INDONESIA’S FDI – EXPORTS – GDP GROWTH NEXUS:
TRADE OR INVESTMENT - DRIVEN?
Panky Tri Febiyansah1
Abstract
This paper examines the relationship between foreign direct investment inflow, export and economic growth in Indonesia in a dynamic framework. We uses vector error correction model to estimate the causal relationship between FDI, exports and GDP. The findings in Indonesia’s case verify the proposition that FDI plays an important role which, in turn, together with joint
Keywords: Export, Foreign Direct Investment, Growth.
JEL Classification: C32, F14, F21, F41
1Panky Tri Febiyansah, MIDEC is the reseacher in Research Centre for Economics (P2E) – The Indonesian Institute of Sciences (LIPI). Email: (panky_ie@yahoo.com).
470Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
I. INTRODUCTION
The global economic condition is usually considered to be one of the most important determinants of
However, empirical evidence shows different experiences in different developing countries that have resulted in highlighting different directional relationships between a country’s openness and GDP growth. The variation of a country’s openness to investment and trade has implications for the country’s economic growth.
Some findings show that FDI has a significant effect in developing countries. There are two ways in which this occurs. In general cases, the channel of FDI in influencing the economy is by stimulating productivity growth and exports. This is called the
A clear
There is evidence that exports are a significant determinant of a country’s output growth. Exports will deliver an incentive to producers for supplying foreign demand for goods and services. This incentive leads to wide production capacity, higher endowment utilization and decreased unemployment (Balassa 1978). It is called
Alternatively, economic growth can enhance technological progress, capital capacity and human productivity. It leads to a more attractive endowment factor which, in turn, will generate the ability of firms to gradually increase their production and export their products. However, other studies show that the relationship between exports and growth is
&Rodrigues 2010 and Doyle 2001). These indications imply that either
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 471
economic performance. How effectively then the above characteristics are interacting in a country is a matter for empirical study and can be examined by testing the
Since the Asian financial crisis (AFC) in 1997/98, Indonesia has been recovering rapidly that can be seen by higher economic growth, export growth and inward FDI growth. This performance was certainly remarkable from 2004 to 2006. Unfortunately, the global financial crisis (GFC) in 2008 affected almost all countries in the world including Indonesia. However, Indonesia’s economic performance was relatively stable in terms of the ability to absorb external shock. Hence, this paper aims to examine the relationship between foreign direct investment inflow, export and economic growth in Indonesia.
According to several theoretical and empirical views, obtaining a better insight for the real determinants of economic growth in Indonesia is straightforwardly required by assessing the
Empirical outcomes denote the presence of a long run relationship in the
II. THEORY
The literature review will provide the applied findings to build a framework. However, there is no previous study which has a similar aim of this paper using Indonesia time series data. In order to solve this issue, empirical results from the experience of other countries will be applied. Moreover, large empirical studies which related to this study have been undertaken, whether the estimation of FDI and exports over economic growth was employed either separately or continuously.
To some extent, comparing the findings in terms of direction of causality and magnitude of effect are relatively complicated. The complexity comes from the difference in the stage of economy development, the characteristic of economic building and additional variables included in the
472Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
The literature, which talking about the relationship between investment inflow, export and economic growth on this paper’s focus, is extensive. For example, Giles and Williamson (2000a, b), Tarzi (2005), Kondeker and Kalirajan (2010) and Kinda (2010) describe comprehensively the interaction between FDI and economic growth in the host country. On the other hand, Balassa (1978) and Sannassee et al. (2014) work for the underlying study about how the exports and economic activities can be closely related.
