Can internally generated FDI impact export performance? The study on Indonesia in the years 1980-2018

Abstract

Objective: As part of a developing country, Indonesia is concerned with issues related to investment inflows and trade liberalization. The objective of this study is to examine whether or not inward foreign direct investment (FDI) influence to export performance in Indonesia over the time period 1980-2018.

Research Design & Methods: We apply Augmented Dickey-Fuller and Phillip-Perron unit root test to check the stationarity. The autoregressive distributed lag (ARDL)-bound test is applied to check co-integration existence.

Findings: Results present that the variables are stationary at first differences I(1). The ARDL bound testing co-integration approach confirms that there is long-run relationship between considered variables. The findings also indicate the significant positive impacts of FDI on exports in long run and in the short run. The result of the Granger causality test confirms that there is a unidirectional causal relationship existing between the variables where export has a Granger cause to FDI. Results of stability test suggest that there is structural stability in the residuals of the equation of exports.

Contribution & Value Added: FDI does not work uniformly in all sectors, and policymakers should understand the difference and identify their sector-wise policies relating with FDI. The law and order should also be maintained, which is the essential part to attract foreign investors. At this stage, we can also set the direction of future research, that is, the sector-wise study should be done on the relationship between FDI and exports.

Keywords

FDI, Export, ARDL, Cointegration, Long-run

Author Biography

Cheng Wen Lee

Professor in the Department of International Business, College of Business, Chung Yuan Christian University (CYCU) Taiwan. Research interests: International Business Management, International Marketing, International Marketing Management, and Global Logistics Management.

Agus Fernando

Ph.D. Student in the Ph.D. Program in Business, College of Business, Chung Yuan Christian University (CYCU) Taiwan. Research interest: international trade, macroeconomic, entrepreneurship, management strategic, small and medium-sized enterprises (SMEs).

