15.0
1980-2021
Malaysia GDP, %
Korea GDP, %
Malaysia GDP pc, %
Korea GDP pc, %
<Figure 2.1> Annual growth rate of GDP and GDP per capita of Malaysia and South Korea, 1980-2021 (%)
GDP = Gross Domestic Product; GDP pc = Gross Domestic Product per capita
Source:
World
Bank.
2022b.
Data
Bank:
World
Development
Indicators.
https://databank.worldbank.org/source/world-development-indicator (Accessed August 18, 2022)
In retrospect, South Korea's economic strategy was outward-looking in order to
strengthen its economy. Between the 1960s and 1970s, Korea pursued an aggressive exportoriented policy, laying the groundwork for the country's rapid growth and technological
advancement. Malaysia, on the other hand, experienced slower growth in the 1970s and 1980s.
Its economic success can be attributed in large part to its market-oriented policies. Malaysia
benefited from privatization program implemented in the 1980s, which helped to open up the
economy and foster rapid growth. In light of this, Malaysia's economy is more open than that
of South Korea (Table 2.1).
Over the study period, the relations between Malaysia and South Korea have been
strong. Prior to 1991, Korea did not appear on the list of Malaysia's top ten trading partners.
Since then, as bilateral trade between the two countries has improved, Korea has emerged as
one of Malaysia's major trading partners in terms of imports and exports. South Korea is among
Malaysia's top 10 major trading partners in 2021, accounting for 4% of the nation's total trade
(Table 2.2). Malaysia's top trading partners within ASEAN are Singapore, Thailand, and
Indonesia. These three countries accounted for 21% of Malaysia's total trade.
4
In line with the LEP, Malaysia has strong relationships with Japan and Taiwan, apart
from South Korea. In 2021, Japan was the 4th most important trading partner, accounting for
7% of Malaysia's total trade, followed by Taiwan with a contribution of 5%.
<Table 2.2>
Ranking
1
2
3
4
5
6
7
8
9
10
Malaysia: Top 10 Major Trading Partners, 2021 ($ billion)
Country
Total Trade
Exports
Imports
China PR
101.6
46.4
55.2
Singapore
64.5
41.8
22.7
United States
52.4
34.3
18.1
Japan
36
18.2
17.8
Taiwan
27.9
9.8
18.1
Thailand
23.6
12.6
11
Indonesia
23.0
9.5
13.5
Hong Kong
22.7
18.5
4.2
South Korea
21.2
9.1
12.1
India
16.8
10.9
5.9
World
537.5
299
238.5
Source: Ministry of International Trade and Industry (MITI), Malaysia. 2022. Trade And Economic Information
Bulletin 2022 (1st Quarter). Kuala Lumpur: MITI Malaysia
According to South Korea’s trade patterns, Malaysia however, ranked 12th as South
Korea's main trading partner in 2021, accounting for about 2% of the nation’s total trade (Table
2.3). In light of Korea's New Southern Policy, apart from Malaysia, Viet Nam and Singapore
are South Korea's main trading partners. In 2021, these two countries accounted for 8% of
South Korea's total trade.
<Table 2.3> South Korea: Top 10 Major Trading Partners, 2021 ($ billion)
Ranking
Country
Total Trade
Exports
Imports
1 China PR
301.5
162.9
138.6
2 U.S.A
169.1
95.9
73.2
3 Japan
84.7
30.1
54.6
4 Viet Nam
80.7
56.7
24.0
5 Taiwan
47.8
24.3
23.5
6 Australia
42.7
9.8
32.9
7 Hong Kong
39.7
37.5
2.2
8 Germany
33.1
11.1
22.0
9 Russia
27.3
10.0
17.4
10 Singapore
24.8
14.1
10.7
12 Malaysia
20.6
10.1
10.5
Total
1259.5
644.4
615.1
Source: Korea International Trade Association. K-statistics. http://www.kita.org/kStat/byCount_AllCount.do
(Accessed 18 August 2022).
