THE LOCATION DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN INDONESIA: DOES REGIONAL CHARACTERISTICS AND INDUSTRY AGGLOMERATION MATTER?

Abstract

The important role of FDI in the economy has been widely discussed and it is not surprising that most countries including the ASEAN region such as Indonesia compete in attracting FDI. This has resulted in unequal distribution of FDI location across the country and in the provinces within countries. This study investigates the location determinants of FDI flow within Indonesia provinces using the regional data set from 2003 to 2014, in order to address two objectives (1) To investigate the FDI location pattern among the different provinces and across sectors in Indonesia, and (2) To examine the determinants of FDI location choice across the economic sector. The results show that FDI from Japan to Indonesia by sector has flowed to manufacturing (63.5%), services (34%), and primary sector (2.5%) and mainly invested in the Java island such as West Java, Jakarta, East Java, and Banten. The estimation results generally support the existing literature that agglomeration was among the most important determinants of the regional distribution of FDI in Indonesia. The province market size, wages, and infrastructure were also important considerations for Japanese FDI. However, evidence regarding of quality of labor was less consistent as a determinant of FDI flows.
Keywords: FDI; Location choice; Industry Agglomeration; Regional Characteristics, Indonesian provinces