THE EFFECT OF FOREIGN INVESTMENT AND FOREIGN DEBT ON UNITED STATES ECONOMIC GROWTH

THE EFFECT OF FOREIGN INVESTMENT AND FOREIGN DEBT ON

UNITED STATES ECONOMIC GROWTH

Introduction

In macroeconomic analysis the level of economic growth achieved by a country is

measured by the development of real Gross National Product or real national income achieved

by a country. Economic growth is influenced by several factors which are economic

indicators or also called macroeconomic indicators.3. Of the several indicators that are often in

the spotlight in their influence on economic growth, among them are foreign investment (FDI)

and portfolio investment. The impact of foreign debt on economic growth is widely

questioned. Some experience and empirical evidence has also shown that a number of

countries utilizing foreign loans to carry out their development can succeed well in the sense

that the country can improve its level of development. However, there are also many countries

that have the opposite experience, namely economic conditions that experience a downturn,

so that they need assistance from donors to repay their debts. As with foreign debt, foreign

investment and portfolio investment are one of the sources of financing national economic

development and growth. Foreign investment, both direct investment and portfolio

investment, is directed to replace the role of foreign debt as a source of financing national

economic growth and development. The role of foreign investment is increasingly important

given the fact that United States foreign debt has increased significantly.

As a developing country, the influence of foreign investment has an important meaning

for economic growth in United States. Foreign investment is seen as more effective in

promoting economic growth. Foreign capital, especially foreign debt, is factually placed as

the main source of development financing, although normatively it should be placed as an

additional source. This fact has led to a hidden danger, which is inherent in the pattern of

foreign capital-driven development. The greater the position of dependency, the greater the

associated risks that must be faced by the global economic system in the form of dependence

on foreign capital, especially foreign debt4 .

Problem Formulation

Based on the background of the above problems, the problem formulation of this study

is how does foreign capital affect United States economic growth?

Theoretical Approach

There have been many empirical studies on the effect of foreign capital inflows on

economic growth in developing countries. The role of foreign capital in the economy or

economic growth is still being debated, both regarding its intensity and direction. According

to Michael F. Todaro5 there are two groups of views on foreign capital. First, groups that

support foreign capital, they view foreign capital as filling the gap between the supply of

savings, foreign exchange, government revenue, managerial skills, and to achieve growth

rates. Second, those who oppose foreign capital with its multi-national companies, argue that

foreign capital tends to reduce the level of domestic savings and investment.

Using data from 1970-1986, Sritua Arif and Adi Sasono6 found that the net flow of

foreign capital into United States, both in the form of foreign capital investment and foreign

debt, after taking into account the payment of debt installments, interest, and profits

transferred by foreigners abroad, showed a negative cumulative value, even this foreign

capital tends to have a crowding out effect on domestic savings. Similar results were also

presented by several studies by Weiskoft, Chenery, and Strout, Mudrajat Kuncoro, and

Bambang Kustianto which showed that foreign capital in the form of debt had a negative

effect on domestic savings in various developing countries including United States. In

addition, foreign capital flows can also have a negative effect on economic growth, although

it is statistically insignificant. These studies also found that domestic savings play a more

important role than foreign capital, both quantitatively and statistically in determining

economic growth.7 . In contrast to external debt, one of the resources of foreign capital,

namely foreign investment, has a positive impact on economic growth. The results show that

economic growth tends to have a positive effect on FDI growth. This means that if economic

growth increases, it will attract foreign investors to invest their capital in the form of foreign

investment, in other words, the value of foreign investment will increase if economic growth

in United States also increases or is high. This happens because at the time of the period

before the monetary crisis the investors view that the growth rate is not the main thing to

invest but after the economic crisis the investors pay more attention to the stability of

economic growth to be more convinced that the investment made will provide the level of

profit as expected. Only Earl's study shows that external debt increases domestic savings, but

this only happens in Latin American countries.

