Analysis of Factors Affecting the Entry of Foreign Direct Investment into Indonesia (Case Study of Three Industrial Sectors in Indonesia)

TL;DR

This study analyzes key factors influencing FDI entry into Indonesian industries in 2022, highlighting the roles of HDI and industry-specific factors, with implications for strategic investment decisions amid pandemic impacts.

Contribution

It identifies the differential effects of HDI and other factors on FDI across three Indonesian industries using empirical analysis.

Findings

HDI positively affects FDI in the Basic Metal industry.

HDI negatively affects FDI in the Mining industry.

Electricity factor does not influence FDI in the studied industries.

Abstract

The realization of FDI and DDI from January to December 2022 reached Rp1,207.2 trillion. The largest FDI investment realization by sector was led by the Basic Metal, Metal Goods, Non-Machinery, and Equipment Industry sector, followed by the Mining sector and the Electricity, Gas, and Water sector. The uneven amount of FDI investment realization in each industry and the impact of the COVID-19 pandemic in Indonesia are the main issues addressed in this study. This study aims to identify the factors that influence the entry of FDI into industries in Indonesia and measure the extent of these factors' influence on the entry of FDI. In this study, classical assumption tests and hypothesis tests are conducted to investigate whether the research model is robust enough to provide strategic options nationally. Moreover, this study uses the ordinary least squares (OLS) method. The results show that the electricity factor does not influence FDI inflows in the three industries. The Human Development Index (HDI) factor has a significant negative effect on FDI in the Mining Industry and a significant positive effect on FDI in the Basic Metal, Metal Goods, Non-Machinery, and Equipment Industries. However, HDI does not influence FDI in the Electricity, Gas, and Water Industries in Indonesia.