References

1. Albahi, M. (2016). Export-Import and Foreign Direct Investment (FDI): Indonesian Economic Study. IOSR Journal of Economics and Finance. 07. http//: doi:37-44. 10.9790/5933-0704033744.
2. Alıcı, A. A., & Ucal, M.S (2003, September). Foreign Direct Investment, Exports and Output Growth of Turkey: Causality Analysis. Paper Presented at the European Trade Study Group (ETSG) Fifth Annual Conference, Universidad Carlos III de Madrid.
3. Ancharaz, V.D. (2003). FDI and Export Performance of the Mauritian Manufacturing Sector. Retrieve from http://s3.amazonaws.com/zanran_storage/r0.unctad.org/ContentPages/53012909.pdf (last accessed on July 23, 2016)
4. Antoni, (2008). InvestasiLangsungAsing (FDI) Dan Perdagangan: Bukti Empiris Di Indonesia. JurnalEkonomiBisnis dan Koperasi. 10(2).
5. Association of South East Asian Nation [ASEAN]. (2004). Guide Book for Investing in ASEAN: Update 2004. Sekretariat ASEAN.
6. Athukorala, P. (2002). Foreign Direct Investment and Manufacturing Exports: Opportunities and Strategies. Background paper to the World Bank study ‘Vietnam’s Exports: Policies and Prospects’, World Bank Vietnam.
7. Balasubramanyam, V.N.,& Salisu, M. (2001). Foreign Direct Investment and Globalisation. In. S. Lahiri (Ed.), Regionalism and Globalisation (pp. 171-197). Routledge
8. Banga, R. (2006). The Export-diversifying Impact of Japanese and US foreign Direct Investments in the Indian Manufacturing Sector. Journal of International Business Studies, 37, 558-568.
9. Bank Indonesia. (2019). LaporanPerkonomian Indonesia. Bank Indonesia.
10. Barrios, S., Gorg, H., & Strobl,E. (2003). Explaining Firms, Export Behaviour: R&D, Spillovers and the Destination Market. Oxford Bulletin of Economics and Statistics, 65, 475-496.
11. Bhatt, P.R. (2010). Is FDI led Exports in New Zealand? Prajnan, XXXIX(4), 247-62.
12. Blake, A.P., & Pain, N. (1994). Investigating structural changes in UK export performance: The role of innovation and direct investment. National Institute of Economic and Social Research.
13. BPS-Statistic Of Indonesia (2018). Statistical Yearbook of Indonesia 2018. Badan Pusat Statistic-Statistic of Indonesia.
14. Cabral, L. (1995). Sunk Costs, Firm Size and Firm Growth. Journal of Industrial Economics, 43, 161-172.
15. Chaisrisawatsuk, S., & Chaisrisawatsuk, W. (2007). Imports, Exports and Foreign Direct Investment Interactions and their effects’. In ESCAP Study, Towards Coherent Policy Frameworks: Understanding Trade and Investment Linkages – A Study by the Asia-Pacific Research Network on Trade (pp. 97-115). United Nations.
16. Chakraborty, D., Jaydeep, M., & Jaewook, L. (2017). FDI Inflows Influence Merchandise Exports? Causality Analysis for India over 1991-2016: Causality Analysis for India Over 1991-2016. Global Economy Journal, De Gruyter,17(3), 1-10.
17. Clausing, K.A. (2000). Does Multinational Activity Displace Trade.Economic Inquiry, 38(2), 190-205.
18. Davaakhuu, O., Sharma, K., & Bandara, Y.M. (2014). Foreign direct investment in a transition economy: Lessons from the experience of Mongolia. Global Business Review, 15(4), 663-675.
19. De Mello, L.R. Jr., &Fukasaku, K. (2000). Trade and foreign direct investment in Latin America and Southeast Asia: temporal causality analysis. J. Int. Dev., 12, 903-924. http//:doi:10.1002/1099-1328(200010)12:7<903::AID-JID695>3.0.CO;2-8
20. Dickey, D.A., & Fuller, W.A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427-431.
21. Dritsaki, M., Dritsaki, C., & Adamopoulus, A. (2004). A Causal Relationship between Trade, FDI and Economic Growth for Greece. American Journal of Applied Sciences, 1 (3), 230-235.
22. Dunning, J. H. (1970). Studies in direct investment. Allen and Unwin.
23. Engle, R.F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: Journal of the Econometric Society, 55 (2),251-276.
24. Falk, M., & Hake, M. (2008). A Panel Data Analysis on FDI and Exports. FIW Research Report No. 12. ÖsterreichischesInstitutFürWirtschaftsforschung.
25. Fukunishi, T. (2010). FDI and Export Participation of Local Firms in Africa: The Case of Kenyan Garment Industry. Institute of Developing Economies (IDE), JETRO, Chiba.
26. Graham, E.M. (2004). Do export processing zones attract FDI and its benefits: The experience from China. International Economics and Economic Policy, 1, 87-103.
27. Granger, C.W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: Journal of the Econometric Society, 37 (3), 424-438.
