(E) Mikro Mankiw Bab2 180723 Dirapikan (AutoRecovered)

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PART 1
CHAPTER 2
THINKING LIKE AN ECONOMIST
1. Economists as Scientists
a. Scientific Method: Observation, Theory, and Re-Observation
If the growth of the amount of money distributed in a market has nothing to do with the hike of the price , the said economist will begin to ponder about the validity
of his or her own (?) theory of inflation. If the growth of the amount of both money and inflation as a matter of factly is closely retaliated and supported by
international data, which exactly becomes a real fact at hand, the economist will be more certain of his or her own theory.
b. The Role of Assumptions

When the government changes the number of money in circulation, the most important part of this analysis is on how price is shifting because of many factors
playing in the market.
Municipality Inflation (General)
influenced by 2019
Inflation January February March April May June July August September October November Desember Annually
DKI JAKARTA 0,24 0,26 0,14 0,4 0,59 0,47 0,25 0,17 -0,04 0,21 0,19 0,3 0
Average 0,24 0,26 0,14 0,4 0,59 0,47 0,25 0,17 -0,04 0,21 0,19 0,3 0
Minimum 0,24 0,26 0,14 0,4 0,59 0,47 0,25 0,17 -0,04 0,21 0,19 0,3 0
Maximum 0,24 0,26 0,14 0,4 0,59 0,47 0,25 0,17 -0,04 0,21 0,19 0,3 0
BOGOR
MUNICIPALITY 0,39 -0,4 0,28 0,5 0,58 0,9 0,14 0,37 -0,48 0,16 0,24 0,3 0
SUKABUMI
MUNICIPALITY 0,32 -0,14 0,04 0,46 0,64 0,37 0,28 -0,04 -0,18 -0,04 0,28 0,33 0
BANDUNG
MUNICIPALITY 0,09 -0,08 0,03 0,43 0,84 0,1 0,55 0,61 -0,28 -0,13 0,14 0,45 0
DESTARITA INDAH PERMATASARI_MINISTRY
1 OF AGRICULTURE AND SPATIAL PLAN_2023
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CIREBON
MUNICIPALITY 0,2 -0,16 0,18 0,27 0,37 0,15 0,24 0,24 -0,24 0,03 0,26 0,44 0
BEKASI
MUNICIPALITY 0,67 0,17 0,01 0,35 1,05 0,35 0,63 0,37 -0,06 -0,08 0,37 0,38 0
DEPOK
MUNICIPALITY 0,2 -0,05 0,24 0,49 0,89 1,11 0,05 0,36 -0,25 -0,09 0,13 0,18 0
TASIKMALAYA
MUNICIPALITY 0,41 -0,11 0,03 0,21 0,7 0,28 0,19 0,04 -0,38 -0,07 0,07 0,33 0
0,115 0,38 0,724 0,465 0,29
Average 0,32571 -0,11 71 714 29 71 714 0,27857 -0,2671 -0,0314 0,21286 0,34429 0
Minimum 0,09 -0,4 0,01 0,21 0,37 0,1 0,05 -0,04 -0,48 -0,13 0,07 0,18 0
Maximum 0,67 0,17 0,28 0,5 1,05 1,11 0,63 0,61 -0,06 0,16 0,37 0,45 0
CILACAP 0,33 -0,25 0,32 0,26 0,19 0,75 0,14 0,33 -0,46 -0,07 0,16 0,5 0
PURWOKERTO 0,16 -0,26 0,19 0,21 0,48 0,54 0,45 0,42 -0,5 -0,08 0,15 0,51 0
KUDUS 0,24 -0,21 0,23 0,21 0,22 0,61 0,44 0,82 -0,16 0,1 0,24 0,24 0
SURAKARTA
MUNICIPALITY 0,39 -0,11 0,29 0,68 0,28 0,45 0,38 -0,16 -0,26 0,25 0,23 0,48 0
SEMARANG
MUNICIPALITY 0,22 -0,37 0,34 0,47 0,36 0,6 0,39 0,47 -0,18 -0,06 0,2 0,46 0
TEGAL
MUNICIPALITY 0,31 -0,44 0,2 0,46 0,3 0,82 0,54 -0,02 -0,34 0,13 0,2 0,37 0
0,261 0,38 0,628
Average 0,275 -0,2733 67 167 0,305 33 0,39 0,31 -0,3167 0,045 0,19667 0,42667 0
Minimum 0,16 -0,44 0,19 0,21 0,19 0,45 0,14 -0,16 -0,5 -0,08 0,15 0,24 0
Maximum 0,39 -0,11 0,34 0,68 0,48 0,82 0,54 0,82 -0,16 0,25 0,24 0,51 0
YOGYAKARTA 0,42 -0,08 0,26 0,46 0,42 0,25 0,05 0,07 -0,07 0,18 0,31 0,46 0
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MUNICIPALITY
Average 0,42 -0,08 0,26 0,46 0,42 0,250,05 0,07 -0,07 0,18 0,31 0,46 0
Minimum 0,42 -0,08 0,26 0,46 0,42 0,250,05 0,07 -0,07 0,18 0,31 0,46 0
Maximum 0,42 -0,08 0,26 0,46 0,42 0,250,05 0,07 -0,07 0,18 0,31 0,46 0
JEMBER 0,5 -0,16 -0,06 0,45 0,64 -0,160,24 0,33 -0,29 0,05 0,28 0,54 0
BANYUWANGI 0,39 -0,08 0,17 0,15 0,46 0,360,39 0,08 -0,05 -0,09 0,22 0,29 0
-0,0
SUMENEP 0,32 -0,37 -0,07 0,37 0,69 0,1 8 0,1 -0,13 0,3 0,41 0,38 0
KEDIRI
MUNICIPALITY 0,15 -0,08 0,16 0,36 0,05 0,08 0,44 -0,23 -0,27 0,32 0,38 0,47 0
MALANG
MUNICIPALITY 0,53 -0,42 0,36 0,44 0,35 -0,17 0,2 0,19 -0,03 -0,04 0,01 0,5 0
PROBOLINGGO -0,0
MUNICIPALITY 0,12 -0,14 -0,12 0,19 0,64 0,48 5 0,27 -0,14 0,12 0,31 0,28 0
MADIUN
MUNICIPALITY 0,33 -0,1 0,14 0,41 0,61 0,22 0,17 0,04 -0,19 0,07 0,16 0,33 0
SURABAYA
MUNICIPALITY 0,33 -0,13 0,15 0,44 0,18 0,21 0,11 0,11 -0,02 -0,08 0,28 0,6 0
0,091 0,35 0,452 0,17
Average 0,33375 -0,185 25 125 5 0,14 75 0,11125 -0,14 0,08125 0,25625 0,42375 0
-0,0
Minimum 0,12 -0,42 -0,12 0,15 0,05 -0,17 8 -0,23 -0,29 -0,09 0,01 0,28 0
Maximum 0,53 -0,08 0,36 0,45 0,69 0,48 0,44 0,33 -0,02 0,32 0,41 0,6 0
TANGERANG
MUNICIPALITY 0,29 0,04 0,01 0,43 0,45 0,59 0,27 0,53 -0,03 0,18 0,37 0,13 0
CILEGON 0,52 -0,21 0,37 0,4 0,59 0,37 0,64 0,3 -0,38 -0,1 0,52 0,45 0
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MUNICIPALITY
SERANG
MUNICIPALITY 0,5 -0,02 0,15 0,66 0,56 0,49 0,42 -0,03 -0,33 0,05 0,17 0,41 0
0,176 0,49 0,533 0,483 0,44
Average 0,43667 -0,0633 67 667 33 33 333 0,26667 -0,2467 0,04333 0,35333 0,33 0
Minimum 0,29 -0,21 0,01 0,4 0,45 0,37 0,27 -0,03 -0,38 -0,1 0,17 0,13 0
Maximum 0,52 0,04 0,37 0,66 0,59 0,59 0,64 0,53 -0,03 0,18 0,52 0,45 0
INDONESIA 0,32 -0,08 0,11 0,44 0,68 0,55 0,31 0,12 -0,27 0,02 0,14 0,34 0
Average 0,32 -0,08 0,11 0,44 0,68 0,55 0,31 0,12 -0,27 0,02 0,14 0,34 0
Minimum 0,32 -0,08 0,11 0,44 0,68 0,55 0,31 0,12 -0,27 0,02 0,14 0,34 0
Maximum 0,32 -0,08 0,11 0,44 0,68 0,55 0,31 0,12 -0,27 0,02 0,14 0,34 0
c. Economics Models
Economists are assuming that the absence of small parts of economics science today is irrelevant with the most updated economic condition and therefore it is
important to develop new research questions.
Definition of the Problems

Further Description on the Research Question in this paper is as follows:
• The flow of FDI from 2011 to 2014 is not always experiencing a hike. In 2013 the flow of FDI is levelling down. Thus, we
should know why such condition occurs.
• Most of FDI is concentrated on manufacturing sector. Around 50% of FDI flow is found in the sector of manufacture. In
accordance with the data collected by Bank Indonesia in 2007, the contribution of manufacturing sector to the economics of
this this country is higher than the amount contributed by natural resources sector due to its high level of additional value. To