Malaysia and South Korea have strong economic ties through investment. South Korea
is one of Malaysia’s top ten foreign investors, particularly in the manufacturing sector,
contributing approximately $6 billion (or 6% of total foreign investment in the country)
5
between 2014 and 2021 (Table 2.4). Malaysia has also attracted a significant amount of foreign
investment from Northeast Asia, North America, Western Europe, and newly industrialized
economies due to the availability of low-cost and skilled labor.
<Table 2.4> Malaysia: Foreign Direct Investment in Manufacturing Sector by Country Origin, 2014-2021
2014-2021
Ranking
Origin
(Cumulative, $ billion)
Share to total investment
1 Netherlands
23.6
24%
2 China
20.5
21%
3 Singapore
18.7
19%
4 Japan
7.4
8%
5 United States of America
7.3
7%
6 South Korea
5.6
6%
7 Austria
4.6
5%
8 British Virgin Islands
3.4
3%
9 Germany
3.3
3%
10 Taiwan
2.6
3%
Sub-total of Top 10 Investors
97.0
98%
Others
1.7
2%
Total
98.7
100%
Source: Malaysian Industrial Development Authority. Various years. Malaysia Investment Performance Report
(various years). Kuala Lumpur: MIDA Malaysia.
The majority of Korean investment is concentrated on the production of non-metallic
products, electrical and electronic products, wood and wood products, rubber products, and
chemicals. Malaysia also served as a global manufacturing base for Korean as well as other
multinational corporations (MNC). Samsung Group, LG, SK Group, and Hyundai Motor
Group are among the notable South Korean conglomerates that have made an impactful
presence in terms of investments in Malaysia (MIDA, 2021).
III. Gravity Model
3.1
Theory
Gravity model is pioneered by Tinbergen (1962). The basic model is depicted by Equation 3.1.
Bilateral Tradeij =
GDPi∙GDPj
Dij
[3.1]
where Bilateral Tradeij is the bilateral trade value between country i and j; GDPi is the income
of country i; GDPj is the income of country j; Dij is the distance measurement between country
i and j.
6
Equation 3.1 can be expressed in log form as in equation 3.2.
ln (Bilateral tradeij) = β0 + β1 ln (GDPi * GDPj) + β3 (Distance) + εijt
[3.2]
where β0, β1 and β2 are the coefficients that are to be estimated, and εij is the error variable
which observes any surprises and changes in events that may affect bilateral trade. Equation
3.2 is the core gravity equation where bilateral trade is predicted to be a positive function of
income and negative function of distance.
Over the years, Tinbergen's model has been augmented by researchers to measure the
strength of international trade relations between two countries. This is done by extending it to
include several determinants other than national income and distance. The widespread use of
gravity model in trade analysis is due to its robustness and high explanatory power of realworld data (Bergstrand 1985; Bergeijk and Brakman, 2010; Plummer, Cheong, and Hamonaka
2010).
Equation 3.3 is the extended specification of the gravity model in logarithmic form that
is commonly used in international trade to explain bilateral trade flows:
ln Xij = β0 + β1 ln (Yi *Yj) + β2 (ln Ni *Nj) + β3 ln Dij + βz ln Vz + + εij
[3.3]
where: i = importing country; j = exporting country; = β0 intercept; i = βi coefficients of the
explanatory variables; and εij = lognormal error term. Briefly, equation 3.3 attempts to explain
bilateral import demand (Xij) with a variety of explanatory variables, example, income of the
importing country (Yi), income of the exporting country (Yi), per capita income of the
importing country (Ni), per capita income of exporting countries (Nj), a variable that accounts
for the distance between the importing and exporting countries (Dij), and a vector of additional
variables that may be employed if thought to be relevant (Vi).
3.2
Review on Previous Related Studies: Malaysian Case Studies
Studies using a gravity model on factors influencing Malaysia's trading relationship with its
trading partner can be categorized into two groups: first, is the effect of ASEAN Free Trade
Area (AFTA) on Malaysian trade with AFTA member countries (or intra-AFTA regional trade)
(Norma 2008; Irwan et al. 2015b); second, is on how non-AFTA blocs affect Malaysia's trade
7
relations with its non-AFTA trading partners (or extra-AFTA regional trade) (Mawar and
Mohd Adib 2009;
Nik and Tajul 2015). This categorization resulted from Malaysia's
membership in the AFTA trading bloc (Table 3.1). Except for Mohd Adib and Mawar (2012),
the static gravity model was used in all of the Malaysian case studies.
