UNDERSTANDING THE DETERMINANTS OF FDI IN INDONESIA THROUGH EXTENSIVE DUNNING AND GRAVITY APPROACH

Abstract

The potential impulse (s) and response (s) of Foreign Direct Investment (FDI) in economy system have been always bring great interest to researchers and practitioners. This paper considers movements of Foreign Direct Investment (FDI) in Indonesia, and therefore, to investigate and understand the determinants of FDI as the primary capital flows among other capitals sources. FDI flow’s is very important to help encourage the growth of sustainable investment, creates new job opportunities, deteriorate the balance payments and lower the ability of national competitiveness, and may crowd out domestic capital. This paper has several specific objectives, such as: 1) to study about the determinants of capital inflows of FDI in Indonesia, and 2) to examine the impacts to investments of ASEAN countries towards FDI in Indonesia.

This paper eventually follows maximum likelihood methodology of Dunning and Gravity Model with the panel estimation and OLS (Ordinary Least Square). The analysis also carried out through an extensive review of the relevant literature, microeconomic, and macroeconomic topics related to FDI.In conclusion, this paper assume that economy growth, labor costs, infrastructures, exchange rates, and political stability has significant structural changes in level, respectively, within the time interval from 1992 to 2012.

Keywords: Dunning Model, Economy Growth, FDI, Gravity Model, Investment