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- Impact of Investment Inflows on Regional Disparity in Indonesia
Impact of Investment Inflows on Regional Disparity in Indonesia
Abstract:
Some tactical policies related to regional development, whether they were intended or not, were implemented since the early 1970s. Moreover, some policies were formulated in the 1990s to reduce regional disparities. However, they were more in normative level than implementation. An increasing level of regional income inequality, which accompanied the rapid economic growth, shows the failure of some those policies. The large differences in economic indicators among provinces in Indonesia are no doubt due to the very significant inequality of investment inflows.
The problem of economic disparity across Indonesia will still exist. The study aimed to (1) analyze the disparity of regional economy by testing income convergence, (2) identify the relationship between regional income and investment inflows, and (3) find the determinants of foreign investment inflows into provinces.
The shortcomings of the cross-sectional approach have advocated the timeseries estimation. However, time-series estimates may be subject to problems of identification and estimation induced by simultaneity bias or endogeneity of variables observed. Based on such disadvantages, both static and dynamic panel data methods were employed to satisfy the objectives of this study.
The study showed that static and dynamic panel data approach gave different results of convergence examination. Consistent with the theory, the OLS and fixedeffects estimators provide the upper and lower bounds. The first-difference generalized method of moments (FD-GMM) provided invalid estimators, which were lower than the coefficient from the fixed effects estimators due to the weak instruments problem. The system-GMM (SYS-GMM) estimators were found to be unbiased, consistent, and valid. They showed that convergence process prevailed among Indonesian provinces for the period 1983-2003. However, the speed of convergence was 0.29 percent, which was relatively slow compared with other studies in developing countries. The model suggested that regional income and investment inflows showed positive and significant relationship. The SYS-GMM was also the most preferred model for finding the determinants of foreign investment inflows.
Results of the study showed that market size (regional gross domestic product), level of economic development (agriculture’s share), infrastructure (electric supply), and educational attainment were the statistically significant factors that attract foreign investors to come to a province.