The Impact of Economic Integration and Macroeconomic on Indonesia Foreign Direct Investment (FDI)

Purpose – This study purposes to analyze the impact of regional economic integration and macroeconomic on Indonesian FDI inflows. Research design, data, and methodology – Data were collected from bilateral relation between Indonesia and 21 home countries whose dominant share FDI to Indonesia from 2005 to 2013. Analysis method was conducted by panel gravity modeI to find the impact of regional economic integration and macroeconomic on Indonesian FDI inflows. Results – The empirical results show that GDP of the home country and Indonesia have a positive impact on Indonesia FDI. Distance and home country real interest rate have a negative impact on Indonesia FDI. Economic integration of European Union (EU) and Indonesia's cooperation with Japan in ASEAN-Japan Comprehensive Economic Partnership (AJCEP) have created impact of investment creation on Indonesia FDI, unfortunately, economic integration of ASEAN has created impact of investment diversion on Indonesian FDI. Conclusions – In order to increase FDI inflow to Indonesia, Indonesia government should improve the physical and social infrastructures to drive the productivity and economic efficiency. It will increase the GDP and also attract more investors. Low interest rate policy should be considered.