Final report methods of economic analysis

[Type here] TON DUC THANG UNIVERSITY FACULTY OF FINANCE AND BANKING FINAL REPORT METHODS OF ECONOMIC ANALYSIS Investigate the relationship between FDI and economic growth in the INDONESIA Lecturer Bùi[.]

FACULTY OF FINANCE AND BANKING

FINAL REPORT

METHODS OF ECONOMIC ANALYSIS INVESTIGATE THE RELATIONSHIP BETWEEN FDI AND

ECONOMIC GROWTH  IN THE INDONESIA

Lecturer: Bùi Duy Tùng

Nguyễn Duy Sửu

Team members:

Table of Contents

ABSTRACT 3

I INTRODUCE: 3

1 OVERVIEW OF THE FDI AND GDP OF THE INDONESIA 3

2 REASON TO CHOOSE THE TOPIC 6

3 THE LAYOUT OF THE REFERENCES PAPER 7

II OVERVIEW OF THEORY AND EXPERIMENTAL RESEARCH 8

1 OVERVIEW OF THEORY 8

2 THE RELATIONSHIP BETWEEN FDI AND ECONOMIC GROWTH 8

3 EXPERIMENTAL RESEARCH 9

III DATA 12

1 RESEACH DATA 12

IV RESEARCH METHODS 17

IV RESEARCH RESULTS 19

1 DESCRIPTIVE STATISTIC 19

2 REGRESSION RESULTS 19

REGRESSION STATISTICS 19

VI CONCLUSION 22

REFERENCES 23

This paper uses the Regresion Model to look at the relationship between foreign directinvestment and GDP growth in Indonesia The findings imply a connection betweenIndonesia's GDP growth and foreign direct investment Using data from recordsspanning the years 2000 to 2020, this report empirically investigates the impact offoreign direct investment on the financial boom within Indonesia Foreign directinvestment (FDI) extensively appeared as a critical driving force of the financial boom.The purpose for that is that due to the fact funding is a dynamic factor of GDP, FDI isthe unbiased variable, and GDP boom is the dependent GDP is directly impactedfavorably by FDI, and an increase in FDI rates of 1% will result in a rise in growthrates of 0.282524073% The ultimate result demonstrates that FDI is a key tool forachieving economic growth, but only when sufficient absorptive capacity has beengenerated through increased private investment within Indonesia The private sector inIndonesia has the ability to develop the business since FDI growth in Indonesia isrising and there is long-term projection in the relationship of the financial drivers

I INTRODUCE:

1 OVERVIEW OF THE FDI AND GDP OF THE INDONESIA.

Foreign direct investment (FDI) extensively appeared as a critical driving force of thefinancial boom The purpose for that is that due to the fact funding is a dynamic factor

of GDP, FDI is the unbiased variable, and GDP boom is the dependent One of themain responsibilities of governments is to enhance the country's development andwelfare Foreign direct investment (FDI) has been explored as a significantdeterminant for growth and development during the last two decades In recent years,Asian countries have garnered a large portion of the world's foreign direct investment(FDI)

Indonesia attracts FDI worth only around 2 percent of its GDP, which comparesunfavorably to other economies in the region, such as Malaysia (over 3 percent),Vietnam (over 6 percent) and Cambodia (over 12 percent) Asa result Indonesia loses

an important source of technology and knowledge transfer and external funding for the

economy Furthermore, the composition of FDI has shifted from export-orientedsectors to natural resources sectors and production for the domestic market This is aproblem as export-oriented manufacturing FDI is associated with rapid laborproductivity growth, higher average wages, larger introduction of new products, andhigher investment rates Additionally, more robust FDI inflows would be a more stablechannel to finance the current account deficit than volatile short-term portfolio capitalflows.

One of the major factors contributing to Indonesia’s relative inability to attract FDI is arestrictive FDI policy environment For instance, based on the 2007 Investment Lawand various sectoral laws, Indonesia’s negative investment list (DNI) stipulatesdifferent types of restrictions on investments, particularly foreign equity limits TheDNI applies at least one investment restriction to 813 business sectors, equivalent toaround 28 percent of all economic sectors Examples include onshore oil and gasupstream production installation, power plants with capacities below one megawatt,and supermarkets smaller than 1,200 square meters In addition, the DNI reservesmany agricultural, industrial, and services subsectors exclusively for MSMEs,effectively barring foreign investors, which cannot operate MSMEs in Indonesia.Investment restrictions deter entry of foreign firms, particularly export-oriented ones,which are crucial to link the Indonesian economy with Global Value Chains (GVCs)and increase its competitiveness

