Dynamic Relationship Between Foreign Direct Investment (FDI) Variables and Economic Variables on GDP in Indonesia

Abstract

Indonesia's economic growth is supported by the large population of people in Indonesia, which causes aggregate demand to increase. Meeting high aggregate demand requires a level of capital to produce goods and services and appropriate policies such as monetary policies to support economic growth. This study examines the influence of investment and monetary variables on gross domestic product (GDP) to analyze the dynamic relationship between foreign direct investment (FDI) variables and economic variables on GDP and prove the hypothesis of FDI-led growth in Indonesia. This study uses an autoregressive distributed lag (ARDL) approach model and uses Eviews 14 software. The variables used in investment research used in this research are Foreign Direct Investment (FDI) and the Composite Stock Price Index (CPSI). Then, the monetary variables used are Exchange Rate (Kurs), Interest Rate (BI rate), and Inflation and Gross Domestic Product (GDP) as independent variables. The data used in this study is time series data sourced from BPS, BI, OJK, and Yahoo Finance from 2014 Q1 to 2022 Q4. Based on the test results, several variables have a significant effect in the short term, namely the Exchange Rate variable (negative), Inflation (positive), and Consumer Stock Price Index (negative). In the long run, the exchange rate and Inflation variables significantly affect GDP positively. On the other hand, the FDI and interest rate variables do not substantially affect GDP in the short term or long term. Then, it can be concluded that the FDI-led Growth Hypothesis is not proven to apply in Indonesia.