Time series analysis of several countries such as; Pakistan, China, Korea shows that

external debt has contributed to economic growth in both poor and rich countries. In addition,

Papanek and Dowling support the hypothesis that external debt contributes as much to

economic growth as domestic savings and private capital inflows, especially in some Asian

countries. The results of this study are consistent with Rana-Dowling's research for

developing countries during 1965-1982 using simultaneous equations. They concluded that

foreign capital flows contribute to economic growth, foreign direct investment contributes to

growth both through the formation of domestic savings and private capital as well as increased

investment efficiency, and external debt contributed more than foreign capital flows8 .

Investment, especially foreign investment, is still an important factor to drive and

encourage economic growth. The expectation of foreign investment in reality is still difficult

to realize. Factors that can affect investment that are taken into consideration by investors in

investing their capital, among others: First, natural resources, second, human resources, third,

political and economic stability, to ensure certainty in business, fourth, government policy,

fifth, ease of licensing.

One way to revive or restart the national economy as it was before the economic crisis is

the policy of inviting investment in United States. Investment, especially foreign investment,

to this day is an important factor to drive and encourage economic growth. The expectation of

foreign investment in reality is still difficult to realize. There are many factors that cause the

reluctance of investment to enter United States at this time. Factors that can support the flow

of investment into a country, such as security, political stability, and legal certainty, seem to

be a problem for United States. Even the regional autonomy that is now implemented in

United States is considered to be a new problem in investment activities in some regions.

With the enactment of Law No. 22/1999 in conjunction with Law No. 32/2004 on Regional

Government, United States entered a new era in the relationship between the Central

Government and Regional Governments. United States is entering the era of regional

autonomy. The new situation is very much taken into account by investors with regard to the

negative impacts caused. The entry of foreign companies in investment activities in United

States is intended as a complement to fill business and industrial sectors that cannot be fully

implemented by the national private sector, either for technological, management, or other

reasons capital. Foreign capital is also expected to directly or indirectly stimulate and

stimulate the climate or life of the business world, and can be utilized as an effort to penetrate

international marketing networks through their networks. Furthermore, foreign capital is

expected to directly accelerate United States economic development process.

In the economic literature, foreign investment can be done in the form of portfolio

investment and foreign direct investment (FDI). Portfolio investment is done through the

capital market with securities instruments such as stocks and bonds. Meanwhile, direct

investment, known as Foreign Direct Investment (FDI), is a form of investment by building,

totally buying or acquiring a company. Foreign and domestic investment in United States is

regulated by Law Number 25 of 2007 on Investment. In this Law, what is meant by Foreign

Investment is an investment activity to conduct business in the territory of the Republic of

United States carried out by foreign investors, either fully using foreign capital or in

partnership with domestic investors (Article 1 of Law Number 25 of 2007 concerning

Investment). Compared to portfolio investment, Foreign Direct Investment (FDI) has more

advantages including its permanent (long-term) nature, contributing to the transfer of

technology, transfer of management skills, opening up new jobs, where this employment is

very important for the country considering the limited ability of the Government to provide

employment opportunities. Whereas, in portfolio investment, funds go to the company issuing

the securities (issuer), and do not necessarily create new jobs. Even if there are issuers who

have obtained funds from the capital market to expand their business or open new businesses,

it does not necessarily mean that they have created jobs. Many of the funds that enter the

issuer are only to strengthen the capital structure or perhaps even to repay bank loans.

Foreign investment on development for developing countries can be broken down into

five (5). First, external sources of funds (foreign capital) can be utilized by developing

countries as a basis for accelerating investment and economic growth. Second, increased

economic growth needs to be followed by with shifts in the structure of production and trade.