Indonesia has long believed that foreign private investment was economicallybeneficial to host country In 1967, when president Soeharto took power frompresident 3 Soekarno, he directly changed the orientation of the economy fromcentralized economy toward liberal economy Despite the initial liberal action policiesFDI showed significant growth only after 1986 Policies toward FDI could be brokeninto four periods The first liberalization policies were 1967 to 1973, which aimed tocorrect the economic policies of the previous government The second policies were

1974 to 1986, which categorized protectionist policies These policies haveimplemented in response to increased nationalist reactions to FDI The third periodwas marked by the second liberalization policies, from 1986 to 1997, as an effect ofthe fall in oil price The fall in oil prices forced the government to restructure theeconomy, away from its dependence on oil revenues The fourth period was the thirdliberalization policies, after the 1997 crisis, which was the continuation of the second

Since the onset of 1997 currency crisis, Indonesia has given more attention to FDI.This was because the government desires to foster economic recovery by way ofattracting FDI In the short run FDI was expected to solve lack of capital, absorbunemployment, extend the market price systems and the private sector and mitigate theexternal debt problem in Indonesia.

According to Salvatore (2007), Capital flows from incoming and outgoing capital from

a certain country is one of the economic activities that is primary important forinternational trading Indonesia as one of the expanded growth put FDI as one of themost important engine of power to increase the expected growth of economy.According to Makki and Somwaru (2004), Foreign Direct Investment and trade aresubstantial catalysts for economic growth and enhancement both in developingcountries and developed countries

The FDI in Indonesia has been believed that the greater the flows and the impact will

be positive to the economic growth In this case, the FDI has power to influence theGDP growth FDI in Indonesia becomes a very significant factor influencing theindustry and labor potential work Since 2000s, the government implied the policiesthat can boost the investment in Indonesia

Indonesia has a world success story in the economic success stories However, thecountry still has long path of the development Indonesia has been success recoveryfrom the Asian crisis and leads the country to become of the highest growth rate in theworld Annual GDP growth rate in real term of Indonesia is around 6 % in the pasteight to nine years, 1999 to 2015 GDP is used by the economists to compare theprosperity of the nations Real GDP is used to measure growth or decline of acountry’s economy The effect of inflation and deflation has been counted in RealGDP Real GDP becomes one of the best indicators to measure economic growth Ifthe GDP has a positive growth rate, it indicates that the economy of one nation is highand if the GDP has a negative growth rate, it indicates that the economy of one nation

is in recession period

Export is a crucial factor that can provide the impetus for economic growth indeveloping countries such as Indonesia The export led growth strategy becomes animportant alternative to the inward development strategy Recent studies have shown

that there is a positive and significant long-term relationship between investment andexport with GDP The relationship of investment and export is negative Vector Errorcorrection model analysis for GDP indicates an error correction coefficient which isnegative to the value of GDP in short term than long term Exports and investmentshave positive coefficient It means that the variable of the investment and exports isover the long-term equilibrium values in short term The impact of investment andexport on GDP are positive in short term Domestic production effect on investment ispositive but negative on export Exports have a negative effect on investment in theshort term and investment can cause increase in exports Fluctuations in the GDPbecause of it changes from its values and fluctuations in investments influenced byGDP.

The importance result of this study will give important information for the policymakers and the scholars to do further research on the FDI, export and GDP in specificvariables and sub discussion

2 REASON TO CHOOSE THE TOPIC.

Foreign direct investment (FDI) has received the attention of a vast literature thatfocuses on both determinants and consequences Two important theories throw light

on the locational determinants of FDI Factor endowments-based trade theory arguesthat FDI is drawn to countries with lower wages and more abundant natural resources.The new trade theory suggests that economies of scale are a driving force of FDI andagglomeration effects often play a crucial role

Against such a background, this paper plans to investigate the empirical relationshipbetween FDI and GDP growth in Indonesia Is FDI economically beneficial toIndonesian economic since long time ago (How much contribution of FDI to GDPgrowth?) Before we undertake econometric analyses on the impact of FDI to GDPgrowth, we first examine factors that determine FDI in Indonesia This study useshistorical and quantitative research methods The historical overview of FDI policiesand trend of investment looks at such important as various government policies andinstitution designed to foster private investment The statistical analysis section

comprises two models on FDI: a model of determinants of FDI and a model of impactFDI on GDP Growth The empirical work in this study is based on time series data.