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figure out the theoretical background behind this argument, we must find the most suitable phenomenon by way of observing
almost similar researches from all across the globe.
• FDI flow of manufacturing sector is fully concerned in Jawa Island. Jawa is the island that becomes the center of economics of
this country and the island is also equipped with many supporting facilities, policies, and factors magnetizing the flow of FDI.
Those factors must be found thus the settled down policies can be implemented in other regions (with or without adjustment?).
• The impact of fare (regional minimum fare and relative fee) towards FDI flow (all kinds of industries, labor intensive industry,
capital intensive industry, and the amount of multinational companies) varies in provinces outside Jawa Island.
• Henceforth, it is presumed that there are factors influencing FDI flow. As a result, we must perform further investigation
towards other factors influencing the flow of FDI.
• The number of foreign investors in the sector of industry are shifting during the period of 2005-2014. The tendencies of that
trend in those provinces are high and it has been pre-assumed due to the influence of regional minimum wage . Thus, it is at its
best to stipulate optimum amount of regional minimum wage in every province of this country.
1.3 Important Roles of the Research

Important points of this research are as follows:
The rise of Regional Minimum Wage (UMR) is one of many indicators of economics slow down and the impact of which can be
shown in the emergence of trading sector in Indonesia and its foreign direct investment (FDI) flow. The boosting of UMR in
domestic context causes domestic foreign investment (FDI)’s slow down. This factor inhibits the economic growth in domestic
market. Foreign Investors will be re-pondering their decisions to invest in Indonesia. The rise of UMR may trigger foreign investors
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to transfer their business to other countries with lower amount of UMR cost. The lowering down of the pace of investment mainly
in the real sector, and it will also have an impact to the decrease of job opportunities and it, therefore, can cause mass lay offs in
every region (Handayani, 2013).
1.4 Objectives
The objectives of this research are:
1. To test the impact of wage (regional minimum wage and relative wage) of FDI flow (in all industries, labour intensive industry,
capital intensive industry, and the number of multinational companies) in Jawa Island.
2. To formulate other factors having the impact on the flow of FDI (in all industries, labour intensive industries, and capital
intensive industries, and number of multinational companies) in Jawa Island.
1.5 Research Gap

There are some research gaps, including:
1. Testing other factors influencing the flow of foreign investment’s FDI in industrial sector which are ready to observe in the
next phase of research, i.e. the research of Emi, 2015, which is testing all sectors contributed in this research.
2. Grouping the FDI flow of the classification of FDI arising from industrial sector (all industries, labour intensive industry,
capital intensive industry, and the number of multinational companies).
3. Investigating on the impact of regional minimum wage and relative wage, of which impact is wider from previous research
(Emi, 2015) and the investigation of which is limited to the amount of regional minimum wage.
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4. Testing the influence of infrastructure development (electricity and road) which is included into the scope of wider-scale
research than the previous ones (Priyanti, 2012) which are mainly focused on road construction.
1.6 Research Contribution

The contribution of this research are as follows:
1. Preparing any information related to the factors influencing FDI flow to the industrial sector.
2. Preparing information related to the factors which are significantly influencing FDI flow to industrial sector.
3. Contributing in providing recommendations on the types of industries which are able to and trustable to develop in every single
province in Jawa Island.
4. Giving recommendations on the proportion of budget allocation for the development of industrial groups based on the
coefficient arising from each variable which significantly influences FDI flow in Jawa Island.
1.7 The Limitation of the Research

The following are the limitation of this research:
1. The scope of the domain of this research includes Jawa Island as the main area of foreign direct investment (FDI).
2. This research focuses on the industrial sector as the biggest sector contributing in the flow of FDI.
The period of this research includes simultaneous year from 2005 to 2014 by considering the availability of the most updated data
arising from all emergence variables.

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d. First model: diagram of circular flow

We require a model that can describe, in general term, on how economics are regulated and how the actors of economics system are inter-related between
one and another.
Circular flow diagram in this economics model has been simplified to include two types of major decision makers – household and companies. To produce
goods and services by using various input like workforce, land, and capital (buildings and machineries). Those inputs are called as production factors. Every
household has its own productional factors and goods and services’ consumption activities manufactured by companies.
THE APPROACH IN INDUSTRIAL DATA
capital / input value (per year) in millions rupiahs
2013 2014 2015

Indonesia 300777949 311111481 349626357
West 257323521 237908689 301236497
East 43454428 73202792 48389860
Table 1.1.
Source: Ministry of Industry, 2017

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capital / input value (per year)

400000000
350000000
300000000
250000000
200000000
150000000
100000000
50000000
0
2013 2014 2015
indonesia west east
Table 1.2.
The amount of investment (per year) in people
2013 2014 2015

Indonesia 9734111 8362746 8735781
West 7901109 6538924 7195984
East 1833002 18223822 1539797

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labor amount (per year)

20000000
18000000
16000000
14000000
12000000
10000000
8000000
6000000
4000000
2000000
0
2013 2014 2015
indonesia west east

Table 1.3.
The amount of labour cost (per year) in million rupiahs
2013 2014 2015

Indonesia 86546669 48602183 48188828
West 73118315 37654464 39942804
East 13428354 10947719 8246024

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labour cost (per year)

100000000
90000000
80000000
70000000
60000000
50000000
40000000
30000000
20000000
10000000
0
2013 2014 2015
indonesia west east
Table 1.4.
Producer/Number of micro and small industries/companies (per year)
2013 2014 2015

Indonesia 3418366 3505064 3668873
West 2610866 2659782 2971231
East 807500 845282 697642

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Producer / Number of Micro and Small Industries / Companies

(Per Year)
4000000
3500000
3000000
2500000
2000000
1500000
1000000
500000
0
2013 2014 2015
indonesia west east

Table 1.5.
Output Value (per-year)
2013 2014 2015

Indonesia 489861304 513309953 570366901
West 413679797 388275108 482250498
East 76181507 125034845 88116403

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output value (per year)

600000000
500000000
400000000
300000000
200000000
100000000
0
2013 2014 2015
indonesia west east

Table 1.6
Value Added (per year)
2013 2014 2015

Indonesia 300777949 55658747 220740544
West 257323520 150366420 181014001
East 43454429 5182053 39726543

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value added (per year)

350000000
300000000
250000000
200000000
150000000
100000000
50000000
0
2013 2014 2015
indonesia west east
Table 1.7
Production Growth (per year)
2013 2014 2015

Indonesia 7,51 4,91 5,71
West 3,85 4,56 4,19
East 3,56 7,63 10,29

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production growth (per year)

12
10
0
2013 2014 2015
indonesia west east

The Table displaying the Production Amounts of each Island / Islands

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Capital Input (Trillion Rupiah)

Correlation Labor Cost and Capital Input
360
350
340
330
f(x) = − 0.0165155717112092 x + 467.709768194484
320 R² = 0.207668947470068 capital / input value (per year) in tril-
310 lions rupiahs
Linear (capital / input value (per
300 year) in trillions rupiahs)
290
280
270
0
0
0
0
0
2
0
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1
Labor Amount (Thousand People)
The increase in labor costs amounted to 1 trillion rupiah, correlated with a decrease in capital input of 0.78 trillion rupiah. So these two things are negatively cor
related. While the coefficient of determination is 45%.

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labor cost ( per year) and Capital Input in Trillion rupiahs

360
350
340
330
f(x) = − 0.789473684210526 x + 367.894736842105
320 R² = 0.453857791225416 labor cost ( per year) in Trillions
rupiahs
310 Linear (labor cost ( per year) in Tril-
lions rupiahs)
300
290
280
270
45 50 55 60 65 70 75 80 85 90
Labor cost (Trillion Rupiah)
The increase in 1 unit of MSMEs, correlated with an increase in capital input of 0.0002 trillion rupiah. So these two things are positively correlated. The coefficie
nt of determination is 98%.

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Producer / Number of Micro and Small Industries / Companies

(per year) in unit (hundred)
360
350
340 f(x) = 0.000200334953837738 x − 387.336177513446
R² = 0.9826446155064
330 producer / Number of micro and
320 small industries / companies (per
year) in unit (hundred)
310
Linear (producer / Number of micro
300 and small industries / companies
(per year) in unit (hundred))
290
280
270
0
0
0
0
0
0
0
0
0
0
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3
3
Micro and Small Industries (Unit)
The increase of 1 Trillion of Output Value, is closely related with an increase in capital input of 0.61 trillion rupiah. So these two things are positively correlated.
The coefficient of determination is 99%.

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Output Value (per year) in Trillion rupiahs

360
350
f(x) = 0.616117850953206 x − 2.84575389948009
340 R² = 0.994084248171852
330
320 output value (per year) in Trillions

rupiahs
310 Linear (output value (per year) in
Trillions rupiahs)
300
290
280
270
480 490 500 510 520 530 540 550 560 570 580
Output Value (Trillion Rupiah)
The increase in 1 Trillion of Value Added, is correlated with a decrease in capital input of 0.003 trillion rupiah. So these two things are negatively correlated. Whi
le the coefficient of determination is 0.03%.

