Abstract
As the fourth populated country in the world, Indonesia’s automobile production is the seventhrank among automobile producer developing countries. With the production capacity of more than2 million units, the industry only produces less than 60% of its capacity. To increase the productionperformance, the role of Foreign Direct Investment (FDI) is essential. However, previous empiricalstudies do not explain the nexus between FDI and the development of the Indonesian automobileindustry. Based on the Ordinary Least Square (OLS) regression analysis, FDI inward stock,domestic sales, imported components, and exchange rate are significant determinants factors inautomobile production. The domestic demand is the primary pillar of automobile production.Since the domestic market seems to be saturated, the export market can be an alternative toincrease automobile production. Unfortunately, the competitiveness of Indonesia’s automobile isstill weak and need to be improved because the Indonesian automobile industry still producesEuro2 automobile products and depends highly on raw material import for upstream industries.Therefore, transfer technology through FDI mechanism is required to develop Indonesia’sautomobile competitiveness. This paper suggests that FDI should be used focusing on Euro4standard upgrade and local upstream industries development.
Highlights
The largest transportation industry in the world is the automobile industry, with more than one billion units used globally
As the primary predictor variable, this paper investigates the nexus between Foreign Direct Investment (FDI) and automobile production
With the production capacity of more than 2 million units, the industry only produces less than 60% of its capacity
Summary
The largest transportation industry in the world is the automobile industry, with more than one billion units used globally. The automobile industry is one of the gates for innovation, technology transfer, infrastructure improvement, socio-culture shifting, and global market expansion which boost a nation's economy as the primary goal. 100,000 industry utilizes high capital investment, absorbs significant employment, improve technology capability, and opens opportunities to develop related industries. Many developing countries eagerly promote their automobile industry through policies series (Jan & Hsiao, 2004). The automobile industry still positive growth globally for the past 15 years (Figure 1)
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