INDONESIA’S FDI – EXPORTS – GDP GROWTH NEXUS: TRADE OR INVESTMENT - DRIVEN?

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 FDI-exports can promote economic growth in the immediate short run and improve the competitiveness for Indonesia’s commodity exports. Nonetheless, the absence and existence of economic growth effects to FDI and exports respectively indicate that Indonesia still has several domestic economic constraints. It denotes that Indonesia’s economic structure is still transforming and far from adequate. Indonesia needs bold policies in order to accelerateits economic growth and further integrate trade chains for reducing domestic economic restrictions and improving Indonesia’s degree of competitiveness.