Foreign Direct Investment (FDI) and Development of Regional Economy in Indonesia: A Panel Data Study on Economic Growth in Provincial Level

The gap between saving and investment generally prevailing in Less Developed Countries (LDCs) has pushed them to find other source for investment that could be used for development financing. One of sources of capital considered as the saf-est and efficient for LDCs is foreign direct investment. These inflows are expected to solve the gap of saving and investment, so that the domestic investment and eco-nomic growth could sustain. This paper investigates the influence of foreign direct investment (FDI) on economic growth of Indonesia in national perspective but using detailed provincial data over the period of 2002 -2006. In the provincial level, FDI is observed to have no impact on economic growth. In this level, export level and local government expenditure have strong impact on economic growth. This result relates to the quality of the data available in provincial level in which FDI did not spread in all provinces, and the dynamic of FDI yearly also have no clear cer-tain pattern. Still the FDI and domestic investment are concentrated in certain region of Java. The method employed in this paper is simple regression, that is, Ordinary Least Square and Panel Data Analyses, beside the qualitative data analyses on the provincial and regional data..