Third, foreign capital can play an important role in mobilizing funds as well as structural

transformation. Fourth, the need for foreign capital declines as soon as structural change takes

place even though foreign capital is more productive in the future. Fifth, for developing

countries that are unable to start building heavy industries and strategic industries, foreign

capital will be very helpful to be able to set up steel factories, machine tools, electronics

factories, basic chemical industries, and so on. So far, domestic investors in developing

countries have been reluctant to undertake high-risk ventures such as exploiting untapped

natural resources and opening up new lands, so the presence of foreign investors will greatly

support pioneering businesses in these fields. The provision of state infrastructure, the

establishment of new industries, the utilization of new resources, the opening up of new areas,

will open up a new trend of increasing employment. Where the pressure of occupation on

agricultural land is reduced and unemployment can be overcome. This is the social benefit of

the presence of foreign investors. The transfer of technology results in local labor becoming

skilled, which will increase its marginal productivity, which in turn will increase the overall

real wage. All of this suggests that foreign capital tends to raise productivity levels,

performance and national income. Thus, the presence of FDI for developing countries is

necessary to accelerate economic development. Foreign capital helps in industrialization,

capital development and creates employment opportunities, as well as technical skills.

Through foreign capital, new areas are opened up and new sources are tapped. Risks and

losses at the start-up stage are also covered, and foreign capital encourages local

entrepreneurs to cooperate. Foreign capital also helps to reduce balance of payments problems

and inflation rates, thereby strengthening the host country's domestic public and private

sectors. Foreign investment in United States is inseparable from the ideals of United States

economic law, which is to initiate and prepare legal concepts about economic life. The

expected economic life is the economic life of the nation and state whose people have

prosperity in social justice, as aspired to Pancasila. And United States as a sovereign state at

the same time as a developing country has a certain pattern of legal concepts in economic

activities, including the concept of achieving a just and prosperous society based on Pancasila,

the concept of a Pancasilais family economy, the concept of a populist economy to defend

the interests of the people.

Therefore, the role of FDI in United States is quite supportive of the development of

economic life in accordance with the concept of law in economic activities and the ideals of

United States economic law. And to support investment in United States, the formation of

economic law with regulatory tools requires a comprehensive study and a macro approach

with accurate information for the sake of multidisciplinary from various aspects, among

others:

 Economic and social

 Sociological and cultural

 Basic needs and development

 Practical and operational and future needs

 Morals and business ethics that apply to the concept of appropriateness and decency in

human life and civilized humanity.

Theoretically, there are several theories that try to explain why investors from

developed to developing countries occur The Product Cycle Theory and The Industrial

Organization Theory of Vertical Organization. The Product Cyrcle Theory developed by

Raymond Vermon9 states that every technology or product evolves through three phases: The

first is the start-up or innovation phase, the second is the process development phase, and the

third is the standardization phase. In each of these phases as a type of economy the country

has a comparative advantage. The Industrial Organization Theory of Vertical Integration is

the most appropriate theory to apply to new multinationalism and vertically integrated

investment. The approach of this theory starts from the fact that the additional costs of doing

business abroad (by investment) must include other costs that must be borne more than the

costs intended just to export from domestic factories. Therefore the company must have some

compensation or firm-specific advantages such as managerial technical expertise economic

circumstances that allow for monopoly. According to this theory, investments are made

through vertical integration by locating several stages of production in different locations

around the world. The main motivation is to benefit from low production costs, local tax

benefits and so on. In addition, another motivation is to create trade barriers for other

companies, meaning that by investing abroad, these multinational companies have hindered

competition from other countries so that monopolies can be maintained. The main motive for

international capital, both foreign direct investment (FDI) and portfolio investment, is to

obtain higher returns than in one's own country through higher economic growth rates, more

favorable tax systems and better infrastructure.

To attract significant capital flows to a country is influenced by several factors: A

conducive investment climate and development prospects in the recipient country. Judging

from the two factors above, it seems that foreign capital flows more to developed countries

than to developing countries. Capital flows to developing countries are still influenced by the

following factors:

 Economic development level of the recipient country

 Adequate political stability

 Availability of facilities and infrastructure required by investors

 Capital flows tend to flow to countries with high per capita income levels.