Another research is also convincing in order to explain the
First criteria are to provide studies which simply test the influence of FDI on economic growth with no exports. Zhang (2001), Li and Liu (2005) and Oladipo (2013) point out that there was significant linkage between FDI and economic growth in DSOE countries. Chakraborty & Basu (2002) supports
A second criteria of studies categorises exports as the only determinant of economic growth with no FDI. Parida and Sahoo (2007) found the relationship in
On the other hand, Gagnon (2008) points out that the long run trend of GLEH in 96 countries was considerable coming from stable terms of trade. Regarding those studies, the dominant effect between ELGH and GLEH is varied, which is similar to Bahmanian and Economidou’s (2009) finding that there is no identical pattern either in the long run relationship or short run effect suggesting that the nexus depends on
Finally, several studies exhibit evidence on the link between FDI, exports and economic growth. Andraz and Rodrigues (2010) demonstrate that FDI, exports and growth had a long run relationship, while FLGH and GLFH prevailed on short run
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 473
on Thailand time series data, Kohpaiboon (2003) presented FDI as a main driver in boosting economic openness and growth using
III.METHODOLOGY 3.1. Estimated Model
This paper applies a standardized procedure of
Granger proposes the ‘Granger test’ to examine the causality that is suitable tool for the process of integrated series. However, Granger and Newbold (1974) also describe that time series data tend to be
(1)
where ∆ =
474Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
After estimating
(2)
where Zt is a k × 1 vector of variables, u is a k × 1 vector of intercept’s parameters ,
(3)
where
(4)
and
(5)
Based on the assumption that Zt must be linear combination of variables in I(1), these
(6)
Moreover, π is called as identified effect matrix which α and β are the vector of correction coefficients and the cointegrating links respectively.
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 475
According to previous explanation about the importance of cointegrating relationships, this study need to first look for long run relations for generated variables within each model. In order to estimate cointegration relationship on VAR process, Johansen (1988) procedure is satisfied to support VECM by deriving maximum likelihood and generating independent identically distributed Gaussian errors.
Note which r representing cointegration rank, satisfying αβ’ needs r greater than zero and less than k as a restriction to avoid
Extending equation (6) in terms of employed variables, the form of
(7)
Where represents first difference process, n is the order of lags and εi,t is a
(8)
The determinants of τij are the coefficients of long run equilibrium. In order to confirm causal relationship, this study based on equation (7) needs an additional verification that is performed by both
476Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
infers to Granger test in generating causality. However, since granger causality method is really responsive to the lag creteria, the schwartz information criterion (SIC) is essential to handle in order to determine proper lags on the model.
3.2. Data
The set of data consists of quarterly observations of real gross domestic product (GDP), real inflow foreign direct investment (FDI), and real exports (EX) in Indonesia from 2000:01 to 2012:04. This aims to isolate the effect of structural change in the Indonesia economy which was converting from fixed exchange rate to floating exchange rate regime caused by AFC. The data set was obtained from the Indonesia’s central bank (BI) and bureau statistics databases (BPS) and international financial statistics
The preference of FDI inflow than FDI outflow comes from the framework of DSOE countries which inward FDI plays a more significant role in the Indonesia economy. Furthermore, FDI inflow in total in time t is
Specifically, FDI is the flow variable. In order to observe production capacity in the growth process, production function context can be adopted to frame. It implies that FDI should be converted into capital stock to explain the existence of lifetime impacts on Indonesia economy. Coming along with exports, it can measure the expanding level of Indonesia development. Instead stock capital is available on UNCTAD, this study still prefers developing the data by estimating equation (9) due to the absence of quarterly data. Clearly, variable FDI is used to generate capital stock data by following difference equation:
(9)
Where Kt+1 is the capital stock in next period, Kt is capital stock in current period, δ presents annual depreciation rate, that is constant about 5 per cent, and FDIt+1 is inward FDI in next period. According to the definition, equation (9) requires initial capital stock. Noting 1999:04
as the initial period (K1999:04), this equation can be assumed that K2000:01 = FDI2000:01, which is, FDI is equal to Capital stock in the first period assuming K1999:04 is K in period zero. Since the depreciation is annual, this rate needs to be converted into quarterly series.
Figure 1 exposes distinct evidence that GDP, FDI and exports move in upward trends and tend to mutually progress each other. This pattern exhibits convergence development of Indonesia economy along time path. However, the move of FDI and exports is interesting to explore. Indonesia FDI looks like better because, since 2006 quarter 1, the move of FDI have preceded exports trend.
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 477
The cross trend is important to understand that caused by not only significantly increasing FDI but also flatter exports performance in the time periods. It implies Indonesia’s exports does not have steady phase in terms of maintaining export growth.
