RELATIONSHIP BETWEEN EXCHANGE RATE AND FDI INFLOW: CASE STUDY OF INDONESIA DURING THE FLOATING EXCHANGE RATE SYSTEM

• Main Author: Maulia, Vhania
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/70585
• Institution: Institut Teknologi Bandung

The recent arguments about the relationship between exchange rates and Foreign Direct Investment (FDI) have brought attention to researchers worldwide. The previous studies found that every country has a different relationship which concludes that there is a possibility of a bidirectional relationship between exchange rates and FDI. Most countries are currently adopting floating exchange rates with limited intervention from the government, allowing them to fluctuate based on the market. Indonesia, as one of the biggest emerging countries in the world, has migrated its exchange rates system from time to time, and post-financial crisis in 1997, the country started to adopt floating exchange rates system until today. The Indonesian government maintains the country's financial stability through macroeconomic policy, including controlling inflation through the Inflation Targeting Framework (ITF), which the central bank adopted, the Bank of Indonesia. As part of the ITF core, inflation targeting in this country aims to control the stability of capital flow and exchange rates. This research will focus on the relationship between exchange rates and FDI in Indonesia. Because of the government intervention in controlling its inflation rate, the study conducts the inflation rate trend analysis. The research includes trend and regression analyses to find the relationship between variables. The result shows no bidirectional relationship between exchange rates and FDI. Still, there is a one-way relationship between both: during floating exchange rates system, exchange rates has a negative relationship with FDI inflow in Indonesia, significant at 10%. When the exchange rates in Indonesia decrease, the FDI increase. The Author also suggests that the government's involvement in controlling inflation has increased FDI inflows to the country.