Uneven Gains from Globalization: How FDI Boosts Growth Amid Trade and Labor Market Challenges in Indonesia and Thailand

Utama Ahmed Dima; Mutmainah; Muhammad Meidy Nur Hafidz; Haifa Lestari

doi:10.63922/ijebir.v4i04.1966

Utama Ahmed Dima Universitas Lambung Mangkurat, Banjarmasin
Mutmainah Universitas Lambung Mangkurat, Banjarmasin
Muhammad Meidy Nur Hafidz Universitas Lambung Mangkurat, Banjarmasin
Haifa Lestari Universitas Lambung Mangkurat, Banjarmasin

DOI: https://doi.org/10.63922/ijebir.v4i04.1966

Keywords: Foreign Direct Investment, Economic Growth, Indonesia, Thailand, VECM

Abstract

This study investigates the long-run impact of Foreign Direct Investment (FDI) on economic growth in Indonesia and Thailand between 1996 and 2023, utilizing a Vector Error Correction Model (VECM) framework. The results confirm that FDI plays a substantial and positive role in promoting economic growth in both countries, consistent with endogenous growth theories emphasizing capital accumulation, technology transfer, and productivity enhancement. In Indonesia, FDI is found to significantly support economic expansion over the long term. However, trade openness and labor force participation have an adverse effect on growth, which may reflect structural challenges such as reliance on low-value-added exports and inefficiencies in labor market absorption. In Thailand, FDI also contributes positively to economic performance, although the effect is comparatively more modest. Unlike Indonesia, trade openness in Thailand is associated with stronger growth, suggesting effective integration into global markets and improved competitiveness. Yet, the labor force variable shows a negative relationship with growth, indicating possible mismatches in labor supply and demand or underutilization of the workforce. These findings highlight the importance of structural reforms—particularly in trade policy and labor market efficiency—to ensure that the benefits of FDI are fully realized. Future studies are encouraged to incorporate additional factors such as institutional quality and financial development to enrich the understanding of growth mechanisms in emerging economies.

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