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Value added (per year) in trillions rupiahs

360
350
340
330
320 value added (per year) in trillions

f(x) = − 0.00368392952482648 x + 320.706086492258 rupiahs
310 R² = 0.000320462855790682 Linear (value added (per year) in
trillions rupiahs)
300
290
280
270
0 50 100 150 200 250 300 350
Value Added (Trillion Rupiah)
If you look at the graph above, the growth of the number of workers is linear with labor costs, while the input trend seems to be influenced by other things.

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Labor cost and Inpput Value (Trillion Rupiah)
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Labor Amount (Hundred People)

Amount and labor cost and input values in Indonesia on the
period of time 2013 - 2015
10000 400
350
9500
300
9000 250
200
8500 150
100
8000
50
7500 0
2013 2014 2015
Axis Title
labor amount (per year) in people (Hundred)

Linear (labor amount (per year) in people (Hundred))
labor cost ( per year) in Trillions rupiahs
capital / input value (per year) in trillions rupiahs
The number of MSMEs in Indonesia from year to year has increased, but, this is not linear with value added growth, but linear with output. This possibility is du
e to the cost of input materials, raw materials, and services for production experiencing price increases.
It can be seen from the graph of input values that continue to increase even though the number of workers is experiencing a downward trend.

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Number of Producer of micro and small industtry
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Output and Value Added (Trillion Rupiah)

The number of MSME, Output Values and Value Added in
Indonesia during Period of Time 2013 - 2015
3700000 600
3650000
(Hundred Unit)
500
3600000
3550000 400
3500000
300
3450000
3400000 200
3350000
100
3300000
3250000 0
2013 2014 2015
Tahun
producer / Number of micro and small industries / companies (per year) in unit (hundred)
output value (per year) in Trillions rupiahs
value added (per year) in trillions rupiahs
Production growth has decreased in trend, although the output trend has increased. Seeing the trend of the number of workers and labor costs that are decrea
sing, this possibility is due to an increase in the number of MSMEs. Although MSMEs are increasing, the number of workers decreases is very reasonable, becau
se usually the MSME work system is family, so it is likely that workers working in the MSME sector are not registered as workers. (This needs to be checked).

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Input and Output Value (Trillion Rupiah)
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Input Values, Output Values, and Growth Production in
Production Growth (%)

Indonesia during Period of Time 2013 - 2015
600 8
500 7
6
400 5
300 4
200 3
2
100 1
0 0
2013 2014 2015
Axis Title
capital / input value (per year) in trillions rupiahs

output value (per year) in Trillions rupiahs
Linear (output value (per year) in Trillions rupiahs)
Linear (output value (per year) in Trillions rupiahs)
production growth (per year) in percent
The increase in Labor as many as 1 million people, correlated with an increase in capital input of 10 trillion rupiah.
So these two things are positively correlated. The coefficient of determination is 5%.

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Correlation betweeen amount of labor and Input Values in West Region during
Period of Time 2013 - 2015
Capital Input (Trillion Rupiah) 350
300
f(x) = 10.5405405405405 x + 189.45945945946

250 R² = 0.0511294876966524
200
150
100
50
0
6.4 6.6 6.8 7 7.2 7.4 7.6 7.8 8
Labor Amount (Million People)
The increase in Labor Cost amounted to 1 trillion rupiah, correlated with a decrease in capital input of 0.263 trillion rupiah. So these two things are negatively c
orrelated. While the coefficient of determination is 2%.

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Correlation between Input Values and Labor Cost in West

Region during Period of Time 2013 - 2014
Input Value (Trillion Rupiah)
350
300
250 f(x) = − 0.263843648208469 x + 278.104234527687

R² = 0.026581263065778
200
150
100
50
0
35 40 45 50 55 60 65 70 75
Labor Cost (Trillion Rupiah)
The increase in the number of MSMEs as much as ten thousand units, correlated with an increase in capital input of 180 trillion rupiah. So these two things are
positively correlated. While the coefficient of determination is 90%.

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Correlation Between Input Values with the Number of Micro,

Small, and Medium Enterprises in West Region during Period
Input Value (Trillion Rupiah) of Time 2013 - 2014
350
300
f(x) = 180 x − 221
R² = 0.906716417910448
250
200
150
100
50
0
2.55 2.6 2.65 2.7 2.75 2.8 2.85 2.9 2.95
Number of micro and small industries (thousand unit)
The increase in the value of output amounted to 1 trillion rupiah, correlated with an increase in capital input of 0.67 trillion rupiah. So these two things are posi
tively correlated. While the coefficient of determination is 90%.

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Correlation Between Input Values and Output Values in West

Region during Period 2013 - 2014
350
300
f(x) = 0.671635494304599 x − 22.2361130642666
R² = 0.997428831094143
250
200
150
100
50
0
380 400 420 440 460 480 500
An increase in added value of 1 trillion rupiah, correlated with an increase in capital input of 0.04 trillion rupiah. So these two things are negatively correlated.
While the coefficient of determination is 0.5%.

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Correlation between Inputt Values and Value Added During in

West Region during Period of Time 2013 - 2014
350
300
250 f(x) = 0.0428901352688882 x + 256.593533487298

R² = 0.00520122909044385
200
150
100
50
0
140 160 180 200 220 240 260 280
The decrease in production growth by 1%, correlated with a decrease in input value of 30 trillion rupiah. So these two things are positively correlated. While the
coefficient of determination is 10%.

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Correlation Between Input Values with Growth Production in

West Region during Period of Time 2013 - 2014
350
300
f(x) = − 30.2934179222838 x + 392.232355273592
250 R² = 0.107948560133511
200
150
100
50
0
3.8 3.9 4 4.1 4.2 4.3 4.4 4.5 4.6
Production growth (%)
In the western regions, the correlation between the decrease of the number of labour and the decrease of the labor cost are theoretically reasonable, but it has
negative correlation with the cost of the input / capital input in which its trend is increasing. It is likely that variables of the cost such as raw materials and other
services are increasing or there may be the purchase of technology for production efficiency.

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Input Values and Labor Cost (Trillion Rupiahs)
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Amount of Labor ( Thousand Perople)

Input Values, Labor Cost, and Amount of Labor in West Region
during Period of Time 2013 - 2015
9 350
7.9
8 7.1301 300
7 6.5
257 250
6 237
5 200
4 150
3
100
2 73
1 37 39 50
0 0
2013 2014 2015
Year
labor amount (per year) in thousand people

Linear (labor amount (per year) in thousand people)
capital / input value (per year) in trillion rupiahs
labor cost ( per year) in Trillion rupiahs
The trend line of the number of MSMEs from 2013-2014 increased although not significantly, an increase in the number of linear MSMEs with output values. Th
eoretically, if MSMEs increase indeed output will increase, but this data only illustrates the linear relationship of the number of MSMEs with output. If you want
to see if the increase in MSMEs per unit will increase output, then you should use MSME / Output value ratio data, applying also to added value.

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Output Values and Values Added (Tr
Number of Micro, Small, and Medium
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thousands Units)
Input Values, Labor Cost, and Amount of Labor in West Region
during Period of Time 2013 - 2015
600 300
Rupiahs)
500 257 482 250
413 388
400 200
181
300 150 150
200 100
100 50
0 2.6 2.6 2.9 0
2013 2014 2015
Tahun
output value (per year) in trillion

producer / Number of micro and small industries / companies (per year) in Million unit
Linear (producer / Number of micro and small industries / companies (per year) in Million unit)
value added (per year) in trillion
If you look at the chart above, the current trend shows that both input and output values are linear. If the input value is increasing, then the output value is also
increasing. While the increase in production inputs and outputs are seen to be negatively correlated with the growth of production costs. This is likely because t
he industrial trend in 2014 was displaying the efficiencies of productional process and the available condition displaying the decreasing return to scale (ROI?), B
ut in 2015, the growth in both input and output values do not correlate with production growth, and it is likely due to price factors.

31
Input Values and Output values(Trilion Rupiahs)
32
Input Values, Output Values, and Production Growth in West

Region during the Period of Time from 2013 to 2015
Growth Production (%)

600 4.8
500 4.56 482 4.6

413 4.4
388
400
301 4.19 4.2
300 257 237 4
200 3.85 3.8
100 3.6
0 3.4
2013 2014 2015
Year
capital / input value (per year) in trillion rupiahs output value (per year) in trillion
production growth (per year) in percent
An increase in the number of workers as many as one million people, correlated with an increase in capital input of 1.67 trillion rupiah. So these two things are
positively correlated. The coefficient of determination is 8%. But, the 2014 data on the number of labor is an outlier so that the correlation….

32
33

Correlation Between Input Values and Amount of Labor in Eastern Areas
during the Period of 2013 - 2014
80
70 f(x) = 1.67732525524515 x + 42.7576573544261

R² = 0.970684357390256
60
50
40
30
20
10
0
0 2 4 6 8 10 12 14 16 18 20
An increase in labor costs of 1 trillion rupiah is correlated with a decrease in capital input of 1.7 trillion rupiah. So these two things are negatively correlated. Wh
ile the coefficient of determination is in the amount of 7%.