<Table 3.1> Selected Case Study Using Gravity Model
AFTA
Other trading blocs
Selected Study
or ASEAN
or Economic Cluster
Gravity Model
1. Rizaudin & Muhd. Ridhuan (2007)
AFTA
EU, NAFTA
Static
2. Normaz (2008)
AFTA
—
Static
3. Mawar & Mohd Adib (2009)
—
OIC
Static
4. Normaz (2010)
—
RoW
Static
5. Tamat et al. (2010)
—
GCC
Static
6. Mohd Adib & Mawar (2012)
—
OIC
Static and Dynamic
7. Nik & Tajul (2012)
—
MEAC
Static
8. Irwan et al (2013)
—
OIC
Static
9. Siti et al (2013)
—
RoW
Static
10. Tajul et al. (2014)
—
MEAC
Static
11. Nurul (2015)
—
EU
Static
12. Irwan et al (2015a)
—
TPP
Static
13. Irwan et al (2015b)
ASEAN
—
Static
ASEAN = Association of Southeast Asian Nations; AFTA = ASEAN Free Trade Area; EU = European Union;
NAFTA = North American Free Trade Agreement; OIC = Organization of Islamic Cooperation; MEAC = Middle
East Asia Countries; GCC = Gulf Cooperation Council; TPP = Trans-Pacific Partnership; RoW = Rest of the
World. — = not applicable
Source: Compiled by Authors
Beyond the framework of AFTA/ASEAN, Mawar and Mohd Adib (2009), Mohd Adib
and Mawar (2012), and Irwan et al. (2013) examined the effect of the Organization of Islamic
Cooperation (OIC) on Malaysia's trade relations among OIC member nations. While, Rizaudin
and Mohd Ridhuan (2007) extended the impact analysis on Malaysia's trade by taking into
consideration other trading blocs, namely North American Free Trade Agreement and the
European Union.
Apart from OIC, Malaysia's trade relations with other Islamic countries are also
examined, namely Middle East Asia Countries (MEAC) and the Gulf Cooperation Council
(GCC). Such studies were conducted by Tajul et al (2014) which reviewed Malaysia's trade
relations with MEACs, and Tamat et al (2010) for the GCC countries.
Among developed economies, Nurul (2015) examined Malaysia's trade relations with
selected EU countries. Meanwhile, Irwan et al (2015a) assessed Malaysia’s trade relations with
Trans-Pacific Partnership.. Most of the above-mentioned studies focused more on the impact
of such trading blocs on Malaysia’s exports.
8
Several studies have been conducted on the impact of trading blocs on Malaysian
exports at the industry level, such as those conducted by Nik and Tajul (2012) and Siti and
Normaz (2015). Nik and Tajul (2012) examined Malaysia's halal industry’s exports to the
MEACs, while Siti and Normaz examined Malaysia's tourism industry. There are a few case
studies that only examined social determinants and how they affected Malaysian exports to its
trading partners. For instance, Normaz's study (2010) uses language determinants specifically
to measure the strength of Malaysia's relations with its trading partners.
3.3
Choice of Variables for Gravity Model
3.3.1 Dependent Variable
In the case of Malaysia, previous researchers specified total export, total import, or total trade
as the dependent variable in their gravity model specification (Table 3.2). In the gravity models
of Normaz (2008), Mohd Adib and Mawar (2012), and Irwan et al. (2013), for example, total
export was identified as the dependent variable. Tamat et al. (2010) specified total import as
the dependent variable in their gravity model, whereas Rizaudin and Muhd Ridhuan (2007)
specified total trade (exports plus imports) as the dependent variable. A detailed choice of
dependent variables for gravity model specification used by other researchers is shown in Table
3.2.
