Analysis of the Effect of Global Uncertainty and Financial Development on Foreign Direct Investment in Indonesia IPB Univeristy

Fuzi Noviyanti, Iman Sugema, Tony Irawan


The world is currently facing unprecedented uncertainty in social, political, and economic aspects, which continuously evolve every year owing to extraordinary events that impact countries worldwide. In contrast, The growth strategy of a country organizes must include Foreign Direct Investment (FDI), especially in Indonesia. The fluctuation in foreign investment in Indonesia indicates that foreign investors also consider growing global uncertainty alongside the development of Indonesia’s financial sector. This study examines the relationship between global uncertainty and financial development on FDI in Indonesia from 1997 to 2020 using the Autoregressive Distributed Lag (ARDL) method. The results indicate that global uncertainty significantly negatively impacts Indonesia’s FDI in the short and long terms. However, global economic policy uncertainty positively influences Indonesia’s FDI in the long term. This indicates that Indonesia has become an attractive alternative for foreign investors during global economic policy uncertainty. Regarding financial development, the amount of credit provided by the domestic banking sector to the private sector in Indonesia positively influences Indonesia’s FDI in both the short and long terms. This demonstrates that Indonesia’s financial condition and infrastructure can determine foreign investors’ decisions to invest in Indonesia.


Ahir, H., Bloom, N., & Furceri, D. 2018. The World Uncertainty Index. SSRN Electronic Journal 33.

Al-Thaqeb, SA., & Algharabali, BG. 2019. Economic Policy Uncertainty: A Literature Review. The Journal of Economic Asymmetries 20 (November): e00133.

Asamoah, ME., & Adjasi, CKD. & Alhassan, AL. 2016. Macroeconomic Uncertainty, Foreign Direct Investment and Institutional Quality: Evidence from Sub-Saharan Africa. Economic Systems 40 (4):612–621.

Baker, SR., Bloom, N., & Davis, SJ. 2016. Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics 131 (4):1593–1636.

Bloom, N. 2014. Fluctuations in Uncertainty. Journal of Economic Perspectives 28 (2):153–176.

Camarero, M., MolinerS., & Tamarit, C. 2021. Japan’s FDI Drivers in a Time of Financial Uncertainty. New Evidence Based on Bayesian Model Averaging. Japan and the World Economy 57 (March):101058.

Carkovic, M., & Levine, RE. 2002. Does Foreign Direct Investment Accelerate Economic Growth?. SSRN Electronic Journal.

Chen, K., Nie, H., & Ge, Z. 2019. Policy Uncertainty and FDI: Evidence from National Elections. The Journal of International Trade & Economic Development 28 (4):419–428.

Chi-Wei, S., Muhammad, U., & Hsu-Ling, C. 2022. Nonlinear Dependence between Economic Policy Uncertainty and FDI Inflows in China. Economic Computation and Economic Cybernetics Studies and Research 56 (3/2022):153–168.

Dai, PF., Xiong, X., & Zhou, WX. 2021. A Global Economic Policy Uncertainty Index from Principal Component Analysis. Finance Research Letters 40 (May):101686.

Desbordes, R., & Wei, SJ. 2017. The Effects of Financial Development on Foreign Direct Investment. Journal of Development Economics 127 (July):153–168.

Dewi, CS., & Hutomo, FO. 2021. Determinants of Foreign Direct Investment in Indonesia. Conference Series 3 (2):499–510.

Dunning, JH. 1973. The Determinants of International Production. Oxford Economic Papers 25 (3):289–336.

Dunning, JH., & Lundan, SM. 2008. Multinational Enterprises and the Global Economy. 2nd ed. Cheltenham, U.K. ; Northampton, MA: Edward Elgar.

Enders, W. 2015. Applied Econometric Time Series. Fourth edition. Hoboken, NJ: Wiley.

Fathia, N., Silvia, V., & Gunawan, E. 2021. Analysis of Foreign Investment Determinants in Indonesia. Economic Development Analysis Journal 3:338–50.

Febrianto, F., & Juliana, R. 2021. Pengaruh Uncertainty terhadap Kebijakan Trade Credit Perusahaan Indonesia. Jurnal Akuntansi Bisnis 14 (2).

Firdaus, M. 2019. Aplikasi Ekonometrika Untuk Data Panel Dan Time Series. Kota Bogor: PT Penerbit IPB Press.

French, JJ., & Wei-Xuan, L. 2022. Economic Policy Uncertainty and Fund Flows to the United States. Finance Research Letters 45 (March):102126.

Ghirelli, C., Gil, M., Pérez, JJ., & Urtasun, A. 2021. Measuring Economic and Economic Policy Uncertainty and Their Macroeconomic Effects: The Case of Spain. Empirical Economics 60 (2):869–92.

Goodell, JW., Richard, JM., & McGroarty, F. 2020. Election Uncertainty, Economic Policy Uncertainty and Financial Market Uncertainty: A Prediction Market Analysis. Journal of Banking and Finance 110 (January):105684.

Gujarati, DN. 2011. Econometrics by Example. Houndmills, Basingstoke, Hampshire, New York: Palgrave Macmillan.

