Foreign and Private Domestic Investments in Indonesia: Crowding-In or Crowding-Out?

• Main Author: Setiyanto, Aris
• Format: Article PeerReviewed
• Language: English
• Published: Bank Indonesia 2022
• Subjects: Economics and Business
• Online Access: https://repository.ugm.ac.id/282835/1/Setiyanto_EB.pdf; https://repository.ugm.ac.id/282835/; https://bulletin.bmeb-bi.org/bmeb/vol25/iss4/5/; https://doi.org/10.21098/bemp.v25i4.1674
• Institution: Universitas Gadjah Mada

This study aims to investigate the empirical relationship between Foreign Direct Investment (FDI) to Private Domestic Investment (PDI) in Indonesia by using quarterly data from 1990Q2 to 2020Q2. It tests the crowding-in effect (which suggests complementarity between FDI and PDI) and crowding out effect (which indicates a substitution effect between FDI and PDI) at the sectoral level. Our results imply the prevalence of the crowding-in effect in the primary and secondary sectors, with the tertiary sector exhibiting a neutral relationship. No rational reason was observed for the restriction of foreign investment. Therefore, it is suggested that Indonesia’s government needs to actively engage in FDI to increase the growth of new investments in the primary and secondary sectors of the domestic economy.