<Table 3.2> Choice Of Dependent Variables In Specification Of Gravity Model
Selected Study
1. Rizaudin & Muhd. Ridhuan (2007)
2. Normaz (2008)
3. Mawar & Mohd Adib (2009)
4. Normaz (2010)
5. Tamat et al. (2010)
6. Mohd Adib & Mawar (2012)
7. Nik & Tajul (2012)
8. Irwan et al. (2013)
9. Siti et al. (2013) & Normaz (2015)
10. Tajul et al. (2014)
11. Nurul (2015)
12. Irwan et al. (2015a)
13. Irwan et al. (2015b)
— = not applicable
Source: Compiled by Authors
Total Exports
—
√
√
√
√
√
√
√
√
√
—
√
√
Total Imports
—
—
—
—
√
—
—
—
—
—
—
—
—
Total Trade
(Export + Import)
√
—
—
—
√
—
—
—
—
—
√
—
—
9
3.3.2 Key Independent Variables
In the Malaysian case study, three important trade determinants that affect the volume of trade
between Malaysia and its trading partners are (i) national income (GDP), (ii) distance between
countries (D), and (iii) the total population (POP) of the trading country (Table 3.3). The
formation of a trading bloc is also an important determinant of the gravity model's specification,
as previous study seeks to assess the impact of the formation of a trading bloc on Malaysia's
trade with its trading partners. All previous researchers in the Malaysian case study used a
dummy variable (0,1) to study the impact of trading blocs on Malaysia's trade with its trading
partners.
<Table 3.3> Choice Of Independent Variables In The Specification Of Gravity Model
National
Selected Study
Income (GDP) Distance Population
1. Rizaudin & Muhd. Ridhuan (2007)
√
√
√
2. Normaz (2008)
√
√
—
3. Mawar & Mohd Adib (2009)
√
√
√
4. Normaz (2010)
√
√
—
5. Tamat et al. (2010)
√
√
√
6. Mohd Adib & Mawar (2012)
√
√
√
7. Nik & Tajul (2012)
√
√
—
8. Tajul et al. (2014)
√
√
√
9. Irwan et al (2013)
√
√
—
10. Siti et al (2015)
√
√
—
11. Nurul (2015)
√
√
√
12. Irwan et al. (2015a)
√
√
√
13. Irwan et al. (2015b)
√
—
—
— = not applicable; GDP = Gross Domestic Product
Source: Compiled by Authors
Trading Bloc
(Dummy variable)
√
√
√
√
√
√
√
√
√
√
√
√
√
3.3.3 Other Proxy for Independent Variables
Apart from the key trade determinants discussed above, other social and economic variables
are also used in the specification of the gravity model by previous studies were (i) language,
(ii) border, (iii) GDP per capita, (iv) inflation rate, (v) foreign exchange rate, (vi) foreign direct
investment, (vii) openness of the economy and, (vii) Corruption Perception Index (Table 3.4).
The choice of trade determinants however depends on the objectives of the study.
10
<Table 3.4> Other Proxy For Independent Variables In Specification Of Gravity Model
Author(s)
GDP
Forex
FDI
P
CPI
Lan
Bor
EO
Infra
pc
1. Mawar & Mohd Adib
—
√
√
√
—
—
√
—
—
(2009)
2. Normaz (2010)
—
—
—
—
—
√
√
—
—
3. Tamat et al. (2010)
—
√
—
—
—
—
—
—
—
4. Mohd Adib & Mawar
—
√
√
√
—
—
√
—
—
(2012)
5. Nik & Tajul (2012)
—
—
—
—
—
—
—
—
—
6. Irwan et al. (2013) ,
√
√
√
√
—
—
√
—
7. Siti et al. (2013)
—
—
—
√
—
√
√
√
8. Tajul et al (2014)
—
—
√
—
—
—
—
—
—
9. Nurul (2015)
—
√
—
—
—
—
—
—
—
10. Irwan et al (2015a),)
—
√
—
√
—
—
—
—
—
11. Irwan et al (2015b),
—
—
√
√
—
—
—
—
GDP pc = Gross Domestic Product per capita; Forex = Foreign exchange rate; FDI = Foreign direct investment;
P = inflation rate; CPI = Corruption Perception Index; Lan = Language; Bor = Border; EO = Economic openness;
Infra = Infrastructure; — = not applicable
Source: Compiled by Authors
3.4
Model Specification of Malaysia-South Korea Gravity Model
In this study, a static gravity model will be used to quantify the variables affecting trade
between Malaysia and South Korea. The study period is from 1970 to 2021.. All observations
are based on time series data. We note in passing that all values are expressed in US dollars,
The total trade is the study’s dependent variable, while the independent variables are GDP,
population, exchange rate, AKFTA, South Korea New Southern Policy, Malaysia Look East
Policy, and FDI. The dummy variables are AKFTA, South Korea New Southern Policy, and
Malaysia Look East Policy.
