FDI from Japan in Indonesia on General Machinery, Electrical Machinery,and Transportation and Equipment Manufacturing: An Econometrics Analysis Approach

Abstract

Foreign Direct Investment (FDI) is an important factor in the economic development of developing countries, since it plays important roles in the transfer of technology knowledge, employment, and human resources development, and in turn the investors can receive significant revenues from the lower production costs. Many studies of FDI have examined these FDI-related transfers from developed to developing countries, and even between developed ones. This study mainly focuses on Outward Foreign Direct Investment (OFDI) from Japan and the explanatory variables which affect it. Since the author’s home country is Indonesia, this work aims to explore OFDI from Japan in Indonesia, and its correlation with the real exchange rate volatility of Indonesian rupiah against American dollars, Japanese yen and the average labor wage, as well as to present brief explanation of Indonesia’s economic policy. The research methodology is split into two major parts. The first stage calculates the real exchange rate volatility for which the mathematical formula is taken from Kiyota and Urata (2004). Afterwards, in order to find the correlation between the three of affecting variables and FDI from Japan manufacturing firms invested in Indonesia, both of the variables are analyzed using a multiple regressions with OLS (Ordinary Least Square) method. This work is a form of empirical research with secondary data source, or quantitative study since the raw data are obtained from several open source statistical time series of data. Last but not the least, the author hoped that this study can enrich the literature on FDI and have valuable contributions to the work of both scholars and practitioners, particularly to the development of the future research from the framework of this study.