Foreign Direct Investment, Trade Dynamics, and Economic Growth in Indonesia: Evidence from a Vector Error Correction Model

Authors

  • Renaldi Renaldi Economics Development Department, Faculty of Economics and Business, Universitas Merdeka Malang
  • Riska Aprilia Economics Development Department, Faculty of Economics and Business, Universitas Merdeka Malang
  • Lutfi Asnan Qodri Economics Development Department, Faculty of Economics and Business, Universitas Merdeka Malang

DOI:

https://doi.org/10.26905/jrei.v6i2.16689

Keywords:

Economic Growth, Exports, Foreign Direct Investment, Imports, Indonesia, Vector Error Correction Model

Abstract

This study examines the short-run dynamics and long-run relationships between foreign direct investment (FDI), exports, imports, and economic growth in Indonesia using annual time-series data from 1990 to 2024. Employing a Vector Error Correction Model (VECM), the analysis captures both long-term equilibrium relationships and short-term adjustments among the variables. The results reveal the existence of cointegration, indicating a stable long-run relationship. Empirical findings show that, in the long run, FDI has a statistically significant negative effect on economic growth, while imports exert a positive and significant impact. Exports, however, do not demonstrate a significant effect on growth in either the short or long run. These results suggest that FDI inflows in Indonesia are largely concentrated in non-productive sectors, limiting their contribution to sustainable economic growth, whereas imports play a crucial role in supporting industrial production through capital goods and intermediate inputs. The study highlights the importance of redirecting FDI toward high-value-added sectors and maintaining strategic import policies to promote long-term economic growth.

 

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Published

2025-08-31

Issue

Vol. 6 No. 2 (2025): Agustus 2025

Section

Articles

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