Gujarati, DN., & Porter, DC., 2009. Basic Econometrics. 5th ed. Boston: McGraw-Hill Irwin.

Haque, MA., Biqiong, Z., & Arshad, MU. 2022. Sources of Financial Development and Their Impact on FDI Inflow: A Panel Data Analysis of Middle-Income Economies. Economies 10 (8).

Huang, Y., & Luk, P. 2020. Measuring Economic Policy Uncertainty in China. China Economic Review 59 (February):101367.

Iamsiraroj, S. 2016. The Foreign Direct Investment–Economic Growth Nexus.” International Review of Economics and Finance 42 (March):116–133.

Indonesia Investment. 2017. Foreign Direct Investment Growth in Indonesia Slowed in Q4-2016 | Indonesia Investments. News. Indonesia-Investment. January 26, 2017.

Jardet, C., Jude, C., & Chinn, M. 2022. Foreign Direct Investment under Uncertainty: Evidence from a Large Panel of Countries. National Bureau of Economic Research.

Juanda, B. 2009. Ekonometrika Pemodelan Dan Pendugaan. Bogor, Indonesia: IPB Press.

Levine, R. 2004. Finance and Growth: Theory and Evidence. Cambridge, MA: National Bureau of Economic Research.

Lutfi, A., Ashraf, M., Watto, WA., & Alrawad, M. 2022. Do Uncertainty and Financial Development Influence the FDI Inflow of a Developing Nation? A Time Series ARDL Approach. Sustainability 14 (19): 12609.

Majeed, A. 2021. The Impact of Foreign Direct Investment on Financial Development: New Evidence from Panel Cointegration and Causality Analysis. Journal of Competitiveness 13 (1):95–112.

Marcella, R., & Juliana, R. 2022. Uncertainty Volatility, Investment, And Cash Holding In ASEAN Countries. Jurnal Akuntansi 26 (2):176–191.

Moosa, IA. 2002. Foreign Direct Investment. London: Palgrave Macmillan UK.

Nezakati, H., Fakhreddin, F., & Vaighan, BM. 2011. Do Local Banks Credits to Private Sector and Domestic Direct Investments Affect FDI Inflow? (Malaysia Evidence). IDOSI Publications.

Nguyen, CP., & Lee, GS. 2021. Uncertainty, Financial Development, and FDI Inflows: Global Evidence. Economic Modelling 99 (June):105473.

Noria, GL., & Fernández, JJZ. 2018. The Effect of Uncertainty on Foreign Direct Investment: The Case of Mexico / El Efecto De La Incertidumbre En La Inversión Extranjera Directa: El Caso De México. Estudios Económicos 33 (1): 117–49.

Ogbonna, OE., Ogbuabor, JE., Manasseh, CO., & Ekeocha, DO. 2022. Global Uncertainty, Economic Governance Institutions and Foreign Direct Investment Inflow in Africa. Economic Change and Restructuring 55 (4):2111–36.

Pesaran, MH., & Shin, Y. 1997. An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. In Econometrics and Economic Theory: The Ragnar Frisch Centennial Symposium. Cambridge: Cambridge University Press.

Phan, DHB., Iyke, BN., Sharma, SS., & Affandi, Y. 2021. Economic Policy Uncertainty and Financial Stability–Is There a Relation? Economic Modelling 94 (January):1018–29.

Putri, HD. 2018. Pengaruh Pembangunan Infrastruktur terhadap Foreign Direct Investment (FDI) di Negara-Negara Asean Tahun 2007-2015. Mini Thesis, Bogor, Indonesia: IPB University.

Riani, DK., & Sugema, I. 2019. Pengaruh Independensi Bank Sentral terhadap Inflasi: Peran Financial Development dan Kualitas Kelembagaan di Asean-5. Master’s Thesis, Bogor, Indonesia: Bogor Agricultural University.

Setiastuti, SU. 2017. Time-Varying Macroeconomic Impacts of Global Economic Policy Uncertainty to A Small Open Economy: Evidence from Indonesia. Buletin Ekonomi Moneter Dan Perbankan 20 (2):129–48.

Sutrisno, N., & Poerana, S. 2020. Reformasi Hukum dan Realisasi Investasi Asing pada Era Presiden Joko Widodo. Undang: Jurnal Hukum 3 (2):237–66.

Yen, KC, & Cheng, HP. 2021. Economic Policy Uncertainty and Cryptocurrency Volatility. Finance Research Letters 38 (January):101428.

Zhuang, J., Gunatilake, HM., Niimi, Y., Khan, ME., Jiang, Y., Hasan, R., Khor, N., Martin, AL., Bracey, P., & Huang, B. 2009. Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review. SSRN Electronic Journal.


Fuzi Noviyanti (Primary Contact)
Iman Sugema
Tony Irawan
Author Biographies

Iman Sugema, IPB University



Tony Irawan, IPB University



NoviyantiF., SugemaI., & IrawanT. (2023). Analysis of the Effect of Global Uncertainty and Financial Development on Foreign Direct Investment in Indonesia: IPB Univeristy. JURNAL EKONOMI DAN KEBIJAKAN PEMBANGUNAN, 12(2), 122-145.

Article Details