The reluctance of foreign investment and indications of investment relocation to other

countries are due to the unfavorable investment climate in United States today. According to

Rahmadi Supanca, various factors are blamed for the unfavorable investment climate, namely:

 Political and security instability

 The number of cases of demonstrations/strikes in the labor sector

 Misunderstanding of the implementation of the Regional Autonomy Law and

incomplete and unclear guidelines regarding the procedures for implementing regional

autonomy.

 Lack of legal certainty

 Weak law enforcement

 Lack of Investment guarantee/protection

 Withdrawal of various incentives in the field of taxation

 The rampant practice of KKN

 United States bad image as a bankrupt country, on the verge of disintegration and the

ineffectiveness of the rule of law further undermines United States competitiveness in

attracting investors to conduct their activities in United States.

 Low quality of Human Resources.

In addition to the above disadvantage factors, the investment climate in United States

has become even less conducive due to political and social stability, security and law

enforcement in the country. The most common problem complained by investors is law

enforcement. Survey results from Political and Economic Risk Consultancy Ltd show that

United States has the worst legal score in Asia. United States is in the top position with the

absence of legal certainty making investors feel uncomfortable to invest their money in

United States. This is also often complained by many investors is the problem of licensing

and bureaucracy which is still considered long-winded and costly. However, this has begun to

improve and increase since the issuance of Law Number 25 of 2007 concerning Investment

replacing Law Number 1 of 1967 concerning Foreign Investment.

Institutional factors that attract investment in the region. This institutional factor

concerns services, local government policies and legal certainty. This conclusion is the result

of a rating conducted by KPPOD in 2002 to determine the investment attractiveness of

districts or cities. Overlapping regulations, long bureaucratic chains, illegal levies, are a big

burden for entrepreneurs. In terms of regulations issued by the local government, it is not

uncommon to overlap with regulations issued by the government above. Therefore, a region

with abundant natural potential may be unattractive to businesses or investors due to the

existence of various regulations overlapping policies. Therefore, the attraction factor for

investors comes from the economic potential of a region, but institutional factors must also be

addressed. The potential of natural resources in various regions in United States that are

available still requires investors to manage, therefore the efforts made are to attract many

investors to be interested in investing their capital and need to create a conducive investment

climate. In the implementation of investment in the regions, there are often obstacles

complained about by investors, namely the inefficiency of business licensing. Investors are

often burdened by complicated bureaucratic affairs that take a long time and are accompanied

by considerable additional costs, therefore the Government ultimately needs to issue a

Presidential Decree considering the many obstacles faced by investors related to the process

of obtaining business licenses for investment activities carried out in the regions. This

problem arose after the implementation of the regional autonomy policy, in which local

governments at the provincial, district and city levels were given authority in the field of

investment. Prior to the implementation of regional autonomy, the processing of business

licenses for investors was carried out by the Central Government (BPKM) and the provincial

government (BKPMD). The existence of Presidential Decree No. 29/2004 aims to guarantee

investors in investing in United States and also implement a one-stop service system that is

expected to accommodate the desire of the business world to obtain services that are more

efficient, easy, fast, and precise so that it is expected to attract and accelerate the entry of

investors to invest in United States.

The implementation of regional autonomy has created negative excesses for business

and investment activities. Many foreign investors have complained about illegal levies that

have no clear legal basis. Various local regulations that overlap with central regulations have

burdened the business world, in addition to corrupt practices that are almost prevalent in all

regions. With the new taxation system, provincial and district/city governments can use tax

instruments to increase the attractiveness of investors and productive workers. If a region

charges too high a tax rate, existing human resources and investors are likely to leave for

locations with lower tax rates. On the other hand, regions that have certain potential but have

not been properly exploited will tend to be provide intensive taxation and facilities to attract

investment flows and productive human resources. The implementation of regional autonomy

has led to a tendency for local governments to control the assets and resources in their regions

with the excuse of increasing local revenue (PAD). As a result, the issuance of local

regulations often overlaps, thus creating new problems for the business world, especially

investors who will do business in the regions. This means that with the implementation of

regional autonomy, the government has been considered to hamper investment because there

are still many additional costs and various local levies or retributions. There is still a struggle

for authority between the Central Government and Local Governments in terms of granting

investment licenses. Investors are still reluctant to deal with local governments.