Recent advancements in growth theory have been mostly theoretical, while significantprogress in growth empirics has also been accomplished In recent research, the study

of the drivers of economic growth has proved difficult A growing number of studieshave found that, while the recipient country's absorptive capacity influences thevolume and type of FDI inflow, institutional factors such as the person receivingeconomy's trade regime, legislation, and political stability, as well as scale factors such

as the balance of payment constraints and the size of the domestic market for goodsand services produced through FDI, influence the impact of FDI on economic growthand development There has been very little if any, country-specific empirical researchinto the factors of economic growth in the Indonesia

3.THE LAYOUT OF THE REFERENCES PAPER.

Section 1:

 Abstract

 The background of research

 Introduction

Section 2: Talk about the theoretical basis for explaining financial indicators

including GDP, and FDI. 

Section 3: Describes the sources of data and data employed in the analyses, reports.

Section 4:

 Methodological title

 Sections on research design

Section 5: Discusses the empirical consequences of the software of an monetary

increase version to Indonesia annual time-collection facts spanning the length 2000 to

2020

Section 6:

“FDI, a form of cross-border investment, in which a direct investor acquires part or all

of the permanent ownership of a business in another country This ownership must be

at least 10% of the total shares of the business” Curently, foreign direct investment is

not new issue for understanding the macroeconomic situation FDI can affect almost

economic and socio-cultural sector And, for developing countries, the rate of capital

accumulation is often low, so FDI is considered an important source of capital to

supplement domestic investment for economic growth Not all countries use FDI

capital effectively, which leads to some countries attracting quite large FDI inflows,

increasing investment capital for the economy, but the contribution of this capital to

growth is low This shows that the assessment of the impact of FDI on economic

growth is more concerned, especially for developing countries, including the

Indonesia

2 THE RELATIONSHIP BETWEEN FDI AND ECONOMIC GROWTH.

Currently, there are many studies on the impact of FDI on growth with many differentresearch methods and samples Studies have shown the rather important role of FDI ineconomic growth, the relationship between FDI and the Solow model is representative

of the neoclassical growth model used to determine the growth in the economy The

model assumes that scientific and technological progress and the larbor force areexogenous for FDI to increase domestic income levels and has no long-term effect oneconomic growth Romer relied on his model to observe and argue that some types ofknowledge are non-competitive, meaning that they cannot be used up like ordinarygoods and services.It is impossible for companies to invest in research anddevelopment because they do not capture the full benefits of innovation Thus,technological change in developing countries is determined by investment FDIsupports long-term economic development through technology transfer and capitalaccumulation, but mainly through advanced technology In addition, FDI has a lastingeffect on economic growth in host countries through technology transfer, capitalaccumulation and human capital growth Therefore, the polarization between the tworegions is strongly increased by FDI inflows and accelerated industrialization in thecountries, making the old sector become more positive in the economy.

In recent years the growth of FDI has served as a catalyst for investment in developingcountries FDI brings the most needed capital, improved managerial skills, modernmarketing techniques, access to modern technology and global links Since 1980 bothdeveloped and developing countries have been trying to attract FDI through providingincentives by adopting greater deregulation policies and reliance on market forces inthe economies Motive of earning high profit is the main contributing factor thatinduces firms to invest abroad particularly in those countries where labour cost isrelatively low Literature reveals that the foreign firms initially face high investmentcost particularly in those countries whose market and institutional conditions are notfamiliar to them However, economic theories suggest number of explanatory variablesthat explain why foreign firms invest abroad in the presence of these disadvantages.These theories are identified as market imperfection hypothesis, internationalizationtheory and Ownership, Location and Internalization (OLI) theory as an eclecticapproach Market imperfection hypothesis postulates that FDI is the direct result of animperfect global market environment

3 EXPERIMENTAL RESEARCH

Indonesia was hit very hard by the East Asian financial crisis with GDP contracting by

13 percent in 1998 Many sub-sectors of economy had decreased dramatically fromtheir high-growth trajectories except for farm food crops, non-food crops, fishery, oiland gas mining, electricity and water, and communications sectors The worst hit

sectors were construction, transport, hotels & restaurants, services, and finance(particularly hard hit by the general banking collapse).

