Analysis of the Relationship between Trade, Foreign Investment, and Economic Growth in Indonesia
Keywords:
Economic growth, Trade, FDIAbstract
Globalization has significantly contributed to economic growth through trade liberalization, technological advancement, and international cooperation. In Indonesia, trade openness and foreign direct investment (FDI) serve as crucial drivers of economic growth, primarily through exports, imports, and technology transfer. However, the relationship between trade, investment, and economic growth is not always linear, as it is shaped by a country’s internal characteristics and economic policies. This study aims to examine both the short-run and long-run relationships among trade, FDI, and economic growth in Indonesia using annual data from 1970 to 2024 and applying the Vector Error Correction Model (VECM) approach. The findings reveal that, based on the Impulse Response Function (IRF) analysis, each variable tends to stabilize in response to shocks from itself or other variables in the long run. In the short run, trade and FDI respond positively only to shocks in economic growth, while economic growth increases primarily due to shocks from FDI and trade. Furthermore, the Variance Decomposition (VD) analysis indicates that the most dominant influence on the variability of trade, FDI, and economic growth comes from each respective variable itself. These results highlight the dynamic interdependence among trade, investment, and economic growth, offering valuable insights for policymakers in formulating strategies to enhance Indonesia’s long-term economic performance
Downloads
References
Abendin, S., & Duan, P. (2021). International trade and economic growth in Africa: The role of the digital economy. Cogent Economics and Finance, 9(1), 1–25. https://doi.org/10.1080/23322039.2021.1911767
Afolabi, J. A. (2022). Financial Development, Trade Openness, and Economic Growth in Nigeria. Iranian Economic Review, 26(1), 237–254. https://doi.org/10.22059/ier.2020.77972
Amade, M. A., Mohammed, I., Ibisanmi, E. V., Owolabi, A. T., & Joshua, U. (2022). Interaction Between Domestic Investment, Foreign Direct Investment and Economic Growth in Nigeria. Academic Review of Economics and Administrative Sciences, 15(2), 261–275. https://doi.org/10.25287/ohuiibf.904346
Astuti, R. D., & Udjianto, D. W. (2022). The Impact of Monetary Policy and International Trade on Economic Growth and Inflation in ASEAN-4 Countries. Jurnal Ilmu Ekonomi, 11(1), 175–190. https://doi.org/https://doi. org/10.15408/sjie.v11i1.22142
Chibalamula, H. C., Evans, Y., Kachelo, M., & Bamwesigye, D. (2023). The Effect of Foreign Direct Investment and Trade Opennes on Economic Growth: Evidence from Five African Countries. Research in Agricultural & Applied Economics, 15(1), 35–46. https://doi.org/10.7160/aol.2023.150103.
Ciftci, C., & Durusu-Ciftci, D. (2022). Economic freedom, foreign direct investment, and economic growth: The role of sub-components of freedom. Journal of International Trade and Economic Development, 31(2), 233–254. https://doi.org/10.1080/09638199.2021.1962392
Dahmani, M., Mabrouki, M., & Youssef, A. Ben. (2022). ICT, trade openness and economic growth in Tunisia: what is going wrong? Economic Change and Restructuring, 55(4), 2317–2336. https://doi.org/10.1007/s10644-022-09388-2
Daniel, C. (2021). The Relationship Between the International Trade and Economic Growth Accounting for Model Uncertainty and Reverse Causality. Munich Personal RePEc Archive, 108405, 01–28. https://mpra.ub.uni-muenchen.de/108405/
Hao, Y. (2023). The dynamic relationship between trade openness, foreign direct investment, capital formation, and industrial economic growth in China: new evidence from ARDL bounds testing approach. Humanities and Social Sciences Communications, 10(1), 1–11. https://doi.org/10.1057/s41599-023-01660-8
Hobbs, S., Paparas, D., & AboElsoud, M. E. (2021). Does foreign direct investment and trade promote economic growth? evidence from Albania. Economies, 9(1), 1–19. https://doi.org/10.3390/economies9010001
Hussein, A. M., & Ali, D. A. (2022). The Role of International Trade and Agricultural Production on Economic Growth in Somalia: Johansson Cointegration Approach. African Journal of Business and Economic Research, 17(4), 123–146. https://doi.org/10.31920/1750-4562/2022/V17N4A6
Kircicek, T., & Ozparlak, G. (2023). The essential role of international trade on economic growth. Journal of Economics, Finance and Accounting, 10(4), 191–202. https://doi.org/10.17261/pressacademia.2023.1826
Kumari, R., Shabbir, M. S., Saleem, S., Yahya Khan, G., Abbasi, B. A., & Lopez, L. B. (2023). An empirical analysis among foreign direct investment, trade openness and economic growth: evidence from the Indian economy. South Asian Journal of Business Studies, 12(1), 127–149. https://doi.org/10.1108/SAJBS-06-2020-0199
Le, A. N. N., Pham, H., Pham, D. T. N., & Duong, K. D. (2023). Political stability and foreign direct investment inflows in 25 Asia-Pacific countries: the moderating role of trade openness. Humanities and Social Sciences Communications, 10(1), 1–9. https://doi.org/10.1057/s41599-023-02075-1
Le, B., Ngo, T. T. T., Nguyen, N. T., & Nguyen, D. T. (2021). The Relationship between Foreign Direct Investment and Local Economic Growth: A Case Study of Binh Dinh Province, Vietnam*. Journal of Asian Finance, Economics and Business, 8(4), 33–42. https://doi.org/10.13106/jafeb.2021.vol8.no4.0033
Moudatsu, A. K., & Garcia, A. S. (2022). International Trade and Growth Limitations: The case of Africa. African Journal of Economic Review, 10(3), 63–88.
