Macroeconomic Determinants of Foreign Direct Investment in Indonesia: The Role of GDP, Inflation, and Exchange Rate (1990–2023)

Authors

  • Tri Ulan Dari UPN “Veteran” Yogyakarta
  • Rini Dwi Astuti UPN “Veteran” Yogyakarta

DOI:

https://doi.org/10.52300/grow.v11i1.21780

Keywords:

economic growth, exchange rate, foreign direct investment, gdp, inflation

Abstract

This study explores the influence of key macroeconomic indicators—Gross Domestic Product (GDP), inflation, and exchange rate—on Foreign Direct Investment (FDI) inflows in Indonesia from 1990 to 2023. Using the Error Correction Model (ECM), the research analyzes both long-term and short-term dynamics to offer a more comprehensive understanding of the relationship between these variables and FDI performance. The results show that GDP has a significant positive effect on FDI in both time horizons, reinforcing the notion that economic growth enhances investor confidence and market potential. In contrast, inflation does not exhibit a significant effect on FDI, suggesting that investors may perceive inflation in Indonesia as relatively stable and manageable. The exchange rate demonstrates a dual effect: it negatively affects FDI in the long term, indicating that prolonged currency depreciation deters investment, while in the short term, it positively influences FDI, as a weaker rupiah may reduce investment costs. Diagnostic tests confirm the reliability and validity of the regression model, including the absence of multicollinearity, heteroskedasticity, and autocorrelation. The study concludes that GDP and exchange rate stability are crucial for attracting and sustaining foreign investment, while inflation remains a less decisive factor in the Indonesian context. These findings offer practical implications for policymakers to prioritize macroeconomic stability and growth-oriented strategies to enhance Indonesia’s competitiveness as an FDI destination.

References

Amalia, R., & Ely, N. (2022). Economic growth and its impact on foreign direct investment in Indonesia. Journal of Global Economic Policy, 10(2), 115–129.

Anindita, R., Putri, N. L., & Wulandari, A. (2021). The strategic role of FDI in supporting economic transformation. Indonesian Journal of Development Economics, 8(1), 45–57.

Apriliana, M., & Soebagiyo, T. (2023). The impact of exchange rate fluctuations on foreign investment inflows in ASEAN countries. Jurnal Ekonomi dan Keuangan Asia, 11(3), 201–217.

Badan Pusat Statistik (BPS). (2025). Foreign investment statistics: 1990–2023. Jakarta: BPS.

Dwitayanti, F., Andayani, R., & Prasetyo, H. (2024). Shift in investment trends post-job creation law. Journal of Regulatory Economics, 13(1), 50–62.

Gunawan, B., & Lestari, A. (2022). Legal certainty and investor confidence: A study on Law No. 25 of 2007. Indonesian Journal of Law and Policy, 9(2), 92–105.

Najmuddin, R., Siregar, M. R., & Hanafi, N. (2023). Macroeconomic stability and its effect on FDI in Southeast Asia. Asian Economic Research Review, 15(1), 37–49.

Nasution, H., & Hartanto, R. (2021). Gross domestic product and foreign direct investment nexus in emerging markets. Journal of Economic Perspectives, 7(3), 144–158.

Pratiwi, D. (2020). Exchange rate volatility and its implications on long-term foreign investments in Indonesia. Jurnal Ekonomi Moneter Indonesia, 18(2), 115–130.

Putra, M. H., & Fitriana, A. (2020). Revisiting the macroeconomic determinants of FDI in Indonesia: A time-series approach. Journal of Economic Development Studies, 6(2), 65–77.

Putri, N., & Nugroho, A. (2023). Inflation uncertainty and its impact on investment decisions in developing countries. Emerging Market Finance Journal, 12(1), 33–47.

Rahmawati, N., & Sutrisno, E. (2021). The effect of inflation and exchange rate on FDI: Evidence from Indonesia. International Journal of Applied Economics and Finance, 9(2), 110–122.

Ramadhan, R., & Hidayat, S. (2022). Economic performance and investment attraction: The role of GDP. Jurnal Kebijakan Ekonomi Nasional, 12(3), 98–112.

Sabrina, D., & Soebagiyo, T. (2024). FDI and technology transfer in Indonesia's industrial policy. Indonesian Journal of Industrial Economics, 10(1), 76–89.

Saragih, D., Hutagalung, P., & Marpaung, E. (2021). Inflation targeting and foreign investment responses in Indonesia. Journal of Macroeconomic Policy, 8(4), 210–224.

Sihombing, J., & Santosa, B. (2022). Foreign investment and productivity gains in Indonesia’s manufacturing sector. Economic Development Bulletin, 17(2), 54–70.

Sukirno, S. (2021). Makroekonomi modern: Teori dan kebijakan (6th ed.). Jakarta: Rajawali Pers.

Sukmawati, R., & Arifianto, T. (2023). Exchange rate policy and its effect on foreign direct investment: Evidence from Indonesia. Jurnal Ekonomi dan Keuangan Negara, 15(1), 70–85.

Tambunan, T. T. H. (2021). Perekonomian Indonesia: Masalah dan kebijakan. Jakarta: LP3ES.

Tadesse, B., Xia, W., & Koang, B. (2021). FDI and economic growth: Comparative study of emerging Asian markets. Journal of Asian Development, 6(2), 103–118.

Wijaya, A., & Harahap, M. (2022). Monetary uncertainty and investor confidence: Lessons from Indonesia’s exchange rate management. Indonesian Monetary and Fiscal Review, 14(3), 89–105.

Wijaya, K., & Prasetyo, A. (2021). Do macroeconomic indicators matter for foreign investment? Evidence from Indonesia. Journal of Policy and Development Studies, 11(1), 27–41.

Yuliana, L., & Santoso, D. (2023). The evolution of Indonesia’s FDI inflows: Post-crisis trends and determinants. Asian Economic Outlook, 19(1), 44–59.

Yusuf, R., & Hendrawan, I. (2021). Gross domestic product and investment dynamics in ASEAN. Journal of Regional Economics, 9(3), 120–132.

Zulfa, M. A., & Millati, N. (2023). Evaluating Indonesia’s FDI trends using the OLI framework. Southeast Asian Economic Journal, 10(1), 67–81.

Downloads

Published

2025-06-23

How to Cite

Dari, T. U. ., & Astuti, R. D. . (2025). Macroeconomic Determinants of Foreign Direct Investment in Indonesia: The Role of GDP, Inflation, and Exchange Rate (1990–2023). Journal Magister Ilmu Ekonomi Universtas Palangka Raya : GROWTH, 11(1), 35–47. https://doi.org/10.52300/grow.v11i1.21780

Issue

Section

Articles

Most read articles by the same author(s)

Obs.: This plugin requires at least one statistics/report plugin to be enabled. If your statistics plugins provide more than one metric then please also select a main metric on the admin's site settings page and/or on the journal manager's settings pages.