DYNAMICS OF THE RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN CENTRAL JAVA PROVINCE

Abstract

Foreign Direct Investment (FDI) and Economic Growth are two important indicators in regional economic development. Several previous studies have shown that there is a two-way relationship between FDI and Economic Growth, where FDI acts as a source of capital formation and technology transfer that drives economic output, while economic growth reflects market attractiveness for investors. Therefore, this study aims to: 1) identify the causal relationship between FDI and economic growth using the Granger Causality Test; 2) analyze the determinants of FDI and Economic Growth in Central Java in 2020-2024 using the Fixed Effect Model panel data analysis method. The results show a one-way causal relationship from FDI to Economic Growth. In addition, from the Fixed Effect Model panel estimation, it was found that an increase in FDI, Labor and Population can increase economic growth in Central Java. Thus, government policies related to investment should not only focus on increasing the quantity of FDI, but also on the quality of FDI that can drive Economic Growth more optimally and sustainably.