The majority of previous research focused on how the establishment and development
of a free trade bloc would impact Malaysian trade. However, to the best of my knowledge, no
research on Malaysia's bilateral trade relations, particularly those with South Korea, has been
conducted. This study also considers international relations policies - LEP and NSP - as
determinants of Malaysian trade with Korea.
From Malaysia's perspective, most previous studies on bilateral relations between
Malaysia and South Korea focused on international political economy. Those studies, to name
a few, were conducted by Vijayakumari (1995), Leong (1996), Tan (2005), Geetha (2010), Cho
(2010), Song Miyoung and Sivachandralingam (2018), and Kim and Hanafi (2021). All of them
have shown that Malaysia and South Korea have good relations. If there is a political conflict,
both governments resolved it through diplomatic platform for the benefit of mutual welfare and
11
regional peace. Having said that, in the context of this study, the adopted Malaysia-South Korea
gravity model can be viewed as a novel contribution to the body of knowledge. Formally, the
model's functional form is described as follows (Equation 3.4):
TTijt = ʄ (GDPpcijt, POPijt, FOREXijt, FDIijt, AKFTA, NSP, LEP)
[3.4]
where: TTijt = total trade of country Malaysia (i) with South Korea (j); GDPpcijt = Malaysia
and South Korea's GDP per capita.; POPijt = total population of Malaysia and South Korea;
FOREXijt = exchange rate of Malaysia Ringgit in relation to South Korean Won; FDIit, =
inward flows of South Korea’s foreign direct investment to Malaysia; AKFTA = ASEAN and
Republic of Korea Free Trade Agreement; NSP = South Korea New Southern Policy; LEP =
Malaysia Look East Policy; ij = cross sectional data of Malaysia and South Korea; and t =
annual time series data. Equation 3.1 is the transformed to log form model form for regression
analysis:
ln TTijt = β0 + β1 ln (GDPpcit * GDPpcjt) + β3 (ln POPjt * POPjt) + β3 ln FOREXijt, +
β4 ln FDIijt + β5 ln AKFTA + β6 ln NSP + β7 ln LEP + εijt
[3.5]
The expected outcome of the independent variable on Malaysia's trade with Korea is
shown in Table 3.5.
<Table 3.5> Expected Result By Independent Variables
Independent variables
GDPpcijt
POPijt
FOREXijt
FDIjt
AKFTA
NSP
LEP
+ = positive; - = negative
Expected Results (+/-)
+
+
+
+
+
+
+
12
3.4.1 Operational Definition of Variables
Total Trade. TTijt includes Malaysia's exports to and imports from South Korea. Total trade
will reflect the actual size of Malaysia’s trade volume.
Gross Domestic Product per capita. GDPpcijt is the GDP per capita of Malaysia and Korea
combined. It determines how much a country's overall economic output is in relation to its
population. It also reflects changes in the population's overall well-being and the standard of
living of a nation. The coefficient of GDPpcijt is expected to have a positive impact on
total trade
Population. POPijt is the population of Malaysia and South Korea combined. The size of a
country's population reflects the size of its demand for domestic goods or imports. A growing
population will increase demand for both domestic and imported goods. The population's
coefficient is expected to have a positive impact on total trade.