Meanwhile, developing countries have the perspective that investment is a matter of

trade alone. Investment decisions include macroeconomic issues, social stability, and regional

development. Thus, it is difficult to accept that a policy that involves a wide range of issues is

subordinated to trade issues. For developing countries, negotiating in the field of investment

means serving the demands and will of developed countries. This shows that foreign investors

want reciprocal obligations between the investing country and the recipient country, standard

setting so that the company's activities are conducive, mutual respect for the policies issued

and the harmony of policies in the field of tax and other incentives between the recipient

country.

Broadly speaking, there are three main sources of foreign capital in a country that

adopts an open economic system, namely foreign loans (debt), Foreign Direct Investment

(FDI), and portfolio investment. Foreign loans are made by the Government bilaterally or

multilaterally, FDI is an investment made by foreign private sector into a country. The form

can be in the form of branches of multinational companies, subsidiaries of multinational

companies, licenses, Joint Ventures, while portfolio investment is an investment made

through the capital market. The benefits that can be expected from a foreign capital package

(FDI) are in the form of employment; transfer of labor; and the creation of new jobs

technology; managerial training and access to international markets through exports. Types of

investment can be divided into direct investment and portfolio investment. Direct overseas

investment is usually considered to be another form of capital transfer made by companies of

persons within a country in the economic activities of another country involving some form of

capital participation in the field of business in which they invest. Direct investment means that

the company from the investor's country de facto and de jure supervises the assets (assets)

invested in the capital saving country by means of investment. According to Nindyo Pramono

that direct investment investors control management, usually carried out by trans-national

companies and the time period is long because it involves goods. Direct investment capital is

more interested in the size and growth rate of the market, labor and production costs and

infrastructure. Whereas in portfolio investment, investors only provide financial capital and

are not involved in management. The investors are institutional investors, short-term in nature

and easily liquidated by selling the purchased shares.

From some of the views and definitions above, it can be seen that direct investment is

the direct involvement of investors in the investment they make, both in capital,

strengthening, and supervision. According to Sidik Jatmika, the benefits of direct investment

are that it does not bring burdens that must be paid in the form of interest, dividends and/or

repayments, can combine expertise, technology and capital, can overcome money transfer

problems, there is a replanting of investment profits that do not yet exist and can create

transfer of technology and skills.

Following the framework of the Harrod-Domar model in a closed economy (no foreign

sector) under full employment conditions, and without capital mobility, savings become very

important for economic growth, which mechanism is through the growth of investment

(saving-investment link). Therefore, investment can be said to be a function of savings I = f

(S). The higher the level of savings that can be created, the greater the country's ability to

invest. Furthermore, increased investment adds more capital and through the multiplier

process results in a higher rate of economic growth and an increase in per capita income. By

S/Y ratio remains unchanged, an increase in income increases people's ability to save, and so

on.

In an open economy, an increase in domestic savings does not necessarily lead to an

increase in investment, or in other words, domestic savings are not directly transferred to

investment. With high capital mobility (no barriers to capital inflows and outflows), savings

and investment are independent of each other. Even with fixed savings, domestic investment

can increase due to capital inflows from abroad.

