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Relationship between Export, Import, Foreign Direct Investment and Economic

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 Advances in Economics, Business and Management Research, volume 97
Third International Conference On Economics Education, Economics, Business and Management, Accounting and Entrepreneurship (PICEEBA 2019)

Relationship between Export, Import, Foreign Direct Investment and

Economic Growth in Indonesia

1Imam Mukhlis, 2Lutfi Asnan Qodri

1Universitas Negeri Malang, Malang, Indonesia,  imam.mukhlis.fe@um.ac.id
2Universitas Negeri Malang, Malang, Indonesia

Abstract
This study aims to analysis the relationship between export, import, foreign direct
investment and economic growth using time series data during 1980 to 2017 in
Indonesia. This paper applied vector error correction model (VECM) to estimate the
relationship between variables. The empirical results showed that foreign direct
investment have significant effect to economic growth in Indonesian economy.
Meanwhile, in the short run there were not significantly affect between export and
import to economic growth in Indonesian economy. In model specification, the model
was invalid because insignificantly coeficient of error correction term.
Keywords: Economic Growth; Export-Import; Foreign Direct Investment, Vector Error
Correction Model.

Introduction
Globalization has a consequence for each country to run an open economy system.
Information can be received easily between countries without any limitation and each country
provides an open access to the other countries. In the other word, it illustrates that each country
exhausts to attain their country’s need (Mukhlis, et al,2018). The fulfillment of goods and services
has improved and it proposes a new circumstance in a free trade. Export and import are the term
that covered a trading activity between countries. Export is goods and services produced by a
country and purchased by civilian in another country and vice versa for import. In the past two
decades, foreign direct investment also has been studied as an important factor for growth and
development. In the recent years, asian countries have attracted a significant part of the foreign
direct investment (FDI) of the world.
Neither export not import play a critical role both for under-develop countries and develop
countries. Yin and Yin (2005) remarked that export has improved investment capital intensive
and productivity in developing countries. Moreover, Hee and Lee (2018) stated that export trade
could enlarge trade balance of a country which will affect to economic growth. In addition,
Salvatore (1990) pointed that export stimulates an economic growth for under develop country
whilst high rates of import potentially affects balance trade deficit. According to the Law of the
Republic of Indonesia, import is the activity of entering goods into the customs area. Literally,
imports can be interpreted as the activities of entering goods from foreign country into the
customs territory of country. Vohra (2001) examine about relationship between export and
economic growth in India, Pakistan, Phillipines, Malaysia, and Thailand ranging 1973 to 1993.
The result indicated that when a country has achieved some level of economic development than
export have a positive and significant impact on economic growth.
Tong (1995) explored the relationship between economic growth and import, the result that
import at different times contributed to economy differently, but as a whole, there was a positive
correlation between import and economic growth. Humpage (2000) on other side, stressed that
import does not lower economic growth. Cause that imports and economic growth are positively
correclated, with causality running in both directions.

Copyright © 2019, the Authors. Published by Atlantis Press.

This is an open access article under the CC BY-NC license (http://creativecommons.org/licenses/by-nc/4.0/). 100
 Advances in Economics, Business and Management Research, volume 97

