Examining the Effect of Trade Openness, Foreign Direct Investment and Corruption on Economic Growth: An Evidence from Indonesia

Abstract

Numerous pieces of literature have been analyzing the determinants of a country's economic growth, but limited studies have tried to combine the positive sides of Trade Openness (TO) and Foreign Direct Investment (FDI) with the negative side of corruption and its effect on Indonesia's economic growth both in the short and long term. Likewise, no studies have tried to analyze the effect of corruption on economic growth through FDI as moderation in Indonesia. Using data for 1995-2019 with Autoregressive Distributed Lag (ARDL) and path analysis methods, this study found that TO negatively affected economic growth in the short and long term. FDI has proven to increase economic growth in the short term but has no long-term effect. Then, similar to TO, corruption is contradicted by the theory that a high level of corruption tends to increase economic growth both in the short and long term. Also, this study proves that FDI cannot moderate the effect of corruption on economic growth. Considering TO and corruption that is found not to be in line with theory, this study suggests the government can focus more their policies on the productive side rather than the consumptive side of TO to increase technological development and improve the quality of the utilization of both natural and human resources, as well as intervene in all market behavior that has the potential to distort healthy economic competition and closing opportunities for corruptors to impede the effectiveness of implementing government policies.