An empirical analysis of linkage between the construction and manufacturing sectors of Malaysia (2000–2010)

Construction and manufacturing are the key sectors of Malaysian economy. These sectors play significant role in socio economic development of Malaysia, generate substantial amount of revenue for Malaysian economy and provide employment opportunities to number of skilled, semi-skilled, unskilled, educated and uneducated people. Construction and manufacturing sectors are greatly interlinked with each other through their backward and forward linkages. The purpose of this study is to measures the causal relationship and linkage between construction and manufacturing sectors of Malaysia by using sophisticated econometric approach. Granger causality test and the vector auto regression (VAR) technique is used to determine the causal relationship between the two sectors and measure the effect of changes in output of one sector on the output of other sector. The results of the study show that there is strong correlation and bidirectional causal relationship exists between the construction and manufacturing sector of Malaysia during the study period 2000-2010. The construction sector takes approximately 21 months to respond the impact of shocks coming from manufacturing sector while the manufacturing sector responding time is 15 months.