In Malaysia, Kogid et al. (2011) investigated the association between economic growth and
imports. They used annual data from 1970-2007. Cointegration of variables has been checked by
using Engle-Granger test and Johansen’s cointegration test which suggests no long-run
relationship. Granger’s causality test and Toda-Yamamoto test for causality have been employed
to check the causality direction between variables. The result of both tests suggested bidirectional
causality between economic growth and imports. The study concludes that imports of Malaysia
contribute towards its economic growth.
The relationship between export and economic growth of countries in Asia was also cared for
and studied by many economists. Kholis (2012) Using pooled least square method, this study
showed that export growth has a positive effect on economic growth in Indonesia but import has
a negative impact on economic growth. This study also explains if export was the main driver of
economic growth. Faridi (2012) studied the capacity of export to contribute to economic growth
in Pakistan during period 1972 – 2008.
Numerous studies related to export and economic growth conducted by several authors like
Ekanayake (1999); Md and Suleiman (2016); Mohsen (2015); Ekanayake (1999) remarked that
export has significantly impact on economic growth. At the same time, the study result did not
show any relationship between economic growth and export in the region under study.
Both export and import have an acquaintance with factors that affect to trade balance in a
country (Babatunde, 2014). Export and import is highly suggested for several reasons like
improving national income and economic growth, enhancing cooperation between countries,
engaging a job opportunity, and expanding market for local products. Theoretically, an
increasing export in a country will promote to the higher an economic growth. In the context of
Indonesia, the commodities of export are dominated by raw goods which affect to the
unpredictable price fluctuation.
Mukhlis and Simanjuntak (2014) examined the relationship between foreign direct investment
with economic growth in Indonesia for 1981-2012. The result show that there was not relationship
between two variables in the long run. Blomstorm and Kokko (1996) asserted that foreign direct
investment (FDI) provides economic growth in developing countries. But studied Carkovic and
Levine (2005) and Putra. Meanwhile, Gorg and Greenaway (2004) examined that foreign direct
investment (FDI) does’t have any influence on economic growth.
In the other hand if seen from the causality from foreign direct investment to export it is to
much result in any research. But majority of the result from any studied explained that forreign
direct investment can be considered to be as a significant. Like analyzing effect of the foreign
direct inventmen inflow to the export performance of fourthteen transition economies in Central
and Eastern Europe (CEE). Kutan and Vuksic ( 2007) examined that foreign direct inventment has
improved the export performance of the host economies by increasing their supply capacities.
Some studied has the research indicated a two way causality Liu, et. al. (2001); Zhang and
Felmingham (2001); Ekanayake, et al (2003); Balimoune-Lutz (2004); Dritsaki, et al. (2004); Zhang
(2006); Alfaro, et al. (2000) explained a directional causal relationship between FDI and export
with a direction from foreign direct investment to export and reversely causal relationship.
Foreign direct investment also has causality with an import in turkey, Onkuwa and Zoral
(2009) examined about how foreign direct investment has a relationship to import in the short
run and long run. In the short run turkish import demand appears to be driven by appreciation
of Turkish Lira and rising domestic price level of good and services. As the Lira continued to
appreciate the demand for import will continue to rise, suggesting trade deficits and huge import
bills which further reduces Turkish foreign reserve. In the long run, changes in the relative
exchanges rate would not affect the import demand and if any it would leave the import bill
unchanged.

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Based on this background, this study aims to analyze relationship between exports, imports,
foreign direct investment (FDI) and economic growth in Indonesia in the period 1980-2017.

Methods
This study used quantitative method. Quantitative method is a scientific approach that views
a reality that can be clarified, concrete, observable and measurable, the relationship of variables is
causal and the research data is in the form of numbers. This type of research using secondary
time series data during 1980-2017. The data set consist of observation for exports of good services
(current US$), omport of goods and services (current US$), foreign direct investment (FDI), and
Economic Growth in Indonesia. All data set are taken from World Development Indicators 2018.
The VECM model is a special case of the VAR model that only applies systems that have
stationary and cointegrated conditions. The use of the Vector Error Correction Model (VECM) in
estimating empirical phenomena can provide benefits especially in conducting analysis both in
the short and long term. While the variables used in this study are as follows:
a. Export (EKS) is the sale of products and services from Indonesia to foreign countries. In
this study exports were accumulated both from oil and gas exports and non-oil and gas.
b. Import (IMP) is the purchase of goods and services from abroad entering Indonesia. The
import value in this study is also the accumulation of oil and gas and non-oil imports.
c. Foreign Direct Investment (FDI) is a form of long-term investment in companies located
in other countries.
d. Economic Growth (PEK) is a percentage increase in economic growth every year.

Whereas the stages in the estimation model consist of:

a. Test data stationarity with the ADF test (Augmented Dickey Fuller test),
The ADF test can be formulated as follows;

If a0 is a constant, t is a deterministic trend, 𝛆 is an error term. If the autoregressive of Y

(Y(t-1)) contains unit root (unit root), then the ratio t (t ratio) for a1 should be consistent
with the a1 hypothesis = 0.
b. Cointegration test with Johansen's approach
Cointegration test with Johansen's approach using 2 statistical tests, namely Trace test
and maximum Eigenvalue test. The two statistical tests can be written as
follows:

c. Where is estimated by the ordered eigenvalue with value. The standard approach to
Johansen's method is the maximum likelihood (ML) procedure is to first calculate Trace
and Maximum Eigenvalue statistics, then compare the appropriate critical values.

In the cointegration test stage, if there was cointegration between variables or cointegration
rank more than zero, the analysis by Vector Error Correction Model.

