Abstract
This study aims to analyze the causality relationship between Foreign Direct Investment (FDI), Foreign Trade, and Economic Growth in Indonesia using quarterly time-series data from Q1-2004 to Q2-2019. This study uses co-analytical techniques, VECM integration, and Engle-Granger causality. The results of a two-way causality test happen between export and GDP variables, as well as import and GDP variables. In other words, foreign trade has an essential role in increasing economic growth in Indonesia. However, the two-way causality relationship takes place only in the short term. In the long run, it does not occur; what happens in the long term is an only one-way relationship, namely from foreign trade (X and M) to economic growth. While export and import relations have an only one-way relationship, namely from import growth to export growth, and this relationship only happens in the short term. In contrast, in the long term, it has no significant relationship. Likewise, the one-way relationship also takes place from imports to FDI in the short term. At the same time, export variables and GDP variables do not have a significant relationship with FDI variables. In the long-term economic growth, it turns out to be very instrumental in increasing both FDI, exports, and imports.
Highlights
This study aims to analyze the causality relationship between Foreign Direct Investment (FDI), Foreign Trade, and Economic Growth in Indonesia using quarterly time-series data from Q1-2004 to Q2-2019
Interconnected relationship between FDI, foreign trade, and economic growth had been explored by many researchers, for example, it has investigated by Chandran and Seila (2010) in India, Shahzad Iqbal (2010) in Pakistan, Ersyad Hussain and Mahpuzul Haque (2016) in Bangladesh, Nguyen Ngo, Thach, Le Hoang Anh, and Duong (2016) in Vietnam
Variables that have causality relationships are between the GDP variable and the Export variable, as well as the GDP variable with Import variable
Summary
This study aims to analyze the causality relationship between Foreign Direct Investment (FDI), Foreign Trade, and Economic Growth in Indonesia using quarterly time-series data from Q1-2004 to Q2-2019. It does not occur; what happens in the long term is an only one-way relationship, namely from foreign trade (X and M) to economic growth. In the long-term economic growth, it turns out to be very instrumental in increasing both FDI, exports, and imports. Export and import can increase economic activity in many production sectors, which will increase economic growth. FDI produces the transfer of knowledge and technology that will increase production efficiency, so it will affect the increase in foreign trade, which is the driving force of economic growth and will further influence foreign investors' interest. It is due to the orientation of FDI that entered Indonesia is tend to be into the domestic market that stated that the entry of foreign investment into Indonesia is more dominant towards the domestic market, rather than the foreign market (Nasution, 2012)
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