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34
Correlation Between Input Values and Labor Cost in Eastern Regions dur-
ing Period of Time 2013 - 2014
70
60
f(x) = − 1.71052631578947 x + 72.3421052631579
50 R² = 0.0717317487266551
40
30
20
10
0
7 8 9 10 11 12 13 14
Labor Cost (Trillion Rupiah)
The increase in the number of MSMEs is as many as one thousand units, it is correlated with an increase in capital input of 0.12 trillion rupiah. So these two thin
gs are positively correlated. While the score of the coefficient of determination is 33%.

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35
Correlation between input values and the amount of Micro, Small, and
Medium Enterprises in Eastern Regions during period of time of 2013 -
2014
80
70
60 f(x) = 0.121022342586324 x − 40.0938275784247

R² = 0.334958612706663
50
40
30
20
10
0
680 700 720 740 760 780 800 820 840 860
Amount of Small and Micro Industries (Thousand Unit)
The increase in the number of MSMEs is as many as one thousand units, it is correlated with a decrease in capital input of 0.79 trillion rupiah. So these two thin
gs are negatively correlated. The coefficient of determination is 99%.

35
36
Correlation between Input Values and the Value Added in Eastern

Regions during the Period of Time of 2013 - 2014
80
70 f(x) = − 0.768348623853211 x + 76.9487767584098

R² = 0.996374667061261
60
50
40
30
20
10
0
0 5 10 15 20 25 30 35 40 45 50
The increase in the number of MSMEs is as many as one thousand units, and it is correlated with the increase in capital input of 0.62 trillion rupiah. So these tw
o things are positively correlated. The coefficient of determination is 99%.

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37
Correlation between Input Values and Output Values in Eastern Regions

during the Period of Time of 2013 - 2014
70 f(x) = 0.627235564639755 x − 5.75702606029638

R² = 0.993460200768128
60
50
40
30
20
10
0
70 80 90 100 110 120 130
An increase in production growth of 1% is correlated with the increase in capital input of 1.29 trillion rupiah. So these two things are positively correlated. While
the coefficient of determination is 7%.

37
38
Correlation between Input Values and Production Growth in Eastern

Regions during the Period of Time of 2013 - 2014
70
60
f(x) = 1.29472795480855 x + 45.3964145102374
50 R² = 0.0745512709462348
40
30
20
10
0
3 4 5 6 7 8 9 10 11
In 2014, the number of workers are increasing significantly but it was dated back in 2015 when the figures was experiencing an enormous fall (and then we nee
d to find out what is the reason behind such trend). If you pay closer attention to the above-mentioned graphic, both input value and amount of labor have a lin
ear correlation whereas the cost of labour is negatively correlated.

38
Capital Input and Labor Cost (Trillion Rupia
39

Amount of Labour, Input Values, and Labor Cost in Eastern Regions during
Period of Time 2013 - 2015
20 80
18
18 73
70
16
60
14
12 48 50
43
10 40
8 30
6
20
4
13
1.8
2 10 1.5
8 10
0 0
2013 2014 2015
Year
labor amount (per year) in million people Linear (labor amount (per year) in million people)
capital / input value (per year) in trillion rupiahs labor cost ( per year) in Trillion rupiahs
If you are looking closer to the data above, then we can infer that both output value and additional value are negatively correlated, whereas the additional value and
the number of MSMEs are positively correlated, it was just sometimes in 2014 it became an outlier.

39
Output Value and Value Added (Trillion Rupiah)
40
Number of Producer (Thousand Unit)

Number of Micro, Small, and Medium Enterprises; Output Values and
Additional Value in Eastern Regions during the Period of Time of 2013 - 2015
900 845 140
807
800 125
697 120
700
100
600
88
500 76 80
400 60
300 43 39 40
200
100 20
5
0 0
2013 2014 2015
Axis Title
producer / Number of micro and small industries / companies (per year) in thousand unit
output value (per year) in trillion
value added (per year) in trillion
If you look closer at the chart above, the input and output trends are both linear. Whereas the trend of production growth seems to be influenced by other thin
gs playing at hand.
If you refer to the previous data, the number of workers increased sharply in 2014, followed by the level of production growth which is approximately 3% and it
is continue to experience a significant increase in the number of production recorded in 2015, even though the number of workers were decreased significantly
in 2015 (and it is necessary to find out why).

40
Output and Input Value (Trillion
41
Production Grow th, Input V alues and Output V alues in Eastern Regions during
the Period of Time from 2 0 1 3 to 2 0 1 5
12 140
125 10.29
10 120
7.63 100
8
88
76 80
6 73
60
4 3.56 48
43 40
2 20
0 0
2013 2014 2015
Year
production growth (per year) in percent output value (per year) in trillion
capital / input value (per year) in trillion rupiahs
From Productivity of Textiles and Appareals Industries, the number of valleys, slopes, and lands in Java are still the biggest in number. The same condition are happe
ned in Bali and Nusa Tenggara and Kalimantan. The reverse condition are in Sulawesi and Sumatera, in condition that the number of valleys, slopes, and lands in Java
are still are more than Bali and Nusa Tenggara and Kalimantan, but the productivity of Textiles and Appareals Industries are less.
e. The Second Model: Production Possibility Frontier

Production possibility frontier shows the graphic displaying various combination of output of a study case, i.e. cars and computers that can be manufactured
resulting from economics process and supported by production factors to change available factors of production into inputs.
The fee for something is every single thing someone sacrifices to earn goods or products. This fee is called as opportunity cost.
It is, therefore, necessary to correlate the factors influencing the fluctuation of Direct Foreign Investment in industrial sector in Jawa Island in the period of 2005
– 2014
Background

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42
The flow of foreign direct investment (hereinafter referred to as FDI) to Indonesia is fluctuating. Based on the data collected from
the Board of Investment Coordination in 2016, during the period of 2011-2014, the realization of FDI flow is generally raising in figures.
The highest point is found sometimes in 2013 in the amount of USD 7.4 trillion dollar, whereas the lowest point was scored in 2011 in the
amount of USD 5.1 trillion dollar. Henceforth, the amount of FDI flow from 2011 to 2014 was increasing in percentage by the level of 33.3
3%. However, this raising trend is lowering down from year to year by the figures of 23.53% in the period of 2011-2012, 17.46% in 2012-
2013, and lowering down in the level of 8.11% in the amount of 2013-2014.
The composition of sectors receiving FDI flow in 2014 was dominated by manufacturing sector, i.e. in the amount of 45.6%.
Service sector lies in the second rank and amounted 29.9%. In the third place there is mining sector in the level of 16.4%, and the fourth
place there is horticulture and farming sector with the percentage of 7.7%, whereas in the lowest level there were forestry, fishing, and
husbandry, each of which scores the percentage of 0.1%.

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43
Food Crops and Plantation Forestry Fishery Livestock

8% 0% 0% 0%
Mining
16%
Manufacturing
46%
Services
30%
Figure 1.1 Composition of Sectors Receiving the Flow of Direct Foreign Investment in 2014
Source: bkpm.go.id
In 2014, most of FDI flow invested in Jawa Island was amounted to 65%. In the second place there was Sumatera Island in the amount of 1
6% and then followed by Sulawesi Island in the amount of 12%. The1 last three positions were held by the Island of Kalimantan on the
percentage of 7%, Bali and Nusa Tenggara on the percentage 0%, and also Maluku and Papua in the amount of 0%.

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44
Maluku Papua
0% 0%
Kalimantan Sulawesi
7% 12% Sumatera
16%
Bali dan Nusa
Tenggara
0%
Jawa
65%
Figure 1.2 Realization of Investment by Areas

Source: bkpm.go.id
Minimum wage is one of the most important factors influencing the selection of research location. In the period of 2005-2014, it has
been recorded that regional minimum wage of every province in Jawa Island is experiencing increasing trend. But, the increase from year
to year is different in every single province. Central Jawa, West Jawa, East Jawa, and Yogyakarta stipulate almost similar amount of
minimum wage. Whereas Banten and Jakarta Special Capital Region stipulated higher amount of minimum wage than those 4 earlier

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45
mentioned provinces. To this end, from 2011 to 2014, Special Region of Jakarta Capital City has been stipulated the amount of minimum
wage which is higher than Banten.
Figure 1.3 Volatility of Minimum Regional Wage in each Province in Jawa Island during the Period of 2005-2014
Source: Department of Economic Sciences, the University of Indonesia, 2017

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46
FDI industri
8,000,000.00
7,000,000.00
6,000,000.00
5,000,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Banten DKI Jakarta Jawa Barat

Jawa Tengah DI Yogyakarta Jawa Timur
Figure 1.4 Volatility of Direct Foreign Investment in Industrial Sector in Jawa Island in the Period of 2005-2014
Source: bkpm.go.id
From the graphic displayed above, we can perceive that the FDI flow in industrial sector during the period of 2005-2014 in those
provinces experience an increasing trend mainly in West Jawa, Banten, and East Jawa. Although during the period from 2005 to 2011 the
graphic shows its volatility, but from 2011 to 2014 those areas still display increasing trend. Whereas the FDI of the industrial sectors in
other provinces show stability of growth.