15.00
14.00
13.00
12.00
11.00
10.00
9.00
8.00 |
|
GDP |
EXPORTS |
|
FDI |
|
|
7.00
Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013
Source: BPS, BI and
Figure 1. Gross domestic product (GDP), stock of foreign
direct investment (FDI) and exports in Indonesia,
2000:Q1 to 2012:Q4 (natural logarithm)
Figure 2 presents the growth rates of GDP, exports and FDI in
Meanwhile, the FDI as a stock capital performed relatively impressive prior to GFC’s shock compared to preceding periods. The average growth of FDI was around 46 per cent within
478Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
15.00 |
|
|
|
13.00 |
GDP |
EXPORTS |
FDI |
|
|
|
|
11.00 |
|
|
|
9.00 |
|
|
|
7.00 |
|
|
|
5.00 |
|
|
|
3.00 |
|
|
|
1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 |
||
|
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 |
Source: BPS, BI and
Figure 2.
From the pattern of exports, it had less productive performance in preventing growth phase of Indonesia. This condition may come from the increasing costs per unit worker, world price and demand of exported commodities then
One important thing to underline is in developing country, Indonesia’s case, exports performance tends to have no time trend. It is realistic because Indonesia exported goods highly depend on world price and demand which drive exports to move volatile.
Placing the time prior to and preceding GFC period, Figure 2 presented exports were
0.73per cent,
IV. RESULTS AND ANALYSIS
This study conducts the formal test to confirm the variables are stationary. Table 1 presents estimated result of unit root test. The outcomes propose that all log form of series are stationary on the first difference and have
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 479
Table 1.
Variable |
Level |
First difference |
|
|
|
GDP |
||
FDI |
||
EX |
||
|
|
|
Note:
Source: Stata result
The next step of the procedure is to verify the variables are either cointegrated or not. In order to undertake this step, we follow the Johansen and Julius cointegration assessment (JJ- cointegration test). However, prior to execute
Table 2.
The selection of lag length criteria
Lag |
0 |
1 |
2 |
3 |
4 |
|
|
|
|
|
|
LR |
|
391.74 |
34.602 |
24.873 |
128.43O |
FPE |
|||||
AIC |
|||||
HQIC |
|||||
SBIC |
|||||
|
|
|
|
|
|
Note: LR, FPE, AIC, HQIC and SBIC stand for like lihood ratio, final prediction error, akaike information,
Source: Stata result
To some extent, a distinctive attribute of error correction form in equation (3) contains variables in
480Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
Table 3.
Cointegration test - Johansen approach
Maximum rank |
Eigenvalue |
Trace Statistic |
5 percent critical value |
|
|
|
|
0 |
- |
45.8639 |
29.68 |
1 |
0.44718 |
15.0419** |
15.41 |
2 |
0.2168 |
2.335 |
3.76 |
3 |
0.04391 |
|
|
|
|
|
|
Note: ** indicates 5 per cent of significance level
Source: Stata result
The results of cointegration - Johansen test are presented in table 3 which maximum eigenvalue and trace statistic recommends rank 1 by rejecting null hypothesis at 5 per cent of significance level. It means that the model has one cointegrating vector. As a result, cointegration test confirms that there are long run nexus between GDPt, FDIt and Ext inferring the tendency to all of variables to move simultaneously.
0.7 |
|
|
0.6 |
ect |
|
0.5 |
||
|
||
0.4 |
|
|
0.3 |
|
|
0.2 |
|
|
0.1 |
|
|
0 |
|
|
|
||
|
||
|
||
|
Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3Q1Q3 |
|
|
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013 |
Source: Stata result
Figure 3.
The relationship on cointegration estimation
To some extent, Figure 3 also supports that the model is cointegrated in the long run with respect to GDP at time series. The residual behaviour of cointegrating calculation (ect) is stationary over the time periods that verifies the model is at one cointegrated vector.
According to cointegration test, the equation corresponding to the presence of long run relationship can be seen as below:
(10)
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 481
Equation 10 exhibits the
Table 4.
