The Analysis of Causality Between Foreign Direct Investment (FDI) and Economic Growth In Indonesia For The Period of 1974-2001

Abstract

Indonesia as less developed country (LDC) still needs much investment to stimulate the economic growth.Because of the investment from domestic was limited,then,the presenceofforeign investment was needed.It was proved that in the beginning of developed countries' development,the presence of foreign investment had positiveinfluenceto the economicgrowth. The objective ofthis research is to know what the relationship betweenthe foreign direct investment and the economic growth in Indonesia.Is there bidirectional causality or unidirectional causality between FDI and the economic growth? To answer this question,writer was applying the Granger causality test combined with the Final Prediction Error by Hsio.The data used in this research were foreign direct investment and economic growth taken from International Financial Statistics and Bank Indonesia for the period of 1974-2001. The result was that there was unidirectional causality from FDI to the economic growth.It means that only FDI causes the economic growth,on the other hand,the economic growth not causes FDI.From the result can be concluded that the presence of FDI in Indonesia had positive influence to the economic growth.