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Results and Discussion

This involved testing the order of integration of the individual series under consideration.
Saveral procedures for the test order of integreation have been developed. The most popular ones
are Augmented Dickey-Fuller (ADF) test. Augmented Dickey-Fuller test relies on rejecting a null
hypotesis of unit root (the series are non stationary) in favor of the alternative hypotheses of
stationarity.
Very important thing to know about stationary properties of variables. Therefore, unit roor
tests applied to examine the null hypothesis of having root. Data stationarity test results using the
Augmented Dickey Fuller test (ADF test) give the following results:

Table 1 Data Stationarity Test Results with ADF Test

Variable Conclusion
EKS Stationary at first difference
FDI Stationary at level
IMP Stationary at first difference
PEK Stationary at level
Source: Process data with Eviews software

Based on the table it can be concluded that in the stationarity level test, all variables are not
stationary at the same degree of the four variables. Its only the economic growth variable (PEK)
and Foreign Direct Investment (FDI) are stationary, while the export (EKS) and import variable
(IMP) are not stationary (containing unit roots). Therefore, the non-stationary variables, namely
the export (EKS) and import (IMP) variables, stationarity tests were carried out in first different.
The result is from the two variables after the root test unit shows stationary (does not contain unit
roots) at the level of 1% (First Difference). Therefore, it can be concluded that all variables are
declared stationary on the degree of foreign direct investment (FDI) and economic growth (PEK)
and stationary variables at first degree difference are exports (EKS) and imports (IMP). Thus, the
data that has been transformed is feasible to be used in VAR or VECM analysis.
The next step is to do a cointegration test to test whether there is a relationship between
variables. Cointegration test results using the Johansen method can be seen in tables 2 and 3.
Based on the results of the Co-integration Test with Johansen's method in tables 2 and 3, it can
be concluded that the value of the trace test indicates the existence of 2 equations that are
cointegrated at the level of 5%. Based on the value of the max eigenvalue test also shows the
existence of 1 equation which is cointegrated at the level of 5%. So that based on the cointegration
test it was found that there was a long-term relationship between the estimated variables.

Table 2 Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.688542 72.17886 47.85613 0.0001

At most 1 * 0.407696 30.18525 29.79707 0.0451
At most 2 0.269415 11.33078 15.49471 0.1920
At most 3 0.000833 0.030013 3.841466 0.8624

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Table 3 Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.688542 41.99361 27.58434 0.0004

At most 1 0.407696 18.85447 21.13162 0.1011
At most 2 0.269415 11.30076 14.26460 0.1398
At most 3 0.000833 0.030013 3.841466 0.8624

Cointegration results in tables 2 and 3 show the value of the Trace Statistic from the Trace test
of 72.17886 greater than the critical value at alpha 0.05 of 27.58434, which means that in the
system there is a cointegrated equation. Trace Statistic value of 30.18525 which is greater than the
critical value at alpha 0.05 of 29.79707 shows that there is at least one cointegrated equation. After
that, when viewed from the Maximum Eigenvalue test, the value of the Trace Statistic of 41.99361
shows that in the system there is one cointegrated equation.
Johansen Co-integration Test through cointegration test shows that in the four variables
namely export, import, foreign direct investment (FDI) and economic growth in Indonesia 1980-
2017 there is a long-term or cointegrated relationship. Thus in the context of this research, a
Vector Error Correction Model (VECM) analysis can be applied.
To analyze the long-term and short-term relationships of the analysis of the relationship of the
variables of export (EX), import (IMP), foreign direct investment (FDI) to economic growth (PEK)
in Indonesia, parameter estimation is done using the Vector Error Correction Model (VECM)
method. This model functions as a tool that is used when the variables observed are several
variables that do not contain unit roots (stationary) even at different degrees. The following are
the results of estimating the model of money demand using VECM as follows:

Table 4 Results of Estimates Using VECM Estimates

Cointegrating Eq: CointEq1

PEK(-1) 1.000000

EKS(-1) 2.33E-07
(1.4E-07)
[ 1.63849]

FDI(-1) -4.87E-07
(2.5E-07)
[-1.97718]

IMP(-1) -1.83E-07
(1.7E-07)
[-1.08528]

C -7.636518

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Table Cont…
Error Correction: D(PEK) D(EKS) D(FDI) D(IMP)

CointEq1 -0.277388 3458978 1070576 3043319

(0.30905) (739700) (273618) (942359)
[-0.89756] [ 4.67619] [ 3.91266] [ 3.22947]

D(PEK(-1)) -0.140239 -1830691 -708506.8 -1804440

(0.27287) (653123) (241593) (832063)
[-0.51393] [-2.80298] [-2.93264] [-2.16863]

D(PEK(-2)) -0.220521 -2317090 -340252.3 -1965810

(0.22894) (547955) (202691) (698081)
[-0.96324] [-4.22861] [-1.67867] [-2.81602]

D(EKS(-1)) 1.48E-07 0.383570 -0.096945 1.092357

(1.4E-07) (0.33424) (0.12364) (0.42581)
[ 1.05745] [ 1.14759] [-0.78411] [ 2.56534]

D(EKS(-2)) 1.60E-07 0.282003 -0.181110 0.662450

(1.4E-07) (0.32630) (0.12070) (0.41569)
[ 1.17165] [ 0.86426] [-1.50052] [ 1.59361]