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47
In accordance with the volatility of regional minimum wage in those six provinces of Jawa Island, the FDI flow in Special Capital
City of Jakarta becomes the second most inhibited issues. This takes place due to the assumption that minimum regional wage (UMR) of
the province in that region is low. On the contrary, Central Jawa and Yogyakarta Provinces still gain lowest level of FDI even though its re
gional minimum wage is also low. Different condition also occurs in West Jawa and East Jawa. Even though its regional minimum wage
amount is almost similar with the waging implemented in Central Jawa and Yogyakarta Special Region, but its FDI flow is absolutely
higher in amount than in those four provinces. Banten becomes the runner up of the classification. Whereas, in both Central Jawa and Yogy
akarta Special Region, the minimum regional wage are higher than the amount implemented in East Jawa, but the amount of which is lower
than West Jawa.

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1,200
1,000
800
600
400
200
-
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BANTEN DKI JAKARTA JAWA BARAT

DI YOGYAKARTA JAWA TENGAH JAWA TIMUR
Figure 1.5 The Fluctuation of the Number of Multinational Companies in every Province outside Jawa Island
Source: Statistics of the Industry in 2014
On the other hand, the number of multinational companies in every province of Jawa Island is also fluctuating. From all of those
provinces it was recorded that the number of multinational companies in this island is increasing. Special Region of Yogyakarta is always
scored the lowest when it deals with the number of foreign companies. Jakarta Special Capital City also displays the decrease of the
number of multinational companies. The number of multinational companies in Central Jawa, East Jawa, and Banten shows fluctuation and
stability. West Jawa always became the best achiever of the classification, by the number of foreign investment companies in that region.

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Dealing with the volatility of regional minimum fee in 6 provinces of Jawa, Yogyakarta Special Region received a number of
investment from multinational companies and the wages are at its lowest level. Meanwhile, the number of multinational companies
operating within the area of Special Capital Region of Jakarta is constantly decreasing due to relatively high level of minimum regional
wage’s hike. Central Jawa gains higher number of stable multinational companies and those areas achieve higher than Yogyakarta Special
Region and Special Capital Region of Jakarta because its regional minimum wage is lower. Different condition also prevails in West Jawa.
Regional minimum wage in that province is relatively similar when it is compared to the condition of Central Jawa and Special Capital
Region of Yogyakarta. However, the number of multinasional companies in West Jawa is higher than the number of the companies in other
four provinces. West Jawa and Banten always become the highest achiever and the runner up of the classification even though their
minimum regional wages are higher. To this end, as a matter of factly, regional minimum wage in West Jawa is relatively similar in amount
when it is compared to the amount applied in Special Region of Yogyakarta, East Jawa, and Central Jawa.

49
50
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BANTEN DKI JAKARTA JAWA BARAT

DI YOGYAKARTA JAWA TENGAH JAWA TIMUR
Figure 1.6 Volatility of Direct Foreign Investment of Labour Intensive Industry in Jawa Island during the period of 2005-2014
Source: bkpm.go.id
From the line diagram displayed above, the most fluctuative labour intensive industry manufacturers are found in Banten, East Jawa,
and West Jawa. Since 2007, both Central Jawa and Jakarta Special Capital City display the same level of fluctuation and amount of FDI
flow whereas the amount displayed in the chart showing the number of manufacturers in Yogyakarta Special Region is stable in number.
FDI flow of labour intensive industry in every province of Jawa Island is also fluctuating. Most of those provinces record that direct
FDI flow to labour intensive industries are relatively increasing. Yogyakarta Special Region always holds the lowest position when it deals
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with FDI flow. The data in Special Region of Jakarta Capital City showed the decreasing trend of FDI flow from 2010 to 2012. FDI Flow
in labour intensive industry in Jawa island is relatively the same with the trend in Jakarta, but it scored higher amount from 2011 to 2014.
Whereas in East Jawa, West Jawa, and Banten the top three of FDI flow are achieved by labour intensive industry.
Dealing with the volatility of regional minimum wage in those 6 provinces of Jawa Island, Yogyakarta Special Region always gain
the lowest level of FDI flow even though its minimum regional wage is lower. The flow of foreign investment has been directly gained
from labour intensive industry in Special Region of Jakarta Capital City and this trend is decreasing during the period of 2009-2012. This is
assumed to occur due to the hike of regional minimum wage. Whereas Central Jawa Province gains stable FDI flow in certain amount
which is higher than the one recorded in Yogyakarta Special Capital City and Special Region of Jakarta Capital City because its regional
minimum wage level is lower. Different condition occurs in East Jawa. Regional minimum wage in this province is relatively similar to the
tariff implied in Central Jawa and Yogyakarta Special Capital City but the FDI flow of which is higher than those four provinces. West Jaw
a and Banten can be the highest and runner up achievers when it deals with the amount implied to minimum regional wage in West Jawa
and its amount is relatively the same with the ones recorded in Yogyakarta Special City, West Jawa, and Central Jawa.

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Figure 1.7 Volatility of Direct Foreign Investment Flow of Capital Intensive Industry
Source: nswi.bkpm.go.id
In other words, the FDI flow of capital intensive industry in each province in Jawa Island is also fluctuating. Most of those
provinces record that the FDI flow from capital intensive industry is relatively increasing. Yogyakarta Special City, Central Jawa, and
Special Capital Region of Jakarta are always become the lowest when it delas with direct foreign investment from capital intensive industry.
East Jawa displays that direct investment flow from labour intensive industry is a little bit higher than three other provinces. The FDI flow

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of capital intensive industry in West Jawa and Banten displays unstable fluctuation even though they become the top scorers of FDI flow of
capital intensive industry in the period from 2011 to 2014.
Dealing with the volatility of regional minimum wage in 6 provinces in Jawa Island, Special Region of Yogyakarta and Central Jaw
a always get FDI flow from capital intensive industry in a low amount even though they have low amount of regional minimum wage. FDI
Flow of capital intensive industry scores the lowest and gains the position as the lowest three due to the high raise of minimum regional.
Meanwhile, East Jawa gains direct foreign investment flow with a little bit higher amount than three other provinces, and its amount is
almost similar with this country’s regional minimum wage. Different condition also occurs in West Jawa, i.e. regional minimum wage of
this province is relatively the same with the tariffs implied in Central Jawa and Yogyakarta Special Region. West Jawa and Banten always
become the first and second achievers of direct foreign investment from capital intensive industry, even though regional minimum wage in
Banten is high and in West Jawa the amount of regional minimum wage is relatively similar to the one implemented in Special Region of Y
ogyakarta, East Jawa, and Central Jawa.
Based on Wahyono’s statement cited in 2012, some other factors influencing the selection of the location of manufacturing plant are
the location of the customers, raw material sources, employees’ wage, water provision, temperature, electricity tariff, transportation,
environmental condition, law and regulations, and other related issues. From those variables, those factors can be categorized into two big
groups, i.e. variables reducing and increasing the production cost of the company. By controlling the variables we can also influence the
amount of variable cost, which in the end of the day will have something to do with the decision to allocate FDI in certain area. According
to Bank Indonesia in 2007, even though those areas have promising potentials, perceived from the availability of market and abundance
amount of resources, but the inconducive climate of investment in Indonesia may trigger investor’s disinterest like what was happening in a
few years ago before the emergence of financial crisis. Mainly those potentials are spent for long-term investment which may result in new
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form of investment which improves the quality of products in small quantities and even negative amount of returned goods . The root of this
problem causes exported products from Indonesia become expensive and uncompetitive.
The issues related to investment are undeniably complex, and they are arising from the issue of safety, political conditions and
stability, law uncertainty, and the condition of infrastructure. As an illustration, the unstable condition of the provision of electricity,
telecommunication, besides road and facilities to the port and condition of work force also become the inhibiting factors . As an impact of
this condition, some foreign companies, i.e. capital intensive industry like electronics, textiles, clothing apparels, and shoes company,
relocate their productions to other countries like Thailand, Malaysia, and Vietnam.
Broadly speaking, this research is attempted to capture the flow of direct foreign investment (for all kinds of industries, i.e. labour
intensive industry, capital intensive industry, and a number of multinational companies) in Jawa Island. This trend is arising from the flow
of direct foreign investment (all kinds of industries, i.e. labour intensive industry, capital intensive industry, and a number of multinational
companies), the roles of minimum regional wage, and other factors influencing direct foreign investment (all industries, labour intensive
industry, capital intensive industry, and a number of multinational companies) to industrial sectors in Jawa Island.
f. Micro and Macro Economics

Microeconomics is learning on how both house-holds and companies make their decision and how they are interacting in certain market.
Macroeconomics is learning about wider scope of economic phenomena.
2. Economists as policy advisors

a. Positive Analysis versus Normative Analysis
When you are learning about economics science, please also bear in your mind the difference between positive statement and the normative one because
those statements can help all of you to stay focus. Most of economics science comprises of positive statements and it tries to explain on how economics
sciences work. Today, individuals applying economics sciences usually have their own normative goals: They want to learn on how to increase their level of

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economy. When you are capturing the fact that economist make their normative statement, you will find that all of them are implementing their roles as
permanent scientists cum policy advisors.
CHAPTER 4
FINDINGS AND ANALYSIS
4.1 Testing of the Models of Normal Regression Econometrics