Exchange Rate. FOREXijt is a proxy for relative prices based on the foreign exchange rate
between the Korean Won and the Malaysian Ringgit. An appreciation of a country’currency
reduces its exports and increases its imports. In contrast, a currency depreciation will have the
opposite effects. We predicted that the exchange rate coefficient would be positive for
Malaysian total trade.
Foreign Direct Investment. FDIjt denotes the amount of Korean FDI invested in Malaysia's
manufacturing sector. The vast majority of Korean FDI in Malaysia is export-oriented. The
greater the FDI inflow into the Malaysian economy, the greater the volume of Malaysian total
trade, indicating a positive relationship.
ASEAN-Republic of Korea Free Trade Agreement. Malaysia and South Korea are
signatories to AKFTA, which was signed in 2010. A dummy variable is used to represent the
AKFTA. The expected result of AKTA on Malaysia’s total trade is expected to be positive.
South Korea New Southern Policy. The Korean NSP was introduced in 2017 in order to
strengthen social and economic ties with ASEAN member countries and India. The policy is
13
represented by a dummy variable. The NSP is expected to have a positive impact on Malaysia's
total trade.
Malaysia Look East Policy. Malaysia's LEP was introduced in 1982 with the goal of
strengthening trade ties with South Korea, including Japan, and Taiwan. The policy is
represented by a dummy variable and is expected to have a positive impact on Malaysia's
total trade.
3.4.2 Data Sources
Data on trade are sourced from the International Monetary Fund's Direction of Trade Statistics
database (https://data.imf.org/). While information on the foreign exchange rates of the Korean
Won and Malaysian Ringgit is retrieved from the International Monetary Fund's International
Financial Statistics database (https://data.imf.org/). The World Bank's World Development
Indicators database (databank.worldbank.org) is used to obtain data on GDP and population.
The annual Economic Report of the Ministry of Finance (Malaysia) and the annual Investment
Performance Report of the Malaysian Industrial Development Authority (MIDA) contain
information on Korean investment in Malaysia.
IV. Findings and Discussion
The Ordinary Least Square (OLS) method is used to estimate the Malaysia-Korea gravity
model. The study's findings show the existence of autocorrelation (DW = 1.4162). The
Hildreth-Lu (1960) transformation method is used to solve the autocorrelation problem. This
method uses a iteration search procedure to find the value of rho (ρ) which minimizes the sum
of squared residuals. The ρ value is then used to transform all of the variables in the model by
subtracting from them the value of ρ multiplied by the value of the previous observation of the
variable (Rizaudin 2021).
Table 3.6 compares the estimation results of the gravity model based on the OLS and
Hildreth Lu approaches. The Hildreth-Lu procedure has been effective because it has resolved
the problem of autocorrelation by increasing the DW value from 1.4162 to 2.3678 which is at
the region of 10% significant level. Based on the regression from the Hildreth-Lu approach, it
was found that the value of R2, which is an indication of the goodness of fit of the gravity
14
model, recorded a value of 0.99. This means as much as 99% of the variation in the TTijt
variable is explained by all independent variables. The estimated model is good and efficient,
as indicated by high R2 and D-W values.
<Table 3.6> The Estimation Results for Malaysia-Korea Gravity Model
OLS
Variable
Coefficient
t statistics
GDPpcijt
0.8653
5.39*
POPijt
3.2765
3.80*
FOREXijt
0.9300
4.66*
FDIijt
0.0025
0.17
AKFTA
- 0.2223
- 3.32*
NSP
- 0.1014
-0.12
LEP
0.1454
1.39
R2 (adjusted)
0.9910
DW
1.4162
N
43
Notes: * significant at 5% level.
Hildreth-Lu method
Coefficient
t statistics
1.1936
5.89*
0.9898
0.81
0.7369
2.68*
0.0101
0.83
0.0943
0.83
0.0026
0.02
0.09431
0.79
0.9947
2.3678
43
As expected, all of the coefficients of the independent variables show a positive
relationship with trade volume based on the Hildreth-Lu estimation results. However, only
GDP per capita income and foreign exchange have a significant relationship with trade volume.
