SUMMARY

FACTORS AFFECTING FOREIGN DIRECT INVESTMENT IN INDONESIA

Submitted by Lintang Widayanto 10/310111/PEK/15283

MASTER OF MANAGEMENT STUDY PROGRAM FACULTY OF ECONOMICS AND BUSINESS UNIVERSITAS GADJAH MADA JAKARTA 2012

SUMMARY

FACTORS AFFECTING FOREIGN DIRECT INVESTMENT IN INDONESIA

. Submitted by: Lintang Widayanto 10/310111/PEK/15283 .

Approved by: Thesis Supervisor

Prof. Marwan Asri, MBA., Ph.D.

TABLE OF CONTENT

SUMMARY..............................................................................................................I SUMMARY............................................................................................................II TABLE OF CONTENT.........................................................................................III ABSTRACT ...........................................................................................................4 I. INTRODUCTION................................................................................................5 II. LITERATURE REVIEW....................................................................................6 III. RESEARCH METHOD.....................................................................................8 IV. RESEARCH RESULTS AND DISCUSSION..................................................8 V. CONCLUSION, SUGGESTIONS AND REFERENCES..................................9

ABSTRACT Foreign Direct Investment (FDI) is an alternative source of funding for the development of developing countries such as Indonesia which does not have enough funds from the domestic. This study aimed to determine the relationship between Gross Domestic Product (GDP), exchange rate of rupiah per U.S. dollar (Rp/US$), and inflation towards FDI. The data used in this study is secondary data in 1990-2011 timeframe. Data was taken from the database of the United Nations Conference on Trade and Development (UNCTAD), Economic and Financial Statistics Indonesia (SEKI), and the Central Statistics Agency (BPS). The method used is multiple linear regression models with the help of software PASW Statistics 18. The results of this study are GDP and inflation has a positive relationship with the FDI, while the exchange rate of Rp/US$ has a negative relationship. From this research it is also known that GDP and exchange rate Rp/US$ have a significant relationship with the FDI with = 5%, while the rate of Rp/US$ will affect FDI significantly with = 10%. Key Words: FDI, GDP, exchange rate of Rp/US$, inflation

I. INTRODUCTION 1.1. Background National development can proceed smoothly if there is sufficient funding. According to Panayotou (as quoted from Sarwedi, 2002) the greatest potential source of funding for developing countries is Foreign Direct Investment (FDI). FDI is judged to be the most important source of financing than others because in addition to bringing funds, FDI also carries the transfer of technology, know-how, and management skills. According to Tambunan (2007), FDI has a relatively small business risk and is more profitable because the FDI could lead to a multiplier effect as an increase in gross domestic product (GDP). The results of Parjiono (2007) concluded that the FDI has a two-way relationship with GDP growth, so that GDP could also affect the FDI. The higher a country's GDP, the higher the countrys purchasing power will be. The source of the FDI is a multinational company. In evaluating proposed investment policy, multinational companies usually use a method of Net Present Value (NPV) which is calculated based on the perspective of parent's company (Shapiro, 2010). The calculation of this point of view is influenced by the exchange rate of Rp against currencies that are used by the company. In this study, the foreign currency used as a benchmark currency is American dollar (US$) for US$ is the world currency. In addition to the above two factors, inflation also affect FDI. The tendency of rising prices encourage both domestic and foreign investors to release the money, funds, or capital to be exchanged into productive assets or in other words inflation prompts investors to invest. 1.2. Research Objectives Based on the background, the research objectives are: 1. To determine the relationship of GDP with FDI in Indonesia.

2. To determine the relationship of the exchange rate of Rp/US$ with FDI in Indonesia. 3. To determine the relationship of inflation with FDI in Indonesia. II. LITERATURE REVIEW 2.1. Foreign Direct Investment Krugman (as quoted in Sianturi, 2010) defines FDI as an international capital flow out of a country where companies establish or expand their company in another country. The purpose of multinational companies investing in other countries (Shapiro, 2010) among others is to reduce production costs, achieve economies of scale, acquire multiple sourcing, finding resources, and keep customers. 2.2. Influence of GDP towards FDI One of the parameters to measure the national income of a country is to look at the country's GDP. GDP is the result of multiplying the price of the goods produced by the number of goods produced in the same period. Sukirno (as quoted in Mudara, 2011) found that the increase in national income indicate an increase in income, which will increase the demand for goods and services. It is making profits to highly grow so that it will encourage the growth of investment 2.3. Influence of Exchange Rate Rp/US$ towards FDI When a company already has a list of candidates for the investment, the company will choose the investments that will maximize the company's value in the eyes of stakeholders. This selection process uses certain criteria that help a manager to decide whether to accept or reject a project. One criterion that is often used is NPV method (Shapiro, 2010). NPV method is a method to rank investment proposals using the NPV is equal to the present value of future cash flow discounted by the cost of capital (Brigham and Houston, 2007). For multinational companies who have exposure to currency exchange rates, investment evaluation process by the method of NPV is calculated from several points of view, one of which is from the point of view of the parent's