Multivariate
DGDPt |
= |
- |
0.44 |
- |
3.27) |
- |
0.89* |
- |
1.03* |
- |
0.95* |
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
- |
0.01 |
+ |
0.02 |
- |
0.04* |
+ |
0.05* |
+ |
0.03* |
+ 0.03* |
|||||||
|
|
|
|
(0.71) |
|
|
|
|
(3.56) |
|
(2.03) |
|
|
(2.29) |
||||
DFDIt |
= |
0.04 |
- |
0.44 |
- |
3.27) |
+ 0.15 |
+ |
0.004 |
+ |
0.23 |
|||||||
|
|
(0.78) |
|
|
|
|
|
|
|
|
(0.55) |
|
(0.01) |
|
|
(0.82) |
||
|
+ |
0.3* |
+ |
0.19* |
- |
0.1 |
+ |
0.08 |
+ |
0.01 |
+ 0.16* |
|||||||
|
|
(2.98) |
|
|
(1.76) |
|
|
|
|
(1.06) |
|
(0.19) |
|
|
(2.38) |
|||
DEXt |
= |
0.04 |
- |
0.44 |
- |
3.27) |
+ 1.22* |
- |
0.51 |
- |
0.14 |
|||||||
|
|
(0.78) |
|
|
|
|
|
|
|
|
(2.13) |
|
|
|||||
|
+ |
0.34 |
+ |
0.23 |
- |
0.45* |
- |
0.04 |
- |
0.04 |
- |
0.09 |
||||||
|
|
(0.16) |
|
|
(0.99) |
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: ( ) is
Source: Stata result
The estimated outcomes of the multivariate
Table 5.
the analysis for residual behaviour
|
Diagnostic on Autocorrelation |
Diagnostic on Normality |
|
|
|||
Statistics |
14.34 |
7.47 |
3.46 |
P - values |
0.11 |
0.59 |
0.18 |
|
|
|
|
Note: Null hypothesis for
Null hypothesis for Normality: residual is normally distributed
Source: Stata result
482Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
These imply that all fundamental assumptions of the
Imaginary
1
5
0
0 |
5 |
1 |
||
|
|
Real |
|
|
The VECM specification imposes 2 unit moduli
Source: Stata result
Figure 4.
Stability analysis
Granger (1988) has developed the causality test that expressing the ability of variable’s explanation to another variable. Granger causality estimation exists if, by definition, the two variables are I(1), in turn, either feedback or
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 483
Table 6.
Multivariate granger causality estimations
Dependent Variable |
∆ In |
∆ In |
∆ In |
|
|
|
|
0.780 |
1.010 |
||
0.000 |
0.433 |
0.311 |
|
Wald statistic for ∆ In |
- |
0.476 |
3.0803** |
- |
0.753 |
0.027 |
|
Wald statistic for ∆ In |
3.0364* |
- |
3.1945** |
0.029 |
- |
0.023 |
|
Wald statistic for ∆ In |
1.426 |
2.6644** |
- |
0.244 |
0.047 |
- |
|
Wald statistic for ALL |
3.0884* |
1.474 |
3.2008* |
0.009 |
0.199 |
0.007 |
|
|
|
|
|
Note: - The two last rows reports The Wald statistic for The significance of joint estimation -
Source: Stata result
The empirical results of the Granger causality test and adjustment term are presented in table 6. This table is constructed by the statistically critical level of coefficients which express the dynamics of
According to all results provided, several findings can be illustrated. The existence adjustment term in the
484Buletin Ekonomi Moneter dan Perbankan, Volume 19, Nomor 4, April 2017
V. CONCLUSION
This paper presents an empirical study of the
The findings in Indonesia’s case verify the proposition that FDI plays an important role which, in turn, together with joint
The results reveal important insights of policy implication that Indonesia’s economic policy is still far from adequate. Indonesia needs bold policies in order to accelerate its economic growth and further integrate trade chains. In terms of policies, this study proposes a reform in economic policy which can confirm reducing domestic economic restrictions and improving Indonesia’s degree of competitiveness. These reforms are desirable to ensure the change in Indonesia’s economic structure is on the right path for prosperity.
Indonesia’s FDI – Exports – GDP Growth Nexus: Trade or Investment - Driven? 485
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