However, existing empirical studies show a positive relationship between savings and

investment. This is based on several reasons. First, productivity increases and other shocks

have the same effect on desired savings and investment, even under conditions where capital

mobility between countries is perfect. Second, an increase in domestic savings will lead to an

increase in investment, especially in large countries. Third, capital controls protect domestic

tax resources and the balance of payments (BOP) thereby reducing the possibility of BOP

deficits. Lastly, the high transaction costs of buying securities and investments abroad, the

risk of exchange rate changes, and the limited information between countries about

investments prevent domestic savings from simply fleeing abroad for investment purposes.

 The relationship between GDP growth and savings rate is not only positive but also

significant. With technological progress and human capital accumulation, the growth of

savings through the investment effect will increase economic growth permanently.

According to Baldwin and Meier, there are several conditions that must be met in order

to realize development success:

 Indogenous factor (internal force) to develop. The community wants to raise its level of

living, external factors are only complementary to the community's desire to develop.

 Mobility of factors of production. Market imperfections will severely restrict the

movement of factors of production from productive uses to more productive uses. For

this reason, it is necessary to eliminate market imperfections.

 Capital accumulation. Economic development requires the formation of real capital. To

measure the amount of capital required for economic development, the rate of

population growth, the target increase in real income per capita, ICOR, and so on need

to be considered.

To increase the source of investment funds, the following can be done:

 Increase the savings rate by reducing the consumption rate, for example by raising

taxes.

 The government sells government bonds.

 Restrict imports of consumer goods, even imports of capital goods that are not really

needed.

 Keeping inflation at a reasonable level, especially in reducing the level of real

consumption.

 Moving disguised unemployment from agriculture to industry and services.

 Make foreign loans.

 Encourage exports by improving the terms of trade.

 Criteria or direction of investment in accordance with the needs. The general criterion

for investment is productivity for further development, i.e. high marginal social

productivity.

 Investment should be placed in a way that maximizes the ratio between output and

capital (lowest COR).

 The projects selected should provide a ratio that maximizes the use of labor to

investment (high labor productivity).

 Investment should reduce balance of foreign payments (BOP) difficulties between

exports and investment.

 Capital absorption. The ability to absorb capital is determined by two things, namely (1)

the existence or availability of complementary factors of production that work together

with capital, and (2) the conditions necessary to avoid inflation and to maintain the

balance of payments.

 Stability and existing values and institutions. Inversion patterns are the result of

political, cultural, religious, value and other considerations. Thus, non-economic

institutions for development as important as the economic conditions. Economic

development can accelerate when new needs, new motives, new methods of production,

as well as existing institutions in society are created. If there are non-economic

constraints on development, adjustments should be made to the level of development.

Today, economic competition is intensifying. Economic development is emphasized on

optimizing the ability of human thinking and technology which is used as the main

weapon.

The amount of savings available in a country is simply the sum of domestic savings and

foreign savings. Domestic savings are divided into two components: government savings and

private/public savings. Government savings mainly consist of budget savings derived from

the excess of government revenue over its consumption, where government consumption is

defined as all government expenditure in the form of money plus all capital outflows.

Government savings can be positive even if the overall government budget is in deficit

because of the budgetary expenditures including capital outflows that reflect the use of

government savings. Government policy measures have an important impact on the ability to

improve domestic savings. The government actively seeks to implement fiscal and monetary

policies to encourage savings growth by using suitable instruments to achieve this goal. It

appears that the Government's fiscal and monetary policies seem to be designed without

regard to their implications for domestic savings. In general, savings will respond positively

to developing countries and stagnate or even decline in developing and poor countries.

The sources of savings relied upon by each country differ, depending not only on

factors such as the level of per capita income, natural resource endowment and sectoral

composition of GDP, but also on the nature of the savings mobilization policies adopted by

each country. Government savings are almost entirely derived from surplus revenues overall

taxation of government consumption expenditure. Several studies have shown that there are

very few cases where government savings from state-owned enterprises (SOEs) have

contributed significantly to overall government savings. One of the basic tenets of

development strategy is that the expansion of investment needed to support economic growth

will not succeed without efforts to increase the share of government savings in GDP. In

general, private savings are driven by factors such as low per capita income and the high

consumption desires of the private sector, which has the greatest saving capacity.