28. Griffiths, D., & Sapsford, D. (2004). Foreign Direct Investment in Mexico. In Y.A. Wei, & V.N. Balasubramanyam (Eds.), Foreign Direct Investment: Six Country Case Studies, New Horizons in International Business (pp.103-127). MA: Elgar.
29. Gu, W., Awokuse, T.O., & Yuan, Y. (2008, July). The Contribution of Foreign Direct Investment to China’s Export Performance: Evidence from Disaggregated Sectors. American Agricultural Economics Association, Annual Meeting, Orlando, Florida.
30. Helpman, E. (1984). A simple theory of international trade with multinational corporations. Journal of Political Economy, 92, 451-471.
31. International Monetary Fund (2019). International Finance Statistic Database. Retrieve from http://data.imf.org/?sk=4C514D48-B6BA-49ED-8AB9-52B0C1A0179B
32. Jeon, Y. (1992). The Determinants of Korean Foreign Direct Investment in Manufacturing Industries. WeltwirtschaftlichesArchiv, 128, 527-541.
33. Jiang, N., Liping, W., & Sharma, K. (2013). Trends, patters and determinants of foreign direct investment in China. Global Business Review, 14(2), 201-210.
34. Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of economic dynamics and control, 12(2-3), 231-254.
35. Johansen, S., &Juselius, K. (1990). Maximum Likelihood Estimation and Inference on Cointegration-with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
36. Johnson, A. (2006). FDI and Exports: the case of the High Performing East Asian Economies’. CESIS Electronic Working Paper No. 57. The Royal Institute of technology, Centre of Excellence for studies in Science and Innovation
37. Jones, J. D. (1989). A comparison of lag-length selection techniques in tests of Granger causality between money growth and inflation: Evidence for the US, 1959-86. Applied Economics, 21(6), 809-822.
38. Kojima, K., (1973). A Macroeconomic Approach to Foreign Direct Investment. Hitotsubashi Journal of Economics, 14(1), 1-21.
39. Kutan, A.M., & Vukšić, G. (2007). Foreign Direct Investment and Export Performance: Empirical Evidence. Comparative Economic Studies, 49(3), 430-445.
40. Lall, S. (2000). Foreign Direct Investment, Technology Development and Competitiveness: Issues and Evidence. Monograph.
41. Lipsey, R. E., & Weiss, M.Y. (1981). Foreign Production and Exports in Manufacturing Industries. Review of Economic and Statistics, 63, 488-494.
42. Lipsey, R.E., Blomstrom, S.L., &Kulchycky, K. (1988). US and Swedish direct investment and export. In R.E Baldwin (Ed.), Trade Policy Issues and Empirical Analysis (pp.259-297). University of Chicago Press.
43. Liu, X., Burridge, P., & Sinclair, P. J. (2002). Relationships between economic growth, foreign direct investment and trade: evidence from China. Applied Economics, 34(11), 1433-1440.
44. MacKinnon, J. (1991). Critical Values for Cointegration Tests. In R. Engle & C. Granger (Eds.), Long Run Economic Relationships (pp. 267-276). Oxford University Press.
45. Mahadika, I.N., Kalayci, S., & Altun, N.(2017). Relationship between GDP, Foreign Direct Investment and Export Volume: Evidence from Indonesia.International Journal of Trade, Economics and Finance, 8(1), 51-54.
46. Miankhel, A. K., Thangavelu, S.M., & Kalirajan, K. (2009). Foreign Direct Investment, Exports, and Economic Growth in Selected Emerging Countries: Multivariate VAR Analysis. CCAS Working Paper No. 23. Center for Contemporary Asian Studies, Doshisha University.
47. Mithani, Dawood, A., Shabbir, A., & Adam, M.S. (2008). Foreign Directlnvestmentin Malaysia: Trends and Prospects. International Review of Business Research Papers, 4, 249-258.
48. Mohanty, S., & Sethi, N. (2019). Does Inward FDI Lead to Export Performance in India? An Empirical Investigation. Global Business Review. http//: doi:097215091983277. 10.1177/0972150919832770.
49. Njong, A. M. (2008. November). Investigating the Effects of Foreign Direct Investment on Export Growth in Cameroon. Paper submitted to UNECA for the Ad-hoc Expert Group Meeting in Addis Ababa, Ethiopia.
50. Olayiwola, K., & Okodua, H. (2013). Foreign Direct Investment, Non-Oil Exports, and Economic Growth in Nigeria: A Causality Analysis. Asian Economic and Financial Review, 3 (11), 1479-1496.
51. Ozawa, T. (1992). Foreign direct investment and economic development. Transnational Corporation, 1(1), 27-54.
52. Pain, J.Y., & Wakelin, K. (1998). Export performance and the role of foreign direct investment. Manchester School of Economics & Social Studies, 66, 62- 88.