4.1.1 Short Description of Econometrics Model
The testing of the model of econometrics is one of the factors influencing foreign investment and this variable is tested against all
classifications of industries, foreign investments of labour intensive industries, foreign investment of capital investment industries, and the
connting of the amount of abroad companies running in industrial sector is done by implementing regression approach to a panels of data
which includes cross section data covering 6 provinces of Jawa island and time series with research duration of 10 years, i.e. (2005-2014).
This research is prioritizing main variable of minimum wage and relative wage and the controlling variable of this research are among
others: consumers’ price index, road length, electricity load distributed to the industry, number of work force employed in industrial sector,
and gross domestic regional product, and also market openness and national-wide spatial plan.
4.1.2. First Diagnostics

First diagnostics to select the best models is done by way of comparing between pooled least square (PLS) model and fixed effect m
odel (FEM) by using Chow testing. If from the result of this test the p-value of Chow testing can reach the amount less than alpha 5% so F

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56
EM will be the best model for this research. Furthermore, the researcher tests pooled least square (PLS) models against random effect mod
els (REM) by implementing Breusch Pagan Lagrange multiplier (LM) models. If from the result of the test p-value of Breusch Pagan Lagra
nge multiplier test is found in the amount less than alpha 5% so REM will be the best model for this research. Next, fixed effect model (FE
M) and random effect model (REM) are tested by using Hausman test. However, if from the test, the p-value of the Hausman test is found
to be less than 5% so REM is the best model for this research. The findings of Stata 13 data processing are as follows:
1. Model 1. Determinant of foreign direct investment (FDI) flow for all types of industries
The Findings of Chow Test = 0.0055
The Findings of LM Test = 1.0000
The Findings of Hausman Test = 0.0000
2. Model 2. Determinant of foreign direct investment (FDI) flow of labour intensive industry
3. Model 3. Determinant of foreign direct investment (FDI) of capital intensive industry
4. Model 4. Determinant of foreign direct investment (FDI) flow revealing the number of foreign companies
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57

In the first model it is seen that from the result of Chow Test and Hausman test, the p-value score of less than alpha 5% was found,
whereas from LM test it is found that the value of alpha is 5%, so the best model applied in this research is FEM. In the second model it has
been seen that the result of Chow Test and Hausman Test are the p-value of less than 5% from alpha Test, while from LM test the figure of
more than alpha 5 % is found and therefore the best model for this research is FEM. Third model sows that the results of Chow Test and Ha
usman Test are the p-value less than alpha 5%, whereas from LM test it has been found that the p value is higher than alpha 5% ans
therefore the best methods used in this research is FEM. This also applies to the fourth models and it has been seen that the result of Chow
test and Hausman Test are the p-value of less than alpha 5%, and from LM test, it can be found that the value of which is more than alpha 5
%, so the best models for this research is FEM. Thus, in general, the best model depicting the correlation between factors influencing
abroad investment for all classification of the industry, abroad investment of labour--intensive industries, abroad investment of capital
intensive industries, and a series of abroad investment in industrial sector by using FEM.
Next, regression assumption check consisting of multi co-linear test, auto-correlation test, and heterokedasticity test. Multi co-linear
test is done by implementing correlational analysis whereas auto-correlation test is done by implementing Breusch Pagan LM test and heter
okedasticity tests. They are conducted by modifying Wqald test and the processing is assisted by using Stata 13 software.
Table 4.1 The Result of Multi-co-linear Test

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Variable Model 1 Model 2 Model 3 Model 4

Min. wage 26.37 26.37 26.37 26.37
Rel. wage 20.84 20.84 20.84 20.84
Consumers 15.85 15.85 15.85 15.85
Indexed Price
(IHK)
Road 21.24 21.24 21.24 21.24
Electricity 18.81 18.81 18.81 18.81
Work Force 24.01 24.01 24.01 24.01
PDRB 27.79 27.79 27.79 27.79
Openness 1,32 1,32 1,32 1,32
Market
Domestic 7.07 7.07 7.07 7.07
National
Spatial Plan (R
TRWN)
In the first, second, third and fourth models, both market openness and RTRWN dummy have VIF value less than 10, so multicol in both
variables are not found. Meanwhile, other variables have VIF value more than 10, and multicol is found in those variables.
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59
Table 4.2 Result of Model Estimation

C -1578456 -810541.5 -455983.1 303.0742
(0.200) (0.001) (0.704) (0.000)
Minimum wage -179.8194 -103.9691 76.69592 -.0331034
(0.743) (0.307) (0.886) (0.315)
Relative Wage 133.9019 (0. 56.3148 86.12858 .0178263
739) (0.451) (0.827) (0.461)
IHK 2780.542 (0. 903.4048 -286.2701 -.176282
646) (0.421) (0.962) (0.627)
Table 4.2 (Continued)

Road -66.33947 19.6362 -85.26525 -.0076325
(0.281) (0.087)* (0.159) (0.042)**
Electricity 590.2502 (0. 71.11903 494.5184 .0479597
002)*** (0.034)** (0.006)*** (0.000)***
Work force .6459331 .042506 .7205807 -.0000351
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(0.277)
(0.339) (0.732) (0.385)
Size of the -3.682255 -.1605622 -3.811872 -.0002535
market (0.088)* (0.683) (0.072)* (0.051)*
Openness 18300.32 -1341.462 24590.62 .1020613
Trading (0.762) (0.904) (0.678) (0.977)
RTRWN dummy 11822.74 1966.619 -33875.2 .1485628
(0.966) (0.969) (0.900) (0.993)
4.1.3 Result of Econometrics Testing

Based on the above results, size of the market’s variable is negatively significant towards alfa 10% and the variable is calculated
against foreign direct investment (FDI) flow of all kinds of industries. Whereas electricity variable is positively significant towards alfa 1%
and such variable is tested against foreign direct investment (FDI) flow of all kinds of industries. Meanwhile, other variables do not affect
the FDI of all kinds of industries.
Based on previous results, the variable of electricity is positively significant in the amount of alfa 5% against FDI flow of labour
intensive industry. Meanwhile the variable of road is positively significant in the amount of alfa 10% and it is tested against the FDI flow
of labour intensive industry. Other variables non-evidently have something to do with the FDI of labour intensive industry.
Based on the above results, variable of market size has significantly negative impact in the amount of alfa 10% and it is tested against the
FDI of capital intensive industry. Meanwhile, electricity variable is correlatively significant in the amount of alfa 1% and it is tested against
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the FDI of capital intensive industry, whereas other variables no longer have an influence towards the FDI flow of Capital Intensive Indus
try.
Based on the above results, the variable of market size negative significantly influential in the level of alfa 10% towards the FDI flow
against the number of foreign companies. Whereas land variable negative significantly influential in the level of alfa 5% towards FDI flow
against the number of foreign companies, variable of electricity is positively significant in the level of alfa 1% towards the FDI flow
against the number of foreign companies, whereas other variables do not have any influences towards FDI flow to a number of foreign
companies.
4.1.4 Discussion on the Results of Econometric Regression

Variable of Minimum Costs
Minimum Wage -179.8194 -103.9691 76.69592 -.0331034

(0.743) (0.307) (0.886) (0.315)
In the first, second, and fourth models related to FDI determinant for all kinds of industry, the FDI determinant of labour intensive i
ndustry, and determinant of the FDI flow to a number of foreign companies it can be seen that minimum wage has negative influence
towards FDI flow to all kinds of industry which include labour intensive industry and the number of foreign companies even though its
results is not significant. Meanwhile, in the third models dealing with the determinant of FDI flow for capital intensive industry it can be

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observed that minimum wage has positive influence towards FDI flow of capital-intensive industry, eventhough the result is no longer
significant.
Previous research done by Odi (1997) shows similar fact that … does not have any correlations with the investment in labour
intensive industry. Whereas based on Emis research (2015) the fact reveals that minimum wage also has something to do with investment
dealing with both FDI flow and National Based Income and Capital (PMDN). In the short term it has been seen that the amount of inves
tment in Indonesia is increasing. Meanwhile, the raise of stiffly set out level of minimum wage in the long run will distract the development
of investment which will further have negative impact towards economics structure. High amount of wage will be calculated as
entrepreneur’s or investor’s expense because company’s operational cost is calculated from the raise of the level of employee’s expense.
On the one hand, if the products as the output of the industry is not competitive, so in the long run company will bear its loss . This is in
accordance with the research done by Rifianto (2002) and Silalahi (2006) who stated that the increase of the level of minimum wage will
constraint the investors from developing their assumptions towards the profit that possibly will be received. This reflects the increase of
business risk level in Indonesia. Moreover, manpowers in general intend to increase their wage by way of demonstration and. However, if
the increase of the level of wage is followed by the increase of productivity so Indonesia will still have its own unique competitiveness if
we must be compared to other countries and our uniqueness, therefore, can lure more investors’ intent.
Variables of Relative Wage
Relative Wage 133.9019 (0. 56.3148 86.12858 .0178263

739) (0.451) (0.827) (0.461)

