Oil curse and finance-growth nexus in Malaysia: The role of investment

- We examine the existence of oil curse in finance-growth nexus in Malaysia.
- We provide a new insight into the oil curse phenomenon in Malaysia.
- The symptoms of oil curse are existent in Malaysia.
- Oil rent has a weakening indirect impact on the finance-growth nexus.
- The impact is through the quantitative channel or investment quantity.

We empirically examine the existence of an oil curse in the finance-growth nexus in Malaysia. We provide new insights into the oil curse phenomenon in Malaysia that challenges the conventional argument that Malaysia is a counter-example of an oil curse country. We do not find any significant evidence of direct effects of financial development on TFP. However, there are direct and positive effects on the level of investment due to financial development and oil dependence. While we do not find statistical evidence of a direct negative impact of oil rent on economic growth, our results reveal that the symptoms of an oil curse exist. Specifically, we find that oil rent has a weak, indirect, impact on the finance-growth nexus through the quantitative channel or investment quantity. The policy implications of our findings are that the financial sector should be more involved in productive investment activities that can strengthen its role in economic growth and that policymakers should reduce dependence on oil and promote economic diversification.