company (Shapiro, 2010). The calculation of this point of view is influenced by the exchange rate of Rp against currencies that are used by the company. The stronger the Rp exchange rate against foreign currencies, the NPV of the investment appraisal will be better. Likewise, the weaker the exchange rate of Rp against foreign currencies, the assessment of the financial aspects of an investment will deteriorate. Therefore, the Rp exchange rate against foreign currencies affects the magnitude of FDI to Indonesia. In this study the foreign currency which is used as a benchmark is the US$ because the US$ is the world currency. Based on the theories that explain the relationship between the exchange rate of Rp/US$ with FDI, the second hypothesis that can be taken in this research is the exchange rate of Rp/US$ has an opposite relationship with FDI. 2.4. Influence of Inflation towards FDI Mustakini (2010) defines investment as a delay in current consumption to put into earning assets during a certain time period. After a period of time is finished, investors expect to increase their consumption. Investment in productive assets can improve the position of investor indifference curve. Baye (2010) found that the further the position of the indifference curve from the original, the higher a person's satisfaction level will be. A productive asset could provide more value if the value at the present time is higher than the value in the past (when investing) or in other words if the productive asset goes through inflation. Inflation is the increase in prices of goods and services in general where goods and services are basic needs. Inflation occurs because the value of the currency decreases due to the amount of money circulating in the community grows without being followed by increments of goods and services. The tendency of rising prices encourage both domestic and foreign investors to release the money, funds, or capital to be exchanged into productive assets or in other words inflation prompts investors to invest.

III. RESEARCH METHOD 3.1. Type and Source of Data The data used in this research is secondary data with the data type of time series in the timeframe 1990-2011. The data was taken from database of the United Nations Conference on Trade and Development (UNCTAD), Economic and Financial Statistics Indonesia (SEKI) and the Central Statistics Agency (BPS). 3.2. Data Analysis Method The relationship between the dependent variable (FDI) and the independent variables (GDP, exchange rate of Rp/US$, and inflation) are modeled using regression analysis formula (Multiple Regression Analysis). Multiple regression analysis equations were solved using software PASW Statistics 18. Software PASW Statistics 18 is also used to test the validity level of the multiple regression equation. IV. RESEARCH RESULTS AND DISCUSSION 4.1. Analysis of Results of Multiple Regression Equation Based on calculations using the software PASW Statistics 18 multiple regression models between FDI with GDP, exchange rate Rp / US $, and inflation is shown in the following equation:

Based on these equations it can be seen that the GDP and inflation has a direct relationship with FDI, while the exchange rate of Rp/$ has an opposite relationship with FDI. Value for the above equation is 0.845 or 84.5%. It means the GDP, exchange rate Rp/US$, and inflation has an effect of 84.5% against FDI in Indonesia, while the remaining 15.5% is influenced by other variables that are not included in the equations model.

4.2. Significance Level Model and Independent Variables Based on the global test it can be seen that there is a relationship between FDI with GDP, exchange rate Rp/US$, and inflation. From this research it is also known that GDP and exchange rate Rp/US$ have a significant relationship with FDI with = 5%, while the exchange rate of Rp/US$ will affect FDI significantly with = 10%. Variable FDI GDP Exchange Rate Inflation F/t 32,644 9,534 -5,47 1,869 Sig. 0,000 0,000 0,000 0,078

V. CONCLUSION, SUGGESTIONS AND REFERENCES 5.1. Conclusion Based on the analysis results of the research data which is processed by multiple linear regression method, it can be concluded as follows: 1. Indonesia's gross domestic product has a direct and significant relationship (=5%) with foreign direct investment in Indonesia. 2. The exchange rate of Rp/US$ has an opposite and significant relationship (=5%) with foreign direct investment in Indonesia. 3. Inflation has a direct relationship but not significant (=5%) with foreign direct investment in Indonesia. 5.2. Suggestions From the results of empirical studies that have been conducted on the factors that affect foreign direct investment in Indonesia, the suggestions to the government of Indonesia are as follows: 1. The results of Indonesia's GDP should be used by the government to build the infrastructure so that the goals of multinational companies in Indonesia are not only to market their products, but also as a basis for production that can

provide a positive multiplier effect for the people of Indonesia such as the availiability of new jobs 2. The government should maintain the exchange rate of Rp against foreign currencies by boosting exports, because in addition to keeping the Rp exchange rate, exports could increase GDP which both have a positive impact on the FDI. 3. The government should issue a policy to curb inflation by raising interest rates even though it has positive affect the FDI, because high inflation rate could make small entrepreneurs in countries to not develop. 5.3. References Baye, M. R., (2010). Managerial Economics and Business Strategy. 7th ed. Singapore: The McGraw-Hill Companies, Inc. Brigham, E. F., & Houston, J. F., (2007). Esssentials of Financial Management. Singapore: Cengage Learning Asia Pte Ltd. Mudara, I. M. Y. P., (2011). Pengaruh Produk Domestk Bruto, Suku Bunga, Upah Pekerja, dan Nilai Total Ekspor Terhadap Investasi Asing Langsung di Indonesia (1990-2009). Skripsi Tidak Dipublikasikan, Fakultas Ekonomi Universitas Diponegoro Semarang. Mustakini, J. H., (2010). Teori Portofolio dan Analisis Investasi. 7th ed. Yogyakarta: BPFE-Yogyakarta. Parjiono, (2007). FDI and Growth in Indonesia. Economics, School of BusinessJames Cook University, Townsville Australia. Sarwedi, (2002). Investasi Langsung di Indonesia dan Faktor Mempengaruhinya. Jurnal Akuntansi & Keuangan, 4, 17-35. Yang

Shapiro, A. C., (2010). Multinational Financial Management. 9th ed. Asia: John Wiley & Sons, Inc. Sianturi, L., M., (2010). Analisis Determinan Foreign Direct Investment (FDI) di Indonesia (Aplikasi Model ECM). Skripsi Tidak Dipublikasikan, Fakultas Ekonomi Universitas Sumatera Utara Tambunan, T., (2007). Daya Saing Indonesia dalam Menarik Investasi Asing. Pusat Studi Industri dan UKM, Universitas Trisakti & Kadin Indonesia.

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