Foreign direct investment, economic growth, and unemployment in Indonesia: A VECM-based analysis with implications for sustainable development

Abstract

Purpose. To analyze the dynamic short-run and long-run relationships between foreign direct investment (FDI), economic growth, and unemployment in Indonesia. Methodology. The study uses a Vector Error Correction Model (VECM) on annual time-series data from 2000 to 2024, using Augmented Dickey-Fuller stationarity tests, Johansen cointegration, Granger causality, and variance decomposition. Results. Findings reveal a stable long-run equilibrium among the variables. However, short-run dynamics show no significant causal impact of FDI on economic growth or unemployment. Instead, unidirectional causality runs from economic growth to FDI, indicating that domestic market expansion drives foreign investment more than FDI drives immediate job creation. Theoretical contribution. This research enriches endogenous growth theory and Okun's Law by showing that, in developing economies, the transmission mechanism from FDI to the real sector is structurally delayed and depends on domestic absorptive capacity. Practical implications. Policymakers should prioritize reorienting FDI toward labor-intensive sectors, enhancing human capital, and implementing labor market reforms to ensure foreign investment translates into inclusive, sustainable job creation aligned with SDGs 8 and 9. Sustainable Development Goals (SDGs): SDG 8: Decent Work and Economic Growth; SDG 9: Industry, Innovation and Infrastructure; SDG 10: Reduced Inequalities