The Role of Trade Liberalisation and FDI in the Structural Transformation of Indonesia's Industrial Sector
DOI:
https://doi.org/10.57125/FEL.2024.09.25.11Keywords:
structural transformation, industrial sector, trade openness, FDIAbstract
The Indonesian government is formulating policies aimed at promoting trade openness and attracting foreign direct investment (FDI). This study investigated the relationship between trade openness and foreign direct investment (FDI) and their effects on the structural transformation of the industrial sector over the period from 1991 to 2021. The analysis was grounded in empirical data sourced from reputable databases, including the World Development Indicators (WDI), the World Integrated Trade Solutions (WITS), and the National Single Window for Investment (NSWi) administered by the Indonesian Investment Coordinating Board (BKPM). Through this examination, the aim was to elucidate the mechanisms by which these economic variables contributed to changes within the industrial structure, thereby providing insights into the broader implications for economic growth and development. The study employed the Autoregressive Distributed Lag (ARDL) Bounds testing approach to cointegration in order to investigate the long-run and short-run effects of trade openness and FDI on the industrial sector in Indonesia. The measurement of the trade openness encompasses exports, imports, and trade barriers like tariffs. Factors such as per capita income, labour productivity, and information and communication technology (ICT) also drove structural transformation. The findings of this research indicated that exports had a positive and significant impact on structural transformation in the Indonesian industry due to the access to foreign markets and expanding market share. In contrast, the effect of imports could have been more significant, meaning that the presence of imported goods could erode domestic industries because they were less competitive regarding technology and productivity. Meanwhile, the tariff reductions had a significantly negative impact on the value-added of the industry, meaning that the tariff reduction policies hindered domestic industries and caused the Indonesian market to be flooded with imported products. Furthermore, FDI positively impacted the proportion of labour but was not significant for value-added, indicating that the high-productivity foreign capital was needed to increase the value-added of the industrial sector. Moreover, the per capita income was significantly and positively associated with structural transformation, while labour productivity and ICT are significantly and negatively associated. This model could help the Indonesian government formulate practical trade openness and FDI policies to promote industrialization
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