The Effect of Foreign Direct Investment on Indonesian Economic Growth

John Asafu-Adjaye

Economic Analysis and Policy, 2000, vol. 30, issue 1, 49-62

Abstract: This paper estimates the effects of foreign investment in Indonesian’s economic growth for the period 1970 to 1996. Economic growth is measured by growth in gross domestic product (GDP) and gross domestic income (GNI). Two types of foreign investment are considered: foreign direct investment (FDI) and net private capital flows. Other determinants of economic growth included in the analysis are human capital and gross domestic savings. The results suggest that foreign direct investment, net private capital, human capital and gross domestic savings jointly influence economic growth. Foreign direct investment has a significant positive effect on economic growth, while net private capital has no significant effect. Human capital, proxied by the proportion of the population in the labour force and secondary school enrolments, and gross domestic savings, also exert a positive influence on economic growth. On the basis of the analysis, it is suggested that, to enhance the role of FDI in Indonesia’s economic growth, the government should encourage the quality of human capital through improved education and improved skills training.

Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:30:y:2000:i:1:p:49-62

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