Economic growth in Indonesia was accompanied by significant structural change overthe period 1986-2005 Since the beginning of the mid-1980s, the importance of theagriculture sector and mining sector has declined Over the period 1986-1990, theshares of agriculture and mining sector have averaged 20.03 percent per year and14.08 percent per year, respectively Meanwhile, by the period 2000-2005, the shares

of these sectors averaged 14.85 percent per year and 9.83 percent per year,respectively

The share of manufacturing sector had increased from an average of 19.96 percent

per year over the period 1986-1990 to 27.82 percent per year in the period 2000-2005

Moreover, transport and communication sectors, service sectors, and banking andfinance had all seen concurrent rapid growth and development

Những cải cách chính sách quan trọng giữa những năm 1980 đã mang đến một sự thay đổi đột biến của dòng vốn FDI Indonesia cũng được hưởng lợi từ sự bùng nổ đầu tư ra nước ngoài của Nhật Bản sau Hiệp ước Plaza 1985, đồng Yên tăng giá đã đẩy các doanh nghiệp Nhật Bản đầu tư ra các nước Đông Nam Á Sau đó, các doanh nghiệp từ các nước công nghiệp mới cũng bắt đầu di chuyển cơ sở sản xuất đến các địa điểm chi phí thấp hơn trong khu vực châu Á Một lượng lớn các doanh nghiệp FDI định hướng xuất khẩu tập trung vào khu vực sản xuất thâm dụng lao động như dệt và may mặc Các cuộc khủng hoảng tài chính châu Á vào năm 1997 và 1998 đã giáng một đòn chí mạng làm sụt giảm dòng vốn FDI vào Indonesia Kể từ năm 2000, nền kinh tế Indonesia phục hồi tương đối chậm so với các nước châu Á bị ảnh hưởng khủng hoảng khác, đặc biệt là về dòng vốn FDI và xuất khẩu Với sự ổn định kinh tế vĩ mô và chính trị dần dần phục hồi, niềm tin của nhà đầu tư đã bắt đầu quay trở lại FDI đã đóng góp 1,9% GDP của Indonesia trong 2010 Tổng vốn đầu tư cộng dồn tính đến năm 2012 lên tới 19,9 tỷ USD.

Trong hầu hết các giai đoạn phục hồi gần đây, dòng vốn FDI đã thiên về các dự án sản xuất tương đối nhỏ nhằm mục tiêu theo đuổi lợi nhuận nhanh chóng, chứ không phải là các dự án lớn và mạo hiểm với thời gian thai nghén tương đối dài như cơ sở hạ tầng và khai thác mỏ, nơi thực sự cần vốn đầu tư Như thể hiện trong hình 12, khu vực sản xuất đứng đầu danh sách các dự án FDI năm 2011 và đạt 2,3 tỷ USD Tiếp đến là khu vực giao thông, kho bãi và truyền thông, đạt mức 0,7 tỷ USD Thương mại bán buôn và bán lẻ, kinh doanh bất động sản

và khai thác mỏ và khai thác đá đạt khoảng 0,5 tỷ USD.

Đóng góp của FDI vào tổng nguồn vốn cố định ở Indonesia tương đối nhỏ so với các quốc gia ASEAN khác, nhưng FDI đã tạo ra công ăn việc làm, tăng năng suất và cải thiện khả năng tiếp cận thị trường toàn cầu Từ 2006 - 2008, các dự án đầu tư nước ngoài mới đã tạo ra khoảng 645.000 việc làm, chiếm khoảng 7% trong tổng số việc làm tăng thêm của Indonesia

Foreign direct investment (FDI) has been empirically studied numerous times in thepast The literature shows that the nature of relationship between FDI and economicgrowth is far from univocal On the surface, it seems that FDI should have a positiveinfluence over economic growth for many reasons Several of these reasons includetechnology spillover, increased total investment and development of local humancapital or knowledge spillover However, much of the empirical research did not come

to this conclusion In order to explain such results, scholars included other relevantfactors that might support the proclaimed benefits of FDI Examples of thesesupporting factors are human capital, financial market development and tradeopenness Human capital is often presented by researchers as the key factor instrengthening or actualizing the positive influence of FDI on economic growth Manyresearchers suggested and empirically found that human capital is an importantvariable in the relationship between FDI and economic growth Another variable that

is commonly discussed is the condition of local financial markets or the strength of thelocal financial institutions Alfaro, Chanda, Kalemli-Ozcan and Sayek (2004)empirically studied the role of financial markets in bridging FDI and economic

growth The results showed that FDI affects economic growth positively only whenhost countries have well-developed financial markets This result is similar to those inother articles that suggest FDI alone does not positively affect economic growth unlesscertain prerequisites are satisfied by a host country

It is also interesting to see that most empirical studies made use of cross-country dataspanning over a long period of time These panel data are robust, and they incorporate

a large number of observations However, the results are at best generalized for thewhole world, developing countries or a specific region such as Latin America or theMiddle East Although larger data sets produce better empirical research, the resultsmay be not directly applicable to particular countries As mentioned by Li and Liu(2005) and Blomström and Kokko (1996), the impact of FDI varies across countries.Therefore, it is not recommended to directly apply the results of a cross-countryanalysis to any country included in that dataset Therefore, instead of performing a