Openness, Exchange-Rate Shocks, and FDI in Emerging Economies: The Trade-Intensity Mechanism in Indonesia, 1996–2021

Indraswati Tri Abdi Reviane (), Abdul Hamid Paddu and Aditya Idris
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Indraswati Tri Abdi Reviane: Hasanuddin University
Abdul Hamid Paddu: Hasanuddin University
Aditya Idris: Hasanuddin University

A chapter in Proceedings of the 10th International Conference on Accounting, Management, and Economics (10th ICAME 2025), 2026, pp 525-545 from Springer

Abstract: Abstract Understanding how trade openness contributes to economic growth requires examining the mechanisms through which macroeconomic factors transmit their effects. Emerging economies frequently face exchange-rate shocks, fluctuating foreign investment, and varying investment efficiency, all of which shape growth trajectories. This study analyzes how trade intensity mediates the relationship between exchange-rate shocks, foreign direct investment, investment efficiency, and national stability with economic growth in the context of an emerging economy. The analysis employs annual macroeconomic data from 1996 to 2021, obtained from international and national statistical agencies. A path analysis framework is applied to capture both direct and indirect effects of openness-related factors on growth. The principal variables comprise trade intensity, exchange rates, foreign direct investment, incremental capital–output ratio, and measures of national stability. The findings indicate that trade intensity significantly fosters economic growth and serves as a critical transmission channel of openness. Exchange-rate depreciation enhances trade intensity but exerts a negative direct impact on growth, producing an overall contractionary outcome. Foreign direct investment demonstrates a strong and direct positive effect on growth, although its link with trade intensity is weak, suggesting that investment has been predominantly market-seeking rather than export-oriented. Investment efficiency and national stability display limited direct impacts but indirectly support growth through trade intensity. This study concludes that trade intensity constitutes a vital mediator linking openness and growth. The evidence underscores the importance of policies that encourage export-oriented investment, safeguard macroeconomic stability, and improve investment efficiency. These insights are crucial for sustaining resilient growth strategies across emerging economies.

Keywords: Trade Openness; Trade Intensity; Exchange Rate Shocks; Investment Efficiency; Foreign Direct Investment; Economic Growth; Emerging Economies; Path Analysis (search for similar items in EconPapers)
Date: 2026
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DOI: 10.2991/978-94-6239-709-5_36

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