Results And Discussion

The data used in this study are secondary data in the form of annual time series data

from 1981 to 2010. The data used includes economic growth data (GDB), foreign debt (AID),

domestic savings (s) and foreign investment data (FDI) from World Bank Data.

The basic model used in this study is the economic growth model developed by

Papanek.

 GDP = f (FDI, AID, S)

Description:

 GDP= Gross domestic product;

 FDI= Foreign direct investment;

 AID= External debt;

 S= Domestic savings.

The estimation method used in this study is Ordinary Least Square (OLS) multiple

regression, with the following model specifications:

GDPt = a0 + a1 FDIt + a2 AIDt + a3 St + et

An important concept in OLS is the stationarity assumption where all variables must be

non-stochastic. 2This assumption has consequences that will not change too much along with

the sampling time period and has a tendency to lead to the average value (mean) so that

ignoring the assumption of stationarity can cause the emergence of spurious regression which

is characterized by a high R value but a low Durbin Watson value. To avoid spurious

regression symptoms, this study will conduct cointegration testing. The cointegration test is a

test of the analysis model against the problem of spurious regression. So before using the

model, it must be believed that the time series data used have the same degree or order of

integration.

Cointegration testing in this study was carried out using the Cointegration Regression

Durbin Watson (CRDW) method and the Dickey-Fuller method (1981: 1057-1072) After

regressing the basic model, the Durbin Watson Statistic value can be known. This DW

number is used to determine the cointegrative nature of the model in question. If the analysis

model is not stationary, then the DW statistic will be close to zero, and reject the null

hypothesis of non-cointegration. Conversely, if the DW statistic is large, it will accept the

alternative hypothesis in the form of cointegrative properties found in the analysis model.

This CRDW test is a test model that uses order one. Multiple linear regression is used in this

analysis because it has the advantage of knowing statistically what variables affect the

dependent variable that has been applied.

The Dickey-Fuller (DF) method works at a higher order than CRDW, the test model

can be formulated as follows:

D(RESt ) = c - aRESt-1 + a1 D(RESt-1 ) +...+ an D(RESt-n ) + et

The null hypothesis and other decision-making bases used in this test are based on the

McKinnon statistic instead of the t-test.

For the regression analysis results, it is found that the variables of external debt (AID),

foreign investment (FDI), and domestic savings (S) have a significant relationship with the

economic growth variable at the 5 percent level.

The coefficient of the estimated variables of foreign debt and foreign investment gives a

positive sign, which means that the variables of foreign debt and foreign investment have a

positive effect on economic growth variables. While the estimation results of the domestic

savings variable give a positive sign, which indicates a positive relationship between the

domestic savings variable and economic growth.

Foreign debt has a positive and significant effect on United States economic growth, if

foreign debt increases it will encourage higher GDP. The results of this study are also no

different from previous studies which state that foreign debt has a positive influence on

United States economic growth. Similarly, FDI has a positive and significant effect on GDP.

If GDP is getting bigger, it will encourage the creation of FDI. One of the motives of

investors or multinational companies to invest is to get a high return in a country with a high

economic growth rate.

The foreign debt regression coefficient of 0.655 indicates that if there is a 1 percent

increase in foreign debt with the assumption that other variables remain constant, economic

growth will experience a relative change of 0.655 percent. This shows that foreign debt has a

positive influence on United States economic growth. While the regression coefficient of

foreign investment has a coefficient of 1.542 indicating that if there is an increase in FDI by 1

percent, it will cause an increase in economic growth by 1.541 percent. This shows that

foreign investment has a positive influence on economic growth. Then the coefficient value of

the domestic savings variable of 0.366 indicates that if there is an increase in domestic

savings by 1 percent, it will cause an increase in economic growth by 0.366. This shows that

domestic savings have a positive influence on economic growth. The F-test shows that the F-

count value (6.115) is greater than the F-table of 3.29, which means that simultaneously the

variables of external debt, foreign investment, and domestic savings are significant to

economic growth.