The GDP per capita measures the population's purchasing power over local goods and
imports from trading partners. As discussed in Section II, between 1980 and 2021, South
Korea's GDP per capita increased at a 5.1% annual average rate, while Malaysia's grew
at 3.3%. GDP per capita growth reflects an economy's standard of living, particularly in South
Korea, a high-income country. This partly contributed positively to Malaysia's trade volume
with South Korea.
The relative change in the Won and Ringgit, whether the Ringgit appreciates (or the
Won depreciates), causes Malaysian imports from South Korea to become less expensive,
resulting in an increase in import volume. In contrast, when the Won rises (or the Ringgit falls),
Korean imports from Malaysia rise. Both of these scenarios—Ringgit (Won) appreciation
versus Won (Won) depreciation—will boost Malaysia's trade volume.
Although there is a positive relationship between population size and trade volume, it
is not statistically significant. We believe that the two countries' population sizes have not yet
reached the optimal level to trigger a significant impact on trade volume. Thus, a larger and
optimal population and market size can only be achieved through economic integration among
various countries in the form of a free trade zone, as in the case of the establishment of RCEP
in January 2022. In 2021, the total population of the RCEP was 2.3 billion people, accounting
15
for nearly 30% of the world's population. As mentioned earlier, South Korea and Malaysia are
RCEP members.
Although South Korean FDI is trade-creating, it has no significant relationship with
Malaysia's trade volume. This is partly due to Korean FDI in the Malaysian economy is still
small, accounting for only 6% of total FDI in the country from 2014 to 2021, compared to that
of FDI from the Netherlands, China, and Singapore, which contributed 24%, 21%, and 19%,
respectively, during the same period. As a result, for there to be a significant correlation
between Korean FDI and Malaysia's trade volume, the former must be substantial and
comparable to the major foreign investors in Malaysia. This is challenging, though, because
South Korea also makes investments in other nations around the world. At the ASEAN level,
host countries are currently very competitive in attracting foreign investment to their respective
countries.
For dummy variables, such as Malaysia's implementation of LEP in 1982, the
establishment of AKFTA in 2010, and the implementation of NSP in 2017, had no
significant impact on Malaysia trade with South Korea despite having a positive relationship
with Malaysia’s total trade.
To put it differently, despite having a positive relationship, Malaysia's implementation
of the LEP in 1982 had no effect on Malaysia's trade with South Korea. The LEP encompasses
Taiwan, South Korea, and Japan. However, the LEP focused primarily on Japan, which was
Asia's rising star in the late 1970s and early 1980s (Wong 2018). Table 3.7 shows the trend of
Malaysia's total trade with Northeast Asia countries (NEAs) before and after the LEP. Over the
period 1970-1981, Japan contributed an average of 74% of Malaysia's total trade with
Northeast Asia countries (NEAs), while South Korea contributed 6% annually.
< Table 3.7> Malaysia’s Total Trade With Northeast Asia Countries during Pre- and Post-Look East Policy
Average Total
Average Share
Compound
Trade
to Total trade of
annual growth
($ billion)
NEAs
rate
1970198219701982- 19701982Malaysia trade with:
1981
2021
1981
2021
1981
2021
China, P.R.: Mainland
0.25
26.47
8%
34%
12%
15%
Japan
2.34
25.45
74%
32%
21%
5%
Taiwan Province of China
0.21
9.12
7%
12%
23%
10%
Korea, Rep. of
0.18
8.96
6%
11%
23%
9%
China, P.R.: Hong Kong
0.18
8.48
6%
11%
18%
11%
Total Trade with Northeast Asia countries
3.16
78.47
100%
100%
20%
9%
Source: International Monetary Fund. 2022, Direction of Trade Statistics database. https://data.imf.org/ (Accessed
August 25, 2022).