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In those four models displaying the determinant of FDI flow for all kinds of industries, the determinants of FDI flow for labour
intensive industry, capital intensive industry, and FDI flow to a number of foreign companies it has been revealed that the number of
foreign companies relatively have positive correlation with the FDI of all kinds of industries, dealing with the FDI of labour intensive
industry, the flow of FDI to capital intensive industry, and the flow of FDI to a number of foreign companies, eventhough the results are
not significant. Increasing amount of capital flow will cause the increase of the demand of skilled labours, so relative amount of wage will
also increase (Feenstra, 2015).
Variable of Consumers’ Price Index (IHK)

IHK 2780.542 (0. 903.4048 -286.2701 -.176282
646) (0.421) (0.962) (0.627)
In the first and second models, related to all determinants influencing FDI flow in all kinds of industries and the FDI flow to labour
intensive industry it can be seen that the IHK has positive correlation towards the FDI flow of all types of industries, eventhough the
correlation is not significant. Whereas in the third and fourth model displaying the determinants of FDI flow to capital intensive industry a
nd FDI flow to a number of foreign companies it can be seen that IHK has negative correlation with the FDI of capital intensive industry a
nd the FDI flow to a number of foreign companies, although they are not significant in number.
Previous research done by Giordano Dell-Amore Foundation shows that the level of inflation can be one out of many determining
factors to capture the factors influencing macro-economics stability and those factors are further set as important determinants for
investment flow, because they will, however, result in significant correlation. Whereas based on Emi (2015), the increase in the level of infl
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ation will decrease the intent of the investors to do their investment in manufacturing sector. The influence of inflation towards the inves
tments with negative direction of causalities can be explained first thing first with the increase of the level of inflation that may reflect the
raise of price which furthermore make peoples reduce their levels of consumptions, so the distribution of money circulation will be
DECREASING in amount. Secondly, the decrease of the amount of money in circulation will push the level of debt interest so the intent to
invest will also be levelling down.
Road Variable
Road -66.33947 19.6362 -85.26525 -.0076325

(0.281) (0.087)* (0.159) (0.042)**
In the first, third, and fourth models related to all determinants of FDI flow in all types of industries, the determinant of FDI flow to
modal intensive industry and the FDI flow to a number of foreign companies, it can be revealed that road length negatively influences the
FDI Flow of all kinds of industries, i.e. the FDI flow of capital intensive industry to a number of foreign companies, even though its
correlation is not quite significant. Meanwhile, in the second model related to the determinant of FDI flow of labour intensive industry
reveals that the length of the road has positive impact on the FDI flow of labour dense industry and those two determinants hypothetically
have significant correlation. The construction of road network is influencing industrial investment which requires the use of vehicles as
means of transportations (Samir, 2016).
Variable of Electricity Bills

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Electricity 590.2502 (0. 71.11903 494.5184 .0479597

002)*** (0.034)** (0.006)*** (0.000)***
In all models related to the determinant of FDI of any types of industries, the FDI flow to labour intensive industry, the FDI of
capital intensive industry, and the flow of FDI to a number of foreign companies shows that electricity has positive correlation to the FDI
of all kinds of industries, the FDI of labour intensive industry, and the flow of FDI to a number of foreign companies and its result is
significant.
Related to road and electricity bills variables, in the previous research, Odi (1997) stated that bad construction of certain infrastructu
re, can either be perceived as constraint or opportunity for foreign investment. Majority of countries with low level of income, are assumed
as one of many factors showing their uneasiness. But foreign investors also show that the potentials to lure foreign investment are available
in case the government of the respective country gives the opportunities to foreign companies to invest in infrastructure sector. Whereas a
research based on Jordan (2004) stated that well-qualified infrastructure, when it is well-maintained, the output of which may increase the
potentials of investment in certain country. Therefore, that measure stimulates foreign investment flow to that country. According to Emi (2
015) as the condition of the infrastructure increases, the interest to invest will increase in manufacturing sector will also develops. The
factor of infrastructure will affect production cost and trading volume will also be lesser in amount. Total transportation fee calculated from
the availability and well-maintained infrastructure condition will lessen the amount of economic cost. This condition will further reinforce
the ease of investors or entrepreneur to run their business.
The Variable of Man Powers

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Man Powers .6459331 .042506 .7205807 -.0000351

(0.339) (0.732) (0.277) (0.385)
In the first, second, and third models related to the determinants of FDI flow of any types of industry, the determinant of the FDI
flow of labour intensive industry, and the FDI flow to capital intensive industry shows that man powers have positive correlation towards
the FDI flow of any types of industries, the FDI flow of labour intensive industry, and the FDI flow of modal intensive industry are not
significant. In the fourth model related to the determinants of FDI flow to a number of foreign companies shows that man power factor has
negative influence towards the FDI flow to a number of foreign investment companies, even though the correlation is not significant. This
fact is in accordance with the fact disclosed in the previous research stating that the man power factor is one of many determining factors of
FDI when it deals with the determination of FDI location, and it will further explain the importance of human capital. Eventhough the
calculation of which is not significant. (Danciu,et. al., 2015).
Variable of Market Size
Market Size -3.682255 -.1605622 -3.811872 -.0002535

(0.088)* (0.683) (0.072)* (0.051)*
In all models related to the determinants of FDI flow of all types of industries, the determinant of FDI flow to labour intensive
industry, the determinant of FDI flow to capital intensive industry, and the determinant of FDI flow to a number of foreign companies
show that market size has negative influence towards the FDI flow to all types of industries, the FDI of capital intensive industry, and the F
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DI flow to a number of foreign companies, will result in a significant correlation, whereas the correlation of the FDI flow to labour
intensive industry is not significant. This result is in line with the output of the previous research stating that Gross Domestic Product
affects both location determination and income estimation raising from the availability of FDI. (Randelovie, 2017).
The Openness in Trading Variable
The Openness in 18300.32 -1341.462 24590.62 .1020613

Trading (0.762) (0.904) (0.678) (0.977)
In the first and third models related to FDI flow determinant, all types of industries and determinant of FDI flow to capital intensive indust
ry reveal that the openness in trading has positive correlation towards both FDI flow to all kinds of industries and the FDI flow of capital
intensive industry, eventhough the correlation of those two factors is not significant. Whereas in the second and fourth models related to
both determinants of the FDI flow for labour intensive industri and the number of foreign companies reveal that the openness of the market
has negative influence towards the FDI flow to labour intensive industry and the FDI flow to a number of foreign companies, eventhough
their correlation is insignificant.
Based on previous research from Giordano (2007), the openness of the market has significant correlation towards direct foreign inv
estment. FDI has an important role for domestic market and the remaining of which will be kept for abroad market.
Dummy RTRWN 11822.74 1966.619 -33875.2 .1485628

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(0.966) (0.969) (0.900) (0.993)
In the first, second, and fourth models related to the determinants of FDI flow to all kinds of industries, both determinants of FDI
flow of labour intensive industry, and FDI flow from all types of foreign industries reveal that RTRWN has positive influence towards the
FDI flow to all types of industries, the FDI flow of labour intensive industry, and the flow of FDI to a number of foreign companies, even
though the correlation of both factors are insignificant. Whereas in the third model related to the determinant of FDI flow to capital
intensive industry reveal that RTRWN has negative influence to the FDI flow of capital-intensive industry, eventhough its result is not
significant. Based on previous research, spatial availability causes company’s aglomeration and there was spatial distribution flow in form
of company’s aglomeration (Garretsen,et. al., 2007).

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4.2 Theoretical Analysis
Production FDI flow input

The cost of man forces
cost meningkat is limited
is high
Chapter 4.1. Channeling 1 Analysis

Table 4.3 Channeling 1 Analysis
Monthly Minimum Wag

e 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta High High High High High High High High High High
West Java Low Low Low Low Low Low Low Low Low Low
Central Java Low Low Low Low Low Low Low Low Low Low
DI Yogyakarta Low Low Low Low Low Low Low Low Low Low
East Java Low Low Low Low Low Low Low Low Low Low
Banten High High High High High High High High High High

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From the table above, it has been seen that during the period of 2005-2015, DKI Jakarta and Banten provinces, were nominated as the
provinces with high level of wages. Those provinces surely have better higher level of foreign investment flow than the average.
4.2.1 1 Equation: FDI of All Kinds of Industries
Table 4.4 Channneling 1 Analysis
Foreign Direct Invest

ment 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta Low Low Low Low Low Low Low Low Low Low
West Java High High Low High High High High High High High
DI Yogyakarta Low Low Low Low Low Low Low Low Low High
East Java High High High Low Low High Low High Low High
Banten High Low Low Low High Low High High High Low

