FDI and economic growth in Indonesia: a provincial and sectoral analysis

Abstract

Foreign direct investment (FDI) plays an essential role in growing the economy, where this role runs through two things, namely capital accumulation and technology transfer. However, in the literature, previous research findings are still inconclusive to show positive contributions of FDI on economic growth. Furthermore, while the impact of FDI on economic growth has been studied using sectoral data, there has been less research done using data at the provincial and sectoral levels. This study aims to analyze the impact of foreign direct investment (FDI) on economic growth employing sectoral data at the provincial level (33 provinces) in Indonesia over 2010–2019. Based on the fixed effects estimator, our estimation results prove that, in general, FDI significantly positively impacts economic growth in the Indonesian provinces. We also find that FDI in the mining, manufacturing, water, gas and electricity, hotels and restaurants, and real estate sectors has a significant positive effect on economic growth. Meanwhile, only FDI in the agricultural sector has a significant negative impact. Our estimation results confirm that FDI in the manufacturing sector contributes positively and has a considerable impact. The results are robust to the GMM System estimator, which considers the endogeneity problem.