The effect of foreign direct investment on economic growth and unemployment in Indonesia
Keywords:
FDI, GDP, unemployment rate, VECM, ECTAbstract
This study aims to analyze the causal relationship between Foreign Direct Investment (FDI), Gross Domestic Product (GDP), and the unemployment rate in Indonesia using the Vector Error Correction Model (VECM) method. Based on the results of the Johansen cointegration test, three cointegration relationships were found, indicating a long-term equilibrium among the variables. The long-term estimation results show that GDP and the unemployment rate have a negative effect on FDI, suggesting that increases in economic growth and unemployment are not necessarily accompanied by higher inflows of foreign direct investment. In the short term, FDI has no significant effect on either GDP or the unemployment rate, as evidenced by the results of the Granger causality test and short-term parameters in the VECM model. Meanwhile, only the GDP variable exhibits an adjustment mechanism to long-term disequilibrium through a negative and significant Error Correction Term (ECT) value, indicating that economic growth is the most responsive and stable variable in the system. The results of the Impulse Response Function (IRF) and Variance Decomposition (VD) analyses also reinforce the finding that GDP has the greatest contribution in influencing the dynamics of FDI and the unemployment rate in the long run. Therefore, economic growth serves as the key factor driving macroeconomic stability and interaction in Indonesia
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