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The above table proves that the higher the level of Regional Minimum Wage (UMR), the lower the flow of FDI, and these levels of wages can only be implem
the inconsistencies is still there. In certain years the level of wages are relatively low and in other following years the level of wages are relatively high.
For the provinces with low UMR level, the FDI of them are high. Those levels of wages are truly implemented in West Jawa and East Jawa Provinces. W
DIY Yogyakarta. In those provinces the level of the regional minimum wages (UMR) of which are low but their FDI flow are also low.
4.2.2 Equation 2: FDI of Labour Intensive Industry
Foreign Direct In
vestment
for labour
intensive
industry 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta 13455.8 14430.4 19622.6 48775.9 82599.5 68434.3 23040.6 9246.3 11541.5 29574.7
West Java 323285.4 113280.1 221558.5 308504.3 160321.2 212107.6 239134.3 608324.3 636279.5 568530.4
Central Java 33361.5 24207.1 17790.2 60593.7 40690.6 17642.9 73488.7 92090.9 41948.4 127945.5
DI Yogyakarta 510 580 428.7 4100 350 212.3 129 205.6 1710.2 245
East Java 153012.5 107575.9 112158.1 116895.1 184217.4 284193.3 195892.3 644493.7 508974.1 797787.7
Banten 84056.1 56552.3 174730.5 211880.3 127739.1 96303.9 476050.4 319709.3 404300.3 499382.2
101,280.216 113,149.050 279,011.683
7 52,770.9667 91,048.1000 125,124.8833 99,319.6333 0 167,955.8833 3 267,459.0000 337,244.2500
Foreign Direct I 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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nvestment:
Labour
intensive
West Java High High High High High High High High High High
East Java High High High Low High High High High High High
Banten Low High High High High Low High High High High
The table above proves that high level of regional minimum wage (UMR) causes high level of FDI, and this only applies in DKI Jakarta.
Whereas in Banten province, the level of wage is still not consistent. In certain years the level of wage are low whereas in other years the
lrrlrv of wages are high.
For provinces with low level of UMR, the FDI level is high. It applies in West Jawa Province. Whereas in East Jawa it is almost consistent
that the level of wage is high. In both Central Jawa and DIY Yogyakarta anomalies are occuring, and in those two provinces the levels of
wages (UMR) are low but the FDI flow of which are also low.
4.2.3. Equation 3: FDI of Capital Intensive Industries
Table 4.6. Channneling 1 Analysis

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Foreign Direct I
nvestment:
Capital
Intensive 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta 96437.2 167617.4 184815.5 448797.5 87941.1 72137.8 135972 255750.8 273734.8 192915
West Java 1496291.1 1291665.8 903538 1912645 1334003.7 940973 2617187.3 3234485.4 6112834 4399958.6
Central Java 392 329502.3 50282.8 56002 38021.5 11518.5 56554.1 71948.3 259410.6 272012.1
DI Yogyakarta 0 2993.5 0 3431.1 1367 1165.1 600 2312.7 3075.3 5586.2
East Java 512788.4 211689.7 1526577.391 276397 178872.2 475057.6 247161.4 420490.7 1162699 591909.5
Banten 488454 340716.3 299082.4 182281.2 1056116.9 179092.7 1458007 1823463 2342752.9 999824.2
432,393.783 494,049.348 479,925.633 279,990.783 752,580.300 968,075.150 1,692,417.766 1,077,034.266
3 390,697.5000 5 3 449,387.0667 3 0 0 7 7
Foreign Direct I
nvestment:
Capital
intensive 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
East Java High Low High Low Low High Low Low Low Low
Banten High Low Low Low High Low High High High High

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The above-mentioned table has been evidenced that high level of UMR causes low level of FDI, and it also applies in DKI Jakarta. Whereas
in Banten Province, the level of wages are still inconsistent. In certain given years the level of which is low and in some ther years the level
of the wage is high.
For provinces with low level of UMR, the FDI level is high. Those tariffs are applied in West Jawa Province. Whereas in East Jawa
the FDI level is inconsistent. In both Central Jawa and DIY Yogyakarta anomalies occur, where in those two provinces the UMR of which is
low but its FDI level is also low.
4.2.4. Equity 4: FDI Flow to a Number of Multinational Companies
Foreign Direct Inv

estment:
Mnc 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta 126 129 146 147 120 131 130 121 117 115
West Java 731 830 794 795 712 798 830 830 1043 1069
Central Java 103 135 144 156 132 131 148 135 148 189
DI Yogyakarta 22 30 19 24 28 27 29 26 27 29
East Java 195 189 212 205 176 177 194 180 201 236
Banten 245 313 295 322 296 316 309 312 337 339

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237.0000 271.0000 268.3333 274.8333 244.0000 263.3333 273.3333 267.3333 312.1667 329.5000
Table 4.6 (Continued)

Foreign Direct In
vestment: mnc 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
East Java High Low Low Low Low Low Low Low Low Low
Banten High High High High High High High High High High
This above table proves that high level of UMR causes low level of FDI, and it only applies in DKI Jakarta. Whereas in Banten province,
even though its UMR level is high, the FDI flow to a number of multinational companies is always high.
For provinces with low level of UMR, the FDI flow is also high. And this also applies in West Jawa Province. Whereas in Central Ja
wa the level of wages show inconsistent results. Different fact occurs in both Central Jawa and D.I. Yogyakarta. In those provinces the UMR
level of which is low and the FDI flow in those areas is also low.

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Employees fee are low Production Company’s profit is

cost is low increasing.
The demand is increasing
Figure 4.2. Channeling 2 Analysis

Monthly Minimum Wa
ge 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
DKI Jakarta High High High Tinggi Tinggi Tinggi Tinggi tinggi tinggi tinggi Tinggi
West Java Low Low Low Rendah Rendah Rendah Rendah rendah rendah rendah Rendah
Central Java Low Low Low Rendah Rendah Rendah Rendah rendah rendah rendah Rendah
DI Yogyakarta Low Low Low Rendah Rendah Rendah rendah rendah rendah rendah Rendah
East Java Low Low Low Rendah Rendah Rendah rendah rendah rendah rendah Rendah
Banten High High High Tinggi Tinggi Tinggi Tinggi tinggi tinggi tinggi Tinggi

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From the above-mentioned table, it has been displayed that during the period of 2005-2015, West Jawa, DIY, Central Jawa, and East Jawa
Provinces were categorized as the provinces with low level of wages. Henceforth, the investment flow must be subsidized to those areas and
the amount of which must be more than average.
Production
UMR
output is
Increase
decreasing Investment is
decreasing
Employer’s productivity

Table 4.9 Channeling 3 Analysis
Monthly Minimum Wage 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Monthly Minimum Wage: DKI Jakarta Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing
Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing
Monthly Minimum Wage: West Java
Monthly Minimum Wage: Central Java
Monthly Minimum Wage: DI Yogyaka Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing
rta
Monthly Minimum Wage: East Java

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Monthly Minimum Wage: Banten
4.3 Equation 1: FDI Flow to All Types of Industries

Table 4.10. Channeling 3 Analysis
FDI level is decreasing 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta Increasing Increasing Increasing Decreasing Increasing Increasing Increasing Increasing Decreasing
Decreasing Increasing Increasing
West Java Decreasing Decreasing Decreasing Increasing Increasing Decreasing
Central Java Increasing Decreasing Increasing Decreasing Decreasing Increasing
Decreasing
DI Yogyakarta Increasing Decreasing Increasing Increasing Decreasing Increasing Increasing Increasing
Decreasing Increasing
East Java Increasing Increasing Decreasing Decreasing Increasing Increasing Decreasing
Banten Decreasing Decreasing Increasing Increasing Decreasing Increasing Increasing Increasing Increasing
From the above table, we can observe that the inconsistencies are stil found, i.e. in every provinces in Jawa Island, even though its wage level
is always increasing, the FDI flow of which is also fluctuating.
4.4 Equation 2: FDI Flow in Labour Intensive Industry

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FDI: labour intensive 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta Increasing Increasing Increasing Increasing Decreasing Decreasing Decreasing Increasing Increasing
West Java Decreasing Increasing Increasing Decreasing Increasing Increasing Increasing Increasing Decreasing
Central Java Decreasing Decreasing Increasing Decreasing Decreasing Increasing Increasing Decreasing Decreasing
DI Yogyakarta Increasing Decreasing Increasing Decreasing Decreasing Decreasing Increasing Increasing Increasing
East Java Decreasing Increasing Increasing Decreasing Increasing Decreasing Increasing Decreasing Increasing
Banten Decreasing Increasing Increasing Decreasing Decreasing Increasing Decreasing Increasing Increasing
From the above table, we can observe that the inconsistencies are there, i.e. in every provinces in Jawa Island, and the level of the wages (UM
R) of the provinces are always increasing, but the FDI of which are also fluctuating.
4.5 Equation 3: the FDI Flow of Capital Intensive Industry

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FDI: Capital Intensive 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Decreasing Decreasin Increasing
DKI Jakarta Increasing Increasing Increasing g Increasing Increasing Decreasing
Increasing Decreasing Decreasin Increasing Increasing Decreasing
West Java Decreasing Decreasing g Increasing
Increasing Decreasing Decreasin Increasing Increasing Increasing Decreasing
Central Java Increasing Decreasing g
Increasing Decreasing Decreasin Increasing Increasing
DI Yogyakarta Increasing Decreasing g Decreasing Increasing
East Java Decreasing Increasing Decreasing Increasing Decreasing Decreasing
Decreasin Increasing Increasing
Banten Decreasing Decreasing Decreasing Increasing g Increasing Decreasing
From the table above, we can observe that the inconsistencies are there, i.e. in every provinces in Jