The Nexus of Selected Macroeconomic Variables toward Foreign Direct Investment: Evidence from Indonesia

Noris Fatilla Ismail,Suraya Ismail Suraya Ismail

doi:10.37231/jmtp.2021.2.4.184

Abstract

Foreign direct investment (FDI) inflows are a major instrument of economic growth in developing countries. Indonesia is one of the developing countries that has received more FDI with macroeconomic stability. The macroeconomic stability indicator is seen as an important factor in driving economic growth and attracting FDI inflows in Indonesia. Therefore, this study examines the relationship of selected macroeconomic variables toward the FDI in Indonesia over the period 1980-2019. Using Autoregressive Distributed Lag (ARDL), the empirical results showed that market size, domestic investment, government spending and foreign exchange rate are key factors influencing long-run FDI inflows. However, financial development revealed no relationship with FDI inflows in Indonesia. Overall findings indicated that macroeconomic variables influence FDI inflows. These findings guided policymakers in formulating new policies to ensure macroeconomic indicators' stability in driving economic growth.

Highlights

In the past few decades, Foreign Direct Investment (FDI) has seen a remarkable increase in world production and trade (UNCTAD, 2018)
This study focuses on the impact of selected macroeconomic variables on FDI in Indonesia from the year 1980 until 2019
The stability of macroeconomic indicators is a mechanism that can affect the inflow of FDI into a country

Summary

Introduction

In the past few decades, Foreign Direct Investment (FDI) has seen a remarkable increase in world production and trade (UNCTAD, 2018). The increase in foreign capital is one of the important aspects of globalisation In this flow, FDI provides an advantage to the country of origin and host. FDI has a positive impact on economic growth while bringing new capital, technology, knowledge, and management skills to the host country. From this aspect, FDI contributes to an increase in the level of employment in the host country as well as the reduction of production costs through lower labour costs. FDI contributes to an increase in the level of employment in the host country as well as the reduction of production costs through lower labour costs This stability contributes to the attraction of greater FDI volumes

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Methods

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Conclusion