The Impact of Decentralization for Investment Inflow at 32 Province across Indonesia

Abstract

One of the seminal issue for countries is how to manage fiscal decentralization across levels of government. When decentralization is not managed optimally, it undermines government ability to manage local economic including to obtain both foreign and domestic investments. Therefore, this research attempted to discuss the impact of decentralization on investment inflows and to discuss factors influence it. This research uses Indonesia as a case study regarding the effect of decentralization on investment inflows by using a panel data with a random effect model from 2010 up to 2016 periods at 32 Provinces. The results show that the decentralization has a negative and significant impact on investment inflows. The proxy shared total provincial government expenditure against the total Central Government expenditures showed for every 1% increase in the share of local government expenditures toward the central government will reduce 0,38% investment values. The findings also found some factors like the electric power consumption per capita, the density of road, the local incentives regulation on investment, and market size drove investment inflows into a region. Other factors contributed to the investment inflows resulted from the qualitative data were the location of a province and the existence of the industrial area.