53. Pfaffermayer, M. (1994). Foreign Direct Investment and Exports: A Time Series Approach. Applied Economics, 25, 335-351.
54. Pfaffermayer, M. (1996). Foreign Outward Direct Investment and Exports in Austrian Manufacturing: Substitutes or Complements?WeltwirtschaftlichesArchiv, 132, 501-522.
55. Pesaran, M.H., & Pesaran, B. (1997). Working with microfit 4.0: An introduction to econometrics. Oxford University Press.
56. Pesaran, M.H., & Shin, Y.(1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and Economic Theory in 20th Century: The Ragnar Frisch Centennial Symposium (pp. 371-413). Cambridge University Press.
57. Pesaran, M. H., Shin, Y., & Smith, R.J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
58. Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
59. Prasanna, N. (2010). Impact of Foreign Direct Investment on Export Performance in India. Journal of Social Science, 24(1), 65-71.
60. Rahmaddi, R., & Ichihashi, M. (2013). The Role of Foreign Direct Investment in Indonesia’s Manufacturing Exports. Bulletin of Indonesian Economic Studies, 49, 329-54. http//: doi:10.1080/00074918.2013.850632.
61. Ramirez, M. (2010). Foreign Direct Investment in Mexico: A Cointegration Analysis. The Journal of Development Studies, 37. http//:138-162. 10.1080/713600062.
62. Ruane, F., & Julie, M. S. (2004). Ownership and Export Characteristics of Irish Manufacturing Performance. IIIS Discussion Paper No. 32. Institute for International Integration Studies.
63. Sethi, N., & Sucharita, S. (2013). FDI and economic growth in India. Rawat Publication.
64. Sgard, J. (2001). Direct foreign investments and productivity growth in Hungarian firms, 1992-1999. William Davidson Institute Working Papers Series No 425.William Davidson Institute at the University of Michigan.
65. Shahbaz, M., & Rahman, M.M. (2012). The dynamic of financial development, imports, foreign direct investment and economic growth: Cointegration and causality analysis in Pakistan. Global Business Review, 13(2), 201-219.
66. Smarzynska, B.K. (2003). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. The American Economic Review 94 (3), 605-627.
67. Sun, H., & Parikh, A. (2001). Exports, inward foreign direct investment (FDI) and regional economic growth in China. Regional Studies, 35(3), 187-196.
68. Svensson, R. (1996). Effects of Overseas Production on Home Country Exports: Evidence Based on Swedish Multinationals. WeltwirtschaftlichesArchiv, 132, 304-329.
69. Tambunlertchai, S. (2009). Foreign Direct Investment and Export Performance in Thailand. Degree of Bachelor of Arts Thesis submitted to the Mathematics-Economics Program, Wesleyan University, Connecticut.
70. Türkan, K. (2006). Foreign Outward Direct Investment and Intermediate Goods Exports: Evidence from USA. Retrieve from http://www.etsg.org/ETSG2006/papers/Turkcan.pdf
71. UNCTAD. (2016). World Investment Report 2016: Investor Nationality: Policy Challenges. Retrieve from https://unctad.org/en/PublicationsLibrary/wir2016_en.pdf
72. UNCTAD. (2019). World Investment Report 2019: Special Economic Zone. Retrieve from https://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=2460
73. Vural, İ. Y., & Zortuk, M. (2011). Foreign Direct Investment as a Determining Factor in Turkey’s Export Performance. Eurasian Journal of Business and Economics, 4 (7), 13-23.
74. World Bank (2019). The World Development Indicators 2018 (WDI) Database. Retrieve from https://data.worldbank.org/
75. WTO. (2019). World Trade Organization: Annual Report, 2019. Retrieve from https://www.wto.org/english/res_e/publications_e/anrep19_e.htm
76. Xuan, N.T., & Xing, Y. (2008). Foreign direct investment and exports: The experiences of Vietnam1. Economics of Transition, 16, 183-197. http//: doi:10.1111/j.1468-0351.2008.00321.x
77. Yamawaki, H. (1991). Exports and Foreign Distributional Activities: Evidence on Japanese Firms in the United States. Review of Economics and Statistics, 73, 294-300.
78. Zhang, K. H. (2005, June). How Does FDI Affect a Host Country’s Export Performance? The Case of China. Paper presented in International Conference of WTO, China, and the Asian Economies, III. In Xi’an, China.
79. Zhang, Q., & Felmingham, B. (2001). The relationship between inward direct foreign investment and China’s provincial export trade. China Economic Review, 12(1), 82-99.
80. Zhang, K.H., & Song, S. (2000). Promoting Exports: The role of Inward FDI in China. China Economic Review, 11, 385-396.