Nasim, I., Boukhris, M., Kayani, U. N., Bashir, F., & Haider, S. A. (2023). Exploring the Links between Renewable Energy, FDI, Environmental Degradation, and International Trade in Selected Developing Countries. International Journal of Energy Economics and Policy, 13(6), 418–429. https://doi.org/10.32479/ijeep.14948
Nguyen, M. L. T., & Bui, T. N. (2021). Trade openness and economic growth: A study on asean-6. Economies, 9(3), 1–15. https://doi.org/10.3390/economies9030113
Omoke, P. C., & Opuala–Charles, S. (2021). Trade openness and economic growth nexus: Exploring the role of institutional quality in Nigeria. Cogent Economics and Finance, 9(1), 1–17. https://doi.org/10.1080/23322039.2020.1868686
Putri, R. D. S., & Siladjaja, M. (2021). Pengaruh Perdagangan Internasional (Ekspor-Impor) dan Investasi Terhadap Pertumbuhan Ekonomi di Indonesia. Journal of Public Auditing and Financial Management, 1(1), 13–26.
Rehman, A., Ma, H., Ahmad, M., Ozturk, I., & Işık, C. (2021). Estimating the connection of information technology, foreign direct investment, trade, renewable energy and economic progress in Pakistan: evidence from ARDL approach and cointegrating regression analysis. Environmental Science and Pollution Research, 28(36), 50623–50635. https://doi.org/10.1007/s11356-021-14303-9
Safira, A., & Setyowati, E. (2025). Analisis Pengaruh Ekspor, Impor dan Investasi Asing Langsung terhadap Pertumbuhan Ekonomi di ASEAN-4 Tahun 2018-2023. Journal of Accounting and Finance Management, 6(2), 861–870. https://doi.org/10.38035/jafm.v6i2.1778
Shuaibu, M., Adamu, M. B., Abdullahi, S. I., Shehu, K. K., & Buba, S. I. (2022). International Trade and Export Dynamics in Nigeria: An ARDL Vector Error Correction Analysis. Journal of Humanities, Arts and Social Science, 6(1), 50–61. https://doi.org/10.26855/jhass.2022.01.005
Suhardi, A. A., Andini, I., Safitri, N. A. N., & Silalah, P. R. (2023). Peran Perdagangan Internasional Dalam Meningkatkan Produktivitas Perekonomian Di Indonesia. Jurnal Manajemen Dan Ekonomi Kreatif, 1(1), 90–99. https://doi.org/10.59024/jumek.v1i1.33
Taulo, D. N. M., Sitohang, A. C., Hariz, M., Maulana, A. I., Setyawati, Y., Damayanti, J., Prasetya, R. R., & Baihaqi, M. I. (2024). Pengaruh Net Ekspor Dan Investasi Terhadap Pertumbuhan Ekonomi Negara Indonesia. Jurnal Ilmiah Manajemen, Ekonomi Dan Akuntansi, 4(3), 145–154. https://doi.org/10.55606/jurimea.v4i3.856
Todaro, M. P., & Smith, S. C. (2020). Economic Development. Peorson.
Wang, X., Xu, Z., Qin, Y., & Skare, M. (2022). Foreign direct investment and economic growth: a dynamic study of measurement approaches and results. Economic Research-Ekonomska Istrazivanja , 35(1), 1011–1034. https://doi.org/10.1080/1331677X.2021.1952090
Xu, C., Han, M., Dossou, T. A. M., & Bekun, F. V. (2021). Trade openness, FDI, and income inequality: Evidence from sub-Saharan Africa. African Development Review, 33(1), 193–203. https://doi.org/10.1111/1467-8268.12511
Downloads
Published
Issue
Section
License
Copyright (c) 2026 OIKOS: Jurnal Kajian Pendidikan Ekonomi dan Ilmu Ekonomi
This work is licensed under a Creative Commons Attribution 4.0 International License.
