Foreign Direct Investment and Institutional Quality in Indonesia
Evidence from Provincial Panel Data
DOI:
https://doi.org/10.59001/pjeb.v5i2.1276Keywords:
fiscal autonomy, FDI, institutional quality, local democracy index, panel dataAbstract
This study examines the relationship between Foreign Direct Investment (FDI) and institutional quality in Indonesia using provincial panel data for 2010–2020. District-level FDI realization data are aggregated to the provincial level and analyzed using Fixed-Effects (FE) and Random-Effects (RE) estimators with heteroskedasticity-robust corrections. Institutional quality is measured using the fiscal autonomy ratio and the local democracy index. The findings provide mixed evidence regarding the proposed institutional development hypothesis. In models without a lagged FDI variable, most FDI coefficients are positive but statistically insignificant under both FE and RE specifications. Similar results are observed when lagged FDI is incorporated. However, when the local democracy index is used as the measure of institutional quality, the RE specifications with lagged FDI produce positive and statistically significant coefficients in several model specifications. These effects, however, are not robust to the FE specifications as additional control variables are introduced. Overall, the findings provide limited evidence that FDI systematically improves institutional quality at the provincial level in Indonesia. The results suggest that attracting FDI alone cannot be assumed to automatically strengthen regional institutional quality and that institutional improvement may need to be pursued alongside investment promotion.
Penelitian ini menguji hubungan antara penanaman modal asing (Foreign Direct Investment/FDI) dan kualitas institusi di Indonesia menggunakan data panel tingkat provinsi periode 2010–2020. Data realisasi FDI tingkat kabupaten/kota diagregasikan ke tingkat provinsi dan dianalisis menggunakan estimasi Fixed-Effects (FE) dan Random-Effects (RE) dengan koreksi heteroskedasticity-robust. Kualitas institusi diukur menggunakan rasio otonomi fiskal dan indeks demokrasi Indonesia tingkat provinsi. Temuan penelitian menunjukkan bukti yang bervariasi (mixed evidence) terkait hipotesis pengembangan institusi yang diajukan. Pada model tanpa variabel lagged FDI, sebagian besar koefisien FDI bernilai positif tetapi tidak signifikan secara statistik, baik pada spesifikasi FE maupun RE. Hasil serupa juga ditemukan ketika variabel lagged FDI dimasukkan ke dalam model. Namun, ketika indeks demokrasi digunakan sebagai pengukur kualitas institusi, spesifikasi RE dengan lagged FDI menghasilkan koefisien yang positif dan signifikan secara statistik pada beberapa spesifikasi model. Meski demikian, pengaruh tersebut tidak konsisten (robust) pada spesifikasi FE saat variabel kontrol tambahan dimasukkan. Secara keseluruhan, temuan ini memberikan bukti yang terbatas bahwa FDI secara sistematis meningkatkan kualitas institusi di tingkat provinsi di Indonesia. Hasil penelitian mengindikasikan bahwa menarik arus masuk FDI saja tidak dapat diasumsikan secara otomatis memperkuat kualitas institusi daerah, sehingga perbaikan institusi perlu diupayakan beriringan dengan promosi investasi.
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