D(FDI(-1)) 9.85E-10 0.761889 -0.477385 0.360659

(2.5E-07) (0.59305) (0.21937) (0.75553)
[ 0.00398] [ 1.28470] [-2.17615] [ 0.47736]

D(FDI(-2)) -5.59E-07 -2.396182 -0.881551 -2.926271

(3.8E-07) (0.91231) (0.33747) (1.16226)
[-1.46647] [-2.62649] [-2.61224] [-2.51773]

D(IMP(-1)) -1.44E-07 -0.519559 0.187714 -0.978035

(1.2E-07) (0.29874) (0.11050) (0.38059)
[-1.15187] [-1.73917] [ 1.69869] [-2.56982]

D(IMP(-2)) -4.06E-08 -0.080581 0.228886 -0.101257

(1.1E-07) (0.26968) (0.09976) (0.34357)
[-0.36016] [-0.29880] [ 2.29442] [-0.29472]

C -0.197241 5331945 505349.1 2705081

(0.80104) (1917294) (709216) (2442584)
[-0.24623] [ 2.78097] [ 0.71255] [ 1.10747]

R-squared 0.289604 0.647061 0.598792 0.575448

Adj. R-squared 0.033861 0.520003 0.454357 0.422610
Sum sq. resids 422.5407 2.42E+15 3.31E+14 3.93E+15
S.E. equation 4.111159 9840032. 3639871. 12535950
F-statistic 1.132404 5.092645 4.145761 3.765070

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Table Cont…

Log likelihood -93.25426 -607.3435 -572.5356 -615.8185

Akaike AIC 5.900243 35.27677 33.28775 35.76106
Schwarz SC 6.344629 35.72116 33.73214 36.20544
Mean dependent 0.080000 4951543 606857.1 4566029
S.D. dependent 4.182583 14202910 4927560 16497665

Determinant resid covariance (dof adj.) 4.18E+41

Determinant resid covariance 1.09E+41
Log likelihood -1852.214
Akaike information criterion 108.3551
Schwarz criterion 110.3104

The estimation VECM express below :

= -0.277388 (ECT) +2.33E-07(Eks(-1)) – 4.87E-07(FDI(-1)) – 1.83E-07(Imp(-1))
- 0.140239D(PEK(-1)) – 0.220521D(PEK(-2)) – 1.48E-07D(EKS(-1)) + 1.6E-07D(EKS(-2)) + 9.85E-
10D(FDI(-1)) – 5.59E-07D(FDI)-2)) – 1.44E-07D(IMP(-1)) – 4.06E-08D(IMP(-2)) – 0.197241.

Based on the results in the table 4 and the equation, it is known that the dependent variable of
the equation is the variable of economic growth. It can be seen that the coefficient of ECT is -
0.277388. The statistical t test is 0.89756 is less than t value ( t table). Its mean that the specification
model was invalid.
In the long run only there was relationship between the foreign direct investment and
economic growth. This results in line with research conducted by Kobrin (1997). Foreign Direct
Investment have function as a medium for transferring needed resources, such as technology,
managerial skills, marketing knowledge, export outlets and capital from industrialized countries
to the developing countries. Therefore, FDI can increase economic growth. On the other hand,
Indonesia is a developing country where it still needs a lot of funding to build every effort to
improve the economy, road infrastructure, bridges, hospitals, public facilities, etc. Thus foreign
direct investment (FDI) is needed especially for developing countries, especially Indonesia.
Meanwhile, export and import have not significant effect to economy growth in Indonesia.
In the short run there were not relationship between export, import, foreign direct investment
with economic growth in Indonesia. This results has opposite with study by Brueckner's and
Lederman (2015) ; Astuti and Ayuningtyas (2018). The study found that in Sub-Saharan Africa
there was a positive and significant effect of exports on economic growth. Variables import has
not relationship with economic growth in Indonesia in the short run.

Conclusions
The purpose of this study is to analyze the relationship between exports, imports, and FDI
with economic growth in Indonesia in the period 1980-2017 both in the long term and in the short
term. Vector error correction model was employed to examines relationship between exports,
imports, foreign direct investment and economic growth. The results of this study has shown that
in the short term there was not relationship between export, imports, foreign direct investment
and economic growth in Indonesia. In the long run there was negative relationship between

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foreign direct investment with economic growth. Meanwhilde, the specification model was
invalid.

Based on the conclusions, there were suggestions belows:

1. Government must arrange the export and import activity to create economic growth every
time in Indonesian economic.
2. Government must allocate and distribute flow of foreign direct investment to increase
economic activity in every region in Indonesia.
3. Economic agent (producers) can focus to bring investment and international trade to stimulate
economic growth in Indonesia.

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