Is FDI Response Region-Specific or Does It Follow a Broader Economic Pattern? Empirical Evidence from Two Provinces in Indonesia

This study examines whether foreign direct investment (FDI) responses are region-specific or follow broader economic patterns, with empirical studies in West Sumatra Province and the Special Region of Yogyakarta (DIY). Despite having different economic compositions, with West Sumatra being commodity-based and DIY being service-based, both show similar macroeconomic response patterns to FDI. Using a Vector Error Correction Model (VECM) approach and impulse response analysis on quarterly data from 2010 to 2023, the study’s findings indicate that inflation has the most dominant influence on FDI, followed by economic growth, export value, and minimum wage, both in West Sumatra Province and DIY. These findings indicate that FDI inflows are more influenced by national macroeconomic fundamentals than by local economic characteristics. Therefore, macroeconomic stability, particularly inflation control, should be a priority for regional policies, complemented by region-specific strategies tailored to each area’s economic structure. This study contributes to the literature by highlighting the convergence of FDI determinants across structurally distinct regions in Indonesia.