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RISK ANALYSIS OF OPTIMIZATION OF FDI IN INDONESIA

EVIDENCE OF COINTEGRATION MODELING AND ECM

investment, FDI, error correction

model, risk management

including water/ocean areas), the population density, and abundant natural resources. Indonesia

stretches over an area of 2,020,000 million KM

between the Indian and Pacific Oceans. For the

Southeast Asia region, Indonesia is the largest country compared to others. With the existing

characteristics, there must be so many natural resources and human resources that should be

processed to be of maximum benefit. Based on the information, Indonesia should be one of the

countries with the potential to succeed. However, since achieving independence on August 17,

1945 until now Indonesia has remained only in the category of developing countries. Many factors

can be used as reasons for this. One of them is closely related to the geographical location of a

very large country and is also an island country.

economies today (like Germany, USA, England, etc.), most of them have been part of a strong

country since the war era. This is marked by the countries’ ability to do production, such as

technology, vehicles (planes or cars), and even weapons. These products are included in the

category of products that require technology and high costs (capital intensive) to produce.

Risk Analysis of Optimization of FDI in Indonesia Evidence of Cointegration Modeling and ECM

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capital available for government use (Kanayo, 2013; Wang & Liu, 2016). The size of the capital

owned by the government will determine sooner or later the economic growth that occurs in a

country (Massey, 2019). The role of capital is to facilitate development activities such as

et al., 2020). In the author's view, the revenue received by the government in each period will not

be sufficient to be used in carrying out developments that result in economic growth. especially if

you look at it from the perspective of the big targets that have been set. This situation needs to be

given special attention to the government to be resolved as well as possible. High economic growth

is determined by high/fast development too.

also targets to be achieved and it is a common hope that this can be realized. Target can be

interpreted as a picture of a future state that is different from the current situation and is something

that is desired (Nephew, 2017). It offers orientations for individuals and organizations, for society,

politics, science, research or business and economics. These targets require very large capital that,

government as capital to carry out development projects and other production activities that are

important in an effort to achieve existing targets (Schwerhoff & Sy, 2017). The accumulation of

additional funds will have a very big influence on Indonesia, where the availability of capital and

labor is very limited and is one of the factors hindering development in developing countries.

be implemented by the government is to invite foreign investors to attend Indonesia. Unlike the

case with indirect investment, such as portfolio investment which investors can withdraw at any

time, Foreign Direct Investment has properties that are more committed to the long term, so it is

considered more value for a country. This view is certainly in line with what has become the

government's target and also the hope of all of us. Targets and expectations are that in the next

Risk Analysis of Optimization of FDI in Indonesia Evidence of Cointegration Modeling and ECM

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inevitable because other developing countries also want economic growth in their countries.

Hence, foreign investors are willing to invest in Indonesia, the government also need to strive for

positive or interesting things that can affect foreign investors to come to Indonesia so that the

government can convince foreign parties about the benefits that will be obtained for investors and

the six macroeconomic variables to be used. For this reason, the government needs to pay attention

and also maximize activities related to the six variables above in order to mitigate the opportunities

and impacts of existing KTD. The closest discussion to this topic was surfaced by Sijabat (2022)

in which it is stated that FDI affects Indonesia’s economic growth through an analysis using Toda-

Yamamoto approach, which then ignited the researchers’ interest. Hence, the title that the author

feels appropriate for this study is "Risk Analysis of Optimization of FDI in Indonesia Evidence of

Cointegration Modeling and ECM."

METHOD

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data are already available on the internet from several sources, such as the World Bank, the Central

Statistics Agency (BPS), and also assistance from other reliable sources. The time period used is

30 years (or those from 1991 – 2020). The independent variables are exports, foreign debt, central

Indonesia for the long and short term. As is well known, prob. of the export variable is 0.3528 for

the long term and 0.4027 for the short term. According to the authors, it is because the need for

production capital can be met, either through own sources of funds or domestic private investors.

In addition, it is due to Indonesia's ability to provide products needed in the international market

without the help of investors from foreign countries. The existing capabilities in a country will

certainly close the opportunity for the entry of foreign investors, except for those who want to

manufacture their products in Indonesia.

to come to a country. One of them is to increase profits by trying broaden the consumer reach

long term /. - 0,022412 for short term). Thus, the government cannot rule out this variable and still

needs to analyze unexpected events and mitigate. The goal is that export activities can continue to

run optimally and not disturbed. Opportunity mitigation is mitigation implemented before an

unexpected event occurs (Gonovski, 2017). Impact mitigation is mitigation that is implemented

after an unexpected event occurs (Todd & Ancell, 2014).

Opportunity Mitigation

variation and price)

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default risk, impossibility to deliver goods risk.

Impact Mitigation

Effect of Foreign Debt on FDI

short - term. As is well known, prob. of the foreign debt variable is 0,1991 for the long term and

0,2536 for the short term. Logically, foreign debt and FDI are additional capital owned by an

organization and even a country to realize economic growth in a country (Indonesia). This is in

line with research conducted by Rudi et al. (2016), In this study, it can be seen that both variables

are free variables (X1 and X2).

talking about uncertain changes in the world economy, foreign debt variables can pose a big risk

1) Laws on Foreign Exchange Traffic Reporting can continue to be developed; and

2) Determine financing control or loans originating from abroad and also provides direction

so that the debt taken can be used for productive activities and produces benefits.

Impact Mitigation

1) To find the right or specific strategy and direction of policy to finance the payment of debt

that has passed; and

2) Requesting an additional extension of time in debt payments if the funds are not yet

available.

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coefficient which is positive. The prevailing assumption is that on a 1% increase in central bank

interest rates and other constant free variables, it will increase FDI by 1.65E + 08 for the long -

term and 1,46E + 08 for the short - term. Another case with the research conducted by Dewi and

Triaryati (2015) in which interest rates negatively affect the inflow of funds from foreign investors.

by investors from abroad. Talking about risk and risk assessment, the interest rate variable is a

variable that provides risk opportunities, because it has a significant effect on FDI. For this reason,

mitigating opportunities and impacts is the government's task for the long and short term.

Opportunity Mitigation

1) Central Banks need to fight inflation: The central bank or Bank Indonesia needs to make

policies tighter monetary The Central Bank can influence expectations about future

developments occur in the future, for example regarding credit decisions/ purchases and

about wage negotiations. This mode is often being the most difficult to predict because no

one knows exactly how, when, and why expectations can be formed. Proper regulation will

1) Correctly apply markup rates: If the government is forced raise prices for all products, both

goods and services services, then all must go through the calculation policy thorough and

precise. Thus, the government can decide, how big the increase should be. The next

decision to be made is to determine, whether it is better to do a price increase once (which

means more significant or higher) or to continue in smaller increments but done a few time.

A definite or correct answer to both possibilities approach can not be given, because it all

depends on existing situation.

2) Provide information and communicate about the need public price increase policy: The

importance of providing information to the public about the amount and need of price

increases. This can enable people to accept forced policies held. Comprehensive

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Effect of Labor on FDI

term. Significantly marked with a prob value below 0.05. probability value 0,0003 (for short term)

and 0,0366 (for long term). Negative influence can be seen from the value of the coefficient which

Opportunity Mitigation

1) Improving the culture of discipline and self-integrity since the level lowest education.

2) Improve the ability of teaching staff.

3) Updating qualification levels according to needs and development of the era: there is

possible qualifications that must be continuously renewed along with digital advances, the

era of globalization is increasingly increases, and the influx of new technologies or the

need for them technology transfer. Renewal of qualifications can also be caused workers

already have more formal qualifications high school or those with good education, but

because there are changes to the labor market can no longer be used or needs to be

who are (qualified or not) as much as possible is very important. Government can also

provide facilities and infrastructure for free or subsidized so that graduates starting from

bachelor degree can increase capabilities through the availability of jobs, and there are

trainings.

5) Placement of workers with qualifications in their fields: Do not let workers who have

certain qualifications to work in a field they are not good at. productive workforce must be

able to practice their skills.

Impact Mitigation

1) Hiring experts from abroad to provide training to skilled workers in Indonesia.

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3) Communicating regularly with foreign investors about the skills or abilities that should be

owned or controlled by workers from Indonesia to be able to work in multinational

companies, such as language skills foreigners, and so on.

Tambunan et al. (2015) in his research obtained different results from the author. The research

showed results with a negative and insignificant influence on FDI.

the increasing amount of Rupiah received will cause more and more foreign investors to invest

their capital in Indonesia. The results obtained in this study show that the strengthening of the

Rupiah will cause fewer investors from abroad to invest in Indonesia. Therefore, the weakening of

the Rupiah exchange rate or the strengthening of the US currency (US Dollar) will result in

business costs that must be provided by the company can be reduced, such as transportation costs,

labor, and raw materials needed by the company. The reduced costs needed, of course, will be able

to increase the profit received by the company if it exports its products abroad.

5) Regular monitoring of financial market and economic developments.

Impact Mitigation

1) Conducting business activities with an export orientation. By continuing to maintain the

stability of the trade balance;

2) Implement the concept of tax Tobin policy;

3) The possibility of an increase in the rate by introducing expectations of the development of

a certain Exchange Rate

4) Validation and fixed calculation basis

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for the short term, it can be interpreted that if GDP rises (decreases) by 1% (with other free

variables constant) it will have an effect on the decrease (increase) of FDI by -1170.752 for long

term and – 1079.283 for short term. This research also shows that Gross Domestic Product (GDP)

has a significant effect on the entry of foreign investors into Indonesia with a probability value

although GDP can be said to be one of the important variables of prosperity economy in a country,

however, GDP still cannot be used comprehensive measure of economic well-being. This matter

because many jobs or tasks are not included in the calculation GDP, such as unpaid household

work, which are not taken into account when performing the GDP calculation. Therefore, more

calculations are needed than just referring to calculation of GDP.

Opportunity Mitigation

1) Providing attention through assistance and protection to people who are trying to produce

creative economy products

2) The government can continue to pay attention and try to explore natural resources that can

competitiveness in the international market.

Impact Mitigation

1) Periodic industrial monitoring provides a basis for assessing the economic development of

important industries in Indonesia.

2) The government needs to try to diversify previously existing products. The government also

needs to start planning to produce its own domestically produced raw materials.

3) The occurrence of excessive income inequality will be able to reduce the motivation of the

workforce or society, if performance is not beneficial from the point of view of individual

citizens. Therefore, if many people are only low-income, this can negatively affect their