Direct foreign investments in Indonesia: Macroeconomic impact and structural change

DFI contributes enormously to world development. Yet, very few studies measure the impact of DFI inflows on the aggregate economy. On the other hand, developing countries have undertaken extensive liberalization programs in order to effect structural change and attract DFI but little, if any, empirical research exists that measures the impact of liberalization policies on key macroeconomic variables like domestic consumption, domestic investment, exports and imports, or the extent of structural change and its interaction with DFI.;The results show that DFI has contributed a substantial macroeconomic impact in Indonesia. It has greatly increased the level of domestic consumption, domestic investment, exports and imports. DFI inflows have had a complementary rather than a substitutive effect on domestic investment. Though DFI has increased the level of both exports and imports, its effect on exports has been much greater than its impact on imports, therefore, it can be concluded that it has had a positive effect on the net balance of payments position.;Indonesia has also been successful in its liberalization policies as it has succeeded in effecting a substantial structural change in its key macroeconomic variables, all of which register a significant positive increase in their intercept and slope. The interaction of DFI with domestic consumption, domestic investment, exports and imports has all along been substantial and positive.;The policy implications that emerge from this study are that Indonesia should continue in its efforts to attract DFI because DFI has greatly benefitted its economy by contributing a substantial macroeconomic impact and structural change in its aggregate domestic consumption, domestic investment, exports and imports.;This study seeks to fill this gap in DFI literature by focussing on one developing country, Indonesia, and empirically measuring the macroeconomic impact of DFI inflows on domestic consumption, domestic investment, exports and imports during the period 1968-1992. In the same macroeconomic model, it uses the switching regression method to test for structural change in the Indonesian economy brought about by liberalization policies carried out over a broad spectrum of the economy during the period 1986-1992.