Analysis Determinant Factors of Foreign Direct Investment in Indonesia

Abstract

Foreign direct investment (FDI) cannot be separated from economic growth, especially in developing countries to build the country's economy. Problem that many developing countries face is the need for substantial funds for development capital, while state revenues are too low. Therefore, foreign capital is needed to accelerate the economic development of a country.  The purpose of this research is to analyze variables that affect the inflow of FDI in Indonesia, in this case, macroeconomic variables which include Gross Domestic Product (GDP), exchange rates, inflation, and exports. The method of analysis uses the Vector Error Correction Model (VECM), with secondary data, 2005-2019, quarterly. The results show 85.65% of the factors that determine the inflow of FDI in Indonesia can be explained by variables of macroeconomics. These influences are: a. Simultaneously, all macroeconomic variables have a significant effect on FDI; b. Partially, in the short-term, GDP and inflation didn’t have a significant effect; exchange rate have a negative significant effect; export negatively significant effect; c. Partially, in the long-term exchange rates didn’t have a significant effect, GDP and inflation have a positive significant effect, export has a negative significant effect; d. The causality test shows that only exchange rate has a causality with FDI, the causality between FDI and exchange rate is unidirectional. The study implies that even though the exchange rate has a negative, significant, and causal effect on FDI, the stability of the rupiah’s exchange rate must still be maintained because the interest of domestic economic actors must be prioritized.

Keywords: FDI; Macro-economic; GDP; VECM.