Foreign direct investments into 33 Indonesian provinces: is the rupiah a boon or a bane

Abstract

The degree to which exchange rate movements and fluctuations affect foreign direct investment (FDI) inflows is a subject of policy importance for several emerging markets and developing economies like Indonesia. In particular, considering the heavily skewed nature of FDI inflows into Indonesia, it becomes important to understand the determinants of FDI to its provinces. Given the context, we undertake an empirical analysis to study the impact of real effective exchange rate (REER), both in terms of levels and volatility, on FDI inflows to Indonesian provinces. Using a panel dataset featuring data on 33 Indonesian provinces for 2000 to 2014, our panel estimation results strongly suggest that an appreciation of REER as well as greater volatility of REER deters FDI inflows to Indonesia's provinces. Our findings are suggestive that the nature of FDI inflows to Indonesia is export-oriented. Our results remain consistent and robust to different model specifications.