Energy Use, Trade Openness, and Exchange Rate Impact on Foreign Direct Investment in Indonesia

Horas Djulius


We conducted an inquiry on the short run and long run impact of energy use, trade openness, and exchange rate on foreign direct investment in Indonesia from 1981 to 2015. Energy use is one of the key variables because host countries cannot easily anticipate short-term energy shortage, whereas foreign investors interpret such shortage as an indicator of progress and readiness of the manufacturing sector. We use the error correction model to explain the interrelationship between predictors and their effect on foreign direct investment. Results show that short run trade openness significantly affects foreign direct investment. By contrast, long-term energy use and trade openness variables have a positive and significant influence, whereas exchange rate has a negative linkage.

Keywords: foreign direct investment, energy used, trade openness, exchange rate,
error correction model

JEL Classifications: F21, F31, Q43

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