16
South Korea's contribution to Malaysia's overall trade with NEAs increased to 11%
during the post-LEP period, while Japan's contribution decreased to 32%. Japan, however, has
a three-time larger trade share than South Korea. Both countries experienced positive but
declining growth, with South Korea dropping from 23% to 9% and Japan falling from 21% to
5%. Such circumstance explains why, despite having a positive relationship, Malaysia and
South Korea's relationship is insignificant. In other words, the volume of trade between
Malaysia and Korea after the LEP has not been sufficient to produce a significant trade
relationship.
Despite its positive relationship, AKFTA, like the LEP variable, cannot influence
Malaysia's trade with South Korea. In the post-AKFTA period, Vietnam was South Korea's
main trading partner compared to Malaysia, which is the fourth most important among the
ASEAN-10 countries. Malaysia's share of total Korean trade with ASEAN-10 countries fell
from 20% to 10% before and after AKFTA. Similarly, South Korea's total trade growth trend
with Malaysia, although positive, fell from 6% to 2% over the same observation period (Table
3.8). Thus, this explains why the AKFTA determinant has no influence on Malaysia's trade
with South Korea, despite having a positive relationship.
< Table 3.8> South Korea’s Trade With Northeast Asia Countries During Pre- And Post ASEAN-South Korea
Free Trade Agreement
Average Total Trade
Compound Annual Growth
South
($ billion)
Share to ASEAN-10 trade
Rate
Korea’s
trade with:
1998-2009
2010-2021
1998-2009
2010-2021
1998-2009
2010-2021
Vietnam
4.4
45.3
9%
33%
16.3%
16.4%
Singapore
12.4
24.9
25%
18%
11.6%
0.6%
Indonesia
10.9
20.9
22%
15%
10.0%
-1.4%
Malaysia
9.8
17.8
20%
13%
6.2%
2.3%
Thailand
5.5
12.8
11%
9%
10.8%
3.2%
Philippines
5.5
12.1
11%
9%
5.8%
3.2%
Brunei
0.8
1.2
2%
1%
9.2%
-17.1%
Darussalam
Myanmar
0.3
1.1
1%
1%
9.6%
2.0%
Cambodia
0.2
0.8
0%
1%
13.5%
8.2%
Lao People's
0.0
0.1
0%
0%
25.5%
-0.9%
Dem. Rep.
Total trade
with
49.8
137.0
100%
100%
9.8%
5.1%
ASEAN -10
Source: International Monetary Fund. 2022. Direction of Trade Statistics database. Retrieved from
https://data.imf.org/ (Accessed 25 August 2022).
Next, due to the NSP's recent introduction in 2017, its impact on Malaysia's trade
relations with South Korea has not yet been deeply felt. Only four years have passed since the
17
implementation began. This means that it does not influence Malaysia's bilateral trade with
South Korea, despite the positive relationship.
In conclusion, of the seven determinants specified in the Malaysia-Korea gravity model,
only GDPpcij and FOREXij have a significant and positive effect on Malaysia-South Korea
trade relations.
V.
Conclusion
Through a diplomatic pact signed in 1960, Malaysia and South Korea began to engage in
bilateral economic ties. Since then, both countries have improved their trade and investment
relations. The estabishmet of free trade agreements like the RCEP in 2022 and the AKFTA in
2010 has also enhanced bilateral economic ties between Malaysia and South Korea. The Look
East Policy (1982) and the New Southern Policy (2017) strengthened diplomatic relations
between Malaysia and South Korea in an effort to increase trade and investment between the
two nations. LEP pays attention to South Korea in addition to Japan and Taiwan, whereas NSP
focuses on ASEAN (including Malaysia) and India.
In this study, GDPpcij and FOREXij have a significant and positive effect on MalaysiaSouth Korea trade relations. Other determinants such as POPij, FDIij, AKFTA, LEP, and NSP,
despite having a positive relationship have no impact on bilateral trade between Malaysia and
South Korea. However, over the long term, and with the implementation of the RCEP, these
factors are expected to have significant effects on Malaysia's trade with South Korea. This may
be due to the larger size of the RCEP economy, which has the critical mass required to
significantly impact the Malaysia-South Korea trade relationship.
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