The coefficient of determination (Adjusted R2 ) is used to see how many percent of the

variation in the dependent variable (Economic Growth) is explained by variations in the

independent variables (foreign debt, foreign investment and domestic savings). The

coefficient of determination of 0.574 means that the variable value of foreign debt, foreign

investment and domestic savings in explaining the variation in economic growth variables is

57.4 percent and the remaining 42.6 percent is explained by other factors not examined. A

large Adjusted R2 value will make the regression model more precise in predicting United

States economic growth.

With a Gross Domestic Product (GDP) of nearly USD550 billion in 2009, United States

is the third fastest growing economy in Asia and the largest economy in all of Southeast Asia.

Unaffected by the global financial crisis as much as its neighbors, United States economic

growth reached 4.5 percent in 2009, and 5.6 percent in 2010. This figure is expected to

increase to 6 percent in 2011, so that United States is often compared to the BRIC countries

(Brazil, Russia, India and China). According to a report by Standard Chartered, United States

future economic growth is expected to be higher than that of the BRIC countriesinclusive,

given that nominal GDP per capita is expected to quadruple by 2020. Much of United States

economic success is due to sound fiscal management, and in January 2010, rating agency

Fitch Ratings upgraded United States credit rating to BB+ with a stable outlook. This credit

rating upgrade is in line with United States strong and sustainable economic growth, as well

as its improving fiscal position. This indicates increased confidence to invest in United States,

as it places United States only one notch below investment grade. With this rating change,

United States is more likely to attract large amounts of investment and capital flows, and can

attract funds that have so far only been invested in countries that have an "investment grade"

rating. Given its strong economy, stable political situation and ongoing reform efforts, United

States is a major emerging power in Asia.

Conclusion

The role of foreign investment on development for developing countries can be broken

down into five, namely: First, external sources of funds (foreign capital) can be utilized by

developing countries as a basis for accelerating investment and economic growth. Second,

increased economic growth needs to be followed by a shift in the structure of production and

trade. Third, foreign capital can play an important role in mobilizing funds and structural

transformation. Fourth, the need for foreign capital declines as soon as structural change takes

place even though foreign capital is more productive in the future. Fifth, for developing

countries that are unable to start building heavy industries and strategic industries, the

presence of foreign capital will be very helpful to be able to establish steel factories, machine

tools, electronic factories, basic chemical industries, and so on. The role of FDI in United

States is quite supportive of the development of economic life in accordance with the legal

concept of economic activity and the ideals of United States economic law.

To increase the contribution of external debt, domestic savings and foreign investment

to United States economic growth is as follows:

 Efforts to attract foreign investment to United States need to be increased. The ease of

licensing factor, in order to increase investment in United States, the licensing factor

needs to be considered, including efforts to facilitate the provision of investment

licensing services by increasing the number of service centers for granting investment

approval or licensing by delegating authority from the State Minister of Investment or

the Head of the Investment Coordinating Board to the Regional Governor. In addition,

foreign investment has the potential to make a real contribution to economic growth

not only through technology transfer and improved management tightening, for

example by developing the quality and productivity of human resources, supporting

the technology applied, so that the technology transfer plan can be implemented

properly.

 In order to optimize the allocation of foreign aid, it is necessary to consider the

reorientation of projects financed with foreign debt and the role of supervision by both

the authorized institutions through their representatives needs to be improved.

 To reduce the country's dependence on foreign sources of development financing, it is

necessary to mobilize funds from within the country so that efforts are needed to

intensify domestic savings through:

o Promotion of taxation (wealth and luxury goods) that is progressive and based

on ability to pay.

o The need to mature the functions of banking and non-bank financial

institutions in order to create a conducive climate for investment development.