Do FDI determinants converge across regions? Evidence from two Indonesian provinces
DOI:
https://doi.org/10.24914/jeb.v29i1.15235Keywords:
Foreign direct investment, economic growth, minimum wage, export value, VECMAbstract
This study examines whether foreign direct investment (FDI) responses are region-specific or follow broader economic patterns, using empirical evidence from West Sumatra and the Special Region of Yogyakarta (SRY). Despite having different economic structures, with West Sumatra being commodity-based and SRY being service-oriented, both provinces provide an important context for analysing the convergence of regional FDI determinants. Using a Vector Error Correction Model (VECM) and impulse-response analysis on quarterly data from 2010 to 2023, this study finds partial convergence in the FDI determinants. The results show that both provinces respond to common macroeconomic variables, including inflation, economic growth, minimum wages, and exports; however, the direction and magnitude of these effects differ across regions. In West Sumatra, economic growth and export expansion do not necessarily increase FDI inflows, reflecting structural characteristics of a commodity-based economy. Conversely, economic growth strengthens FDI attractiveness in SRY, while higher labour costs reduce investment inflows. These findings suggest that both general macroeconomic conditions and region-specific economic structures shape FDI determinants. This study contributes to the literature by highlighting partial convergence and regional heterogeneity in the determinants of FDI across structurally different regions in Indonesia.
Downloads
References
Abdi, A. H., & Mohamed, A. M. (2025). Determinants of agricultural exports in Somalia: the impacts of exchange rates, foreign direct investment, and institutional quality. Cogent Economics & Finance, 13(1), 2445755. https://doi.org/10.1080/23322039.2024.2445755
Agudze, K., & Ibhagui, O. (2021). Inflation and FDI in industrialized and developing economies. International Review of Applied Economics, 35(5), 749–764. https://doi.org/10.1080/02692171.2020.1853683
Ahmad, M. H., Alam, S., & Butt, M. S. (2003). Foreign Direct Investment, Exports, and Domestic Output in Pakistan. The Pakistan Development Review, 42(4), 715–723.
Al-Khazaleh, S., Badwan, N., Qubbaj, I., Qasem, S., & Sleimi, M. (2025). Foreign direct investment, salaries and wages: empirical evidence from Palestine and Jordan. EuroMed Journal of Business. https://doi.org/10.1108/EMJB-02-2024-0032
Anyanwu, J. C. (2012). Why does foreign direct investment go where it goes?: New evidence from African countries. Annals of Economics and Finance, 13(2), 425–462.
Arliman, L. (2018). Penanaman Modal Asing Di Sumatera Barat Berdasarkan Undang-Undang Nomor 25 Tahun 2007 Tentang Penanaman Modal. SUPREMASI: Jurnal Hukum, 1(1), 8–23. https://doi.org/10.36441/supremasi.v1i1.153
Asari, F. F. A. H., Baharuddin, N. S., Jusoh, N., Mohamad, Z., Shamsudin, N., & Jusoff, K. (2011). A Vector Error Correction Model (VECM) Approach in Explaining the Relationship Between Interest Rate and Inflation Towards Exchange Rate Volatility in Malaysia. World Appl. Sci. J., 12 (Special Issue on Bolstering Economic Sustainability), 12, 49–56.
Awaluddin, I., Sitorus, N. H., Hamzah, L. M., & Fajarini, D. (2023). Foreign Investment And Economic Growth In Indonesia (Panel Data Approach, Granger Causality And Vecm). Journal of Namibian Studies: History Politics Culture, 36, 1009–1032. https://doi.org/10.59670/jns.v36i.4642
Awan, A. G., Ahmad, W., Shahid, P., & Hassan, J. (2014). Factors affecting foreign direct investment in Pakistan. International Journal of Business and Management Review, 2(4), 21–35.
Babu, A. (2018). Causality between Foreign Direct Investments and Exports in India. Theoretical and Applied Economics, 15(4(617)), 135–144.
Bhatti, M. A., & Khan, R. E. A. (2023). Human Capital, Political Instability, Foreign Direct Investment, Infrastructure and Economic Growth: Heterogeneous Causal Linkages. Annals of Social Sciences and Perspective, 4(1), 231–257. https://doi.org/10.52700/assap.v4i1.287
Boeing, P., Eberle, J., & Howell, A. (2022). The impact of China’s R&D subsidies on R&D investment, technological upgrading and economic growth. Technological Forecasting and Social Change, 174, 121212. https://doi.org/10.1016/j.techfore.2021.121212
BPS-Daerah Istimewa Yogyakarta. (2025). Distribusi persentase Produk Domestik Regional Bruto atas dasar harga berlaku menurut lapangan usaha (persen). Bps.Go.Id.
BPS-Sumatra Barat. (2025). Distribusi Produk Domestik Regional Bruto Provinsi Sumatera Barat atas dasar harga berlaku menurut lapangan usaha dan triwulanan (persen). Bps.Go.Id.
BPS Provinsi Sumatera Barat. (2024). Sumatera Barat dalam Angka 2024. In Berita Resmi Badan Pusat Statistik (Vol. 54). BPS-Statistics Sumatera Barat Province.
Chao, K. (2024). Capital Formation in Mainland China, 1952-1965 (1st ed.). Univ of California Press. https://doi.org/https://doi.org/10.2307/jj.15306394
Chindengwike, J. D. (2025). Effect of Gross Capital Formation on the Economic Growth in Tanzania: A Vector Error Correction Model Analysis. African Journal of Empirical Research, 6(1), 67–77. https://doi.org/10.51867/ajernet.6.1.7
Chodorow-Reich, G., Smith, M., Zidar, O. M., & Zwick, E. (2024). Tax policy and investment in a global economy. https://doi.org/10.3386/w32180
Corrado, C., Haskel, J., Jona-Lasinio, C., & Iommi, M. (2022). Intangible capital and modern economies. Journal of Economic Perspectives, 36(3), 3–28. https://doi.org/10.1257/jep.36.3.3
Cushman, D. O. (1987). The Effects of Real Wages and Labor Productivity on Foreign Direct Investment. Southern Economic Journal, 54(1), 174. https://doi.org/10.2307/1058813
Danciu, A. R., & Strat, V. A. (2014). Factors influencing the choice of the foreign direct investments locations in the Romanian regions. Procedia-Social and Behavioral Sciences, 109, 870–874. https://doi.org/10.1016/j.sbspro.2013.12.556
Di Gennaro, V., Ferrini, S., & Turner, R. K. (2025). Extending the Genuine Savings estimates with natural capital and poverty at the regional and national level in Italy. Ecological Economics, 228, 108433. https://doi.org/10.1016/j.ecolecon.2024.108433
Elian, M. I., Bani-Mustafa, A., Sawalha, N., Alsaber, A. R., & Pan, J. (2025). Impact of economic growth and exchange rate volatility on FDI inflows: cointegration and causality tests for the BRICS countries. International Journal of Economics and Financial Issues, 15(1), 42–54. https://doi.org/10.32479/ijefi.17311
Ericsson, J., & Irandoust, M. (2001). On the causality between foreign direct investment and output: a comparative study. The International Trade Journal, 15(1), 1–26. https://doi.org/10.1080/088539001300005431
Faruku, A. Z., Asare, B. K., Yakubu, M., & Shehu, L. (2011). Causality analysis of the impact of foreign direct investment on GDP in Nigeria. Nigerian Journal of Basic and Applied Sciences, 19(1). https://doi.org/10.4314/njbas.v19i1.69339
Fitriya, Basyith, A., & Zainal, R. I. (2020). The Doubled-Edge Sword of Raising the Minimum Wage: The Case of Indonesia. Asian Economic and Financial Review, 10(12). https://doi.org/10.18488/journal.aefr.2020.1012.1453.1465
Fuangfoo, A. M. (2018). Thailand ’ s Minimum Wage Increase of 2013 : Impacts on Foreign Direct Investment. 8(5), 319–324.
Gál, Z., & Lux, G. (2022). FDI-based regional development in Central and Eastern Europe: A review and an agenda. Tér És Társadalom, 36(3), 68–98. https://doi.org/10.17649/TET.36.3.3439
Grömling, M., & Niebel, T. (2024). Measuring the productivity effects of digital capital—a conceptual approach. AStA Wirtschafts- Und Sozialstatistisches Archiv, 18(3–4), 319–335. https://doi.org/10.1007/s11943-025-00350-y
Gupta, P., & Singh, A. (2016). Causal nexus between foreign direct investment and economic growth: A study of BRICS nations using VECM and Granger causality test. Journal of Advances in Management Research, 13(2), 179–202. https://doi.org/10.1108/JAMR-04-2015-0028
Harrison, A., & Rodríguez-Clare, A. (2010). Trade, foreign investment, and industrial policy for developing countries. Handbook of Development Economics, 5, 4039–4214. https://doi.org/10.1016/B978-0-444-52944-2.00001-X
Haryanto, J. T. (2013). Implementasi nilai-nilai budaya, sosial, dan lingkungan pengembangan desa wisata di Provinsi Yogyakarta. Jurnal Kawistara, 3(1). https://doi.org/10.22146/kawistara.3957
Hesna, Y., Suraji, A., Istijono, B., Hidayat, B., & Ophyandri, T. (2017). Kajian Kapasitas Infrastruktur: Suatu Upaya Peningkatan Pariwisata Sumatera Barat. IPTEK Journal of Proceedings Series, 3(5).
Holl, P., & Lork, C. (2025). The Role of Tax Incentives and Wage Dynamics in Shaping Foreign Direct Investment: A Cambodian Perspective (2009-2023). Journal of Mathematics Instruction, Social Research and Opinion, 4(3), 687–698. https://doi.org/10.58421/misro.v4i3.502
Hong, T. Y., & Ali, D. H. A. (2020). The impact of inflation towards foreign direct investment in Malaysia and Iran. International Journal of Academic Research in Business and Social Sciences, 10(6), 201–216. https://doi.org/10.6007/ijarbss%2Fv10-i6%2F7280
Iammarino, S. (2018). FDI and regional development policy. Journal of International Business Policy, 1(3), 157–183. https://doi.org/10.1057/s42214-018-0012-1
Jusaj, Y. V., & Zogaj, V. (2024). Exploring the Nexus Between Foreign Direct Investment Inflows and Economic Growth: A Robust Empirical Analysis of European Low- and Middle-Income Countries. Journal of Risk Analysis and Crisis Response. https://doi.org/10.54560/jracr.v14i3.505
Khan, M. A., West, S., & Wuest, T. (2020). Midlife upgrade of capital equipment: A servitization-enabled, value-adding alternative to traditional equipment replacement strategies. CIRP Journal of Manufacturing Science and Technology, 29, 232–244. https://doi.org/10.1016/j.cirpj.2019.09.001
Komalasari, R., & Mustafa, C. (2024). An Analysis of Foreign Direct Investment, Human Capital Dynamics, and Policy Imperatives in Indonesia and ASEAN. Jurnal Politica Dinamika Masalah Politik Dalam Negeri Dan Hubungan Internasional, 15(1), 57–79. https://doi.org/10.22212/jp.v15i1.4172
Li, B., & Kang, C. (2025). Research on the Contribution of Higher Education to the Sustainable Development of the Economy in China: An Empirical Analysis Based on Provincial Panel Data from 2014 to 2023. Sustainability, 17(3), 1024. https://doi.org/10.3390/su17031024
Mason, R. L., & Vracheva, V. (2017). The impact of inflation targeting on attracting foreign direct investment. Journal of Applied Business and Economics, 19(4), 79–94.
Masso, J., & Tiwari, A. K. (2024). Productivity impacts of R&D and non-R&D modes of technological change for incumbents and entrants in a catching-up economy. Technological Forecasting and Social Change, 199, 123015. https://doi.org/10.1016/j.techfore.2023.123015
Meivitawanli, B. (2021). Research on the relationship between provincial foreign direct investment and economic growth: An empirical study in Indonesia. Journal of International Studies. https://doi.org/10.14254/2071-8330.2021/14-1/17
Mensah, E., Odoley Mensah, R., & Aboagye Danquah, D. (2024). Threshold effects of inflation on the FDI–growth nexus: evidence from inflation-targeting countries in sub-Saharan Africa. Economic Research-Ekonomska Istraživanja, 37(1). https://doi.org/10.1080/1331677X.2023.2299991
Mostafa, M. M. (2020). Impacts of inflation and exchange rate on foreign direct investment in Bangladesh. International Journal of Science and Business, 4(11), 53–69.
Mudiyanselage, M. M. R., Epuran, G., & Tescașiu, B. (2021). Causal Links between Trade Openness and Foreign Direct Investment in Romania. Journal of Risk and Financial Management, 14(3). https://doi.org/10.3390/jrfm14030090
Nayak, B. S., & Walton, N. (2024). The future of platforms, big data and new forms of capital accumulation. Information Technology and People, 37(2), 662–676. https://doi.org/10.1108/ITP-05-2022-0409
Ningrum, N. A. S., & Dwiputri, I. N. (2024). The Influence of Macroeconomic Variables on Foreign Direct Investment in the Manufacturing Industry Sector in Indonesia. Jurnal Ekonomi Pembangunan, 22(01), 73–88. https://doi.org/10.22219/jep.v22i01.26289
Nurhasnah, N., & Rozalinda, R. (2018). Industri wisata halal di Sumatera Barat: potensi, peluang dan tantangan pengembangan ekonomi daerah. Maqdis: Jurnal Kajian Ekonomi Islam, 4(1). https://scholar.uinib.ac.id/id/eprint/874/
Okara, A. (2023). Does foreign direct investment promote political stability? Evidence from developing economies. Economic Modelling, 123, 106249. https://doi.org/10.1016/j.econmod.2023.106249
Olayiwola, K., & Okodua, H. (2013). Foreign Direct Investment , Non-Oil Exports , and Economic Growth in Nigeria : A Causality Analysis. Asian Economic and Financial Review., 3(11), 1–19.
Rolnmuch, T. P. N. A., & Astuti, Y. (2024). Analysis of Factors Affecting the Entry of Foreign Direct Investment into Indonesia (Case Study of Three Industrial Sectors in Indonesia). IRJEMS International Research Journal of Economics and Management Studies, 3(7), 312–320. https://doi.org/10.56472/25835238/IRJEMS-V3I7P135
Samsuddin, M. A., & Amar, S. (2020). Determinants of Economic Growth in Developing Countries of G20 Members. 152, 177–183. https://doi.org/10.2991/aebmr.k.201126.021
Sari, W. P., Kurniasih, E. P., Lestari, N., Supriyanto, E., & Astuti, N. D. (2023). The Effect Of Wages, Infrastructure, And Political Stability On Foreign Investment In Indonesia. Asian Journal of Economics, Business and Accounting, 23(20), 220–228. https://doi.org/10.9734/ajeba/2023/v23i201106
Suryanta, B., & Patunru, A. A. (2023). Determinants of foreign direct investment in Indonesia. Global Journal of Emerging Market Economies, 15(1), 109–131. https://doi.org/10.1177/09749101211067856
Tam, P. T. (2023). Determinants of foreign investment attraction contributed to social economic development: A case study in Vietnam. Journal of Law and Sustainable Development, 11(1), e405–e405. https://doi.org/10.37497/sdgs.v11i1.405
Thi Kim Lien, N. (2021). The Effect of Trade Openness on Foreign Direct Investment in Vietnam. Journal of Asian Finance, Economics and Business, 8(3), 111–0118. https://doi.org/10.13106/jafeb.2021.vol8.no3.0111
Zhao, S. X. B., Wong, D. W. H., Wong, D. W. S., & Jiang, Y. P. (2020). Ever‐transient FDI and ever‐polarizing regional development: Revisiting conventional theories of regional development in the context of China, Southeast and South Asia. Growth and Change, 51(1), 338–361.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Jurnal Ekonomi dan Bisnis
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Jurnal Ekonomi dan Bisnis is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
