Which is more important for Indonesia: Foreign Investment, Effective Exchange Rates, or Inflation? (Study on Indonesia's workforce over the past three decades)

Abstract

Globalization has spurred discussion about developing economic growth with a wider spectrum, giving rise to economic variables that are more precise and sharper in measuring economic development in a region. This dynamic is also behind this study, namely to examine the relationship between foreign investment (FDI), effective exchange rates, and inflation to the number of workers in Indonesia. This research data was sourced from the Indonesian Investment Coordinating Board (BKPM), the Ministry of Trade, and the Organization for Economic Co-Operation and Development. The timeline used in this study spanned thirty years (1991–2021). The novelty in the research is that the analysis was carried out using Fully Modified Ordinary Least Squares (FMOLS), as well as an econometric approach Cointegration Johansen. The capacity absorption hypothesis was also used as the basic model in this research. The adjusted R-square value of this study is 0.8254 so it can be concluded that 82.54% of the number of workers' changes can be explained by all independent variables. The results show that in the last three decades of Indonesia, Indonesia has relied heavily on foreign investment in increasing the number of workers. Conversely, inflationary conditions do not have an impact on the number of workers in Indonesia. Thus, the Indonesian government needs to pay attention to the effects of trade policies and programs because foreign investment (FDI) is able to intensify job creation for workers in Indonesia.