THE IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) ON ECONOMIC GROWTH (CASE OF INDONESIA)

• Main Authors: , Olia Yusnita, , Prof. Lee Kangkook
• Format: Theses and Dissertations NonPeerReviewed
• Published: [Yogyakarta] : Universitas Gadjah Mada 2013
• Subjects: ETD
• Online Access: https://repository.ugm.ac.id/123683/; http://etd.ugm.ac.id/index.php?mod=penelitian_detail&sub=PenelitianDetail&act=view&typ=html&buku_id=63797
• Institution: Universitas Gadjah Mada

There are a lot of studies on the impact of Foreign Direct Investment (FDI) on economic growth. FDI is believed to have beneficial effects on the economy, and plays an important role as a catalyst in stimulating growth and development in host countries. In this study we examine the impact of FDI on economic growth, and we also examine the impact of two components of FDI including Greenfield FDI and Mergers and Acquisitions (M&A) FDI on economic growth. In regression analyses, this study employs three techniques of the econometric approach to examine the impact of FDI on economic growth. They are cross sectional, panel data, and generalized method of moment (GMM) to deal with endogeneity problem. Using the large sample that consist of 203 countries including 162 developing countries and 41 developed countries over period 1991-2010, we compare different effects of FDI including overall of FDI, Greenfield FDI, and M&A FDI in both developing and developed countries. Different techniques that are employed in the regression analyses produce different result each other. Cross sectional regressions shows that FDI and its components have insignificant impact on growth, although the coefficient is still positive. This suggests that there is no evidence that overall FDI promotes economic growth in long-term. Panel regression with fixed effect on four-year average shows that FDI and Greenfield have positive and significant on growth, while M&A is insignificant. The results prove that investment with new asset can assist the host countries to gain better economy that the existing ones. For system GMM result, in developing countries, FDI and Greenfield have positive and significant effect on economic growth. It argues that developing countries need investment in new asset form to encourage their economy. Meanwhile, in developed countries, only M&A has positive and significant, while Greenfield has negative and insignificant impact on economic growth. It shows that M&A can give contribution for economy in develop countries. Combining the regression result and the Indonesia condition, we can abstract relevant policy implication to catch positive impact of FDI on economic growth in Indonesia.