TAX INCENTIVES AND OTHER FACTORS DETERMINING FDI INFLOW IN INDONESIA: INDUSTRIAL APPROACH

Maisara Putra H.S, Koji Kawabata

2014 | Tesis | S2 Magister Ek.Pembangunan

Previous studies on how tax incentives affect Foreign Direct Investment (FDI) inflow yield various results. Some of them conclude that tax incentives do not have a significant effect on foreign investors� decision to invest in some country while others state find significant effects. In Indonesia, there are only a few studies on this topic, most of which use aggregate data for FDI and conclude that tax incentives do not have a significant effect on FDI.

This study, in contrast, uses industrial data to examine the effect of tax incentives on FDI in Indonesia. Using industrial data from 22 industries, panel data is analyzed to determine the influence of tax incentives on FDI inflows during the period of 1990 to 2012. Tax incentives in the form of tax allowances are used to measure the relationship of tax incentives and FDI. The inflation rate, real exchange rate and real interest rate are included as proxy for macroeconomic stability. After we estimated using panel data analysis, the results show that tax incentives are significant in affecting FDI inflows in Indonesia. Using industrial data analysis, these findings contradict previous research that concludes tax incentives do not significantly affect FDI in Indonesia. The finding also emphasize that tax incentives in the form of tax allowance play an important role in the decision of foreign investors in Indonesia. In our analysis per sector, we also find that tax incentives have a high relationship to the incoming FDI in the secondary sector, the sector where most tax incentives are given by the government. The result also indicates that tax incentives in this sector are very significant in affecting FDI inflow compared to other sectors. Furthermore, for the other variables in this study beside tax incentives, only the real interest rate are play very significant role in affecting FDI inflow in all three sectors.

Kata Kunci : FDI, Industry, Tax Incentives, Tax Allowance