Sustainable Development Impacts of Investment Incentives: A Case ...

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Annex 2: Methodology
Lower case figures in the equation represent log value. Technically, FDI figures were not transformed
into natural logarithms because the figures for some years were negative values. Smoothing the FDI
variable was done by using FDI/1000.
In light of that, the following long run regression function was used:
Whereby:
■
■
■
■
FDIt is real foreign direct investment (billion rupiah).
gdpt is real gross domestic product (billion rupiah).
ISBI-INFt is Bank Indonesia Rate minus Indonesia Inflation. This is the measure of real Bank
Indonesia rate.
LIBOR-INFFt is LIBOR interest rate minus U.S. inflation. This is the measure of the real
foreign (world) interest rate.
■ rert is the real exchange rate of rupiah for the $.
■
INCTVt is the dummy variable for investment incentive in Indonesia. The incentive dummy is
used to proxy for foreign shareholding, which rose to 100 per cent of shares since 1994. In the
same year, the government enacted a regulation that made it easier than before for foreign
workers to stay in Indonesia. The dummy variable used was 1 for 1994 and above and 0 for the
period prior to 1994.
The following dynamic regression equation using the error correction model approach (ECM) was used:
Regression analysis was used to determine key factors that influence FDI in Indonesia. The first step was
to carry out unit root tests, which aim at establishing whether or data are stationary or otherwise. If data
are found to be non-stationary, this should imply that the dynamic model is the appropriate mode to
use in the analysis. Unit root tests of level data should produce unit roots for all the variables used in the
model.
Sustainable Development Impacts of Investment Incentives: A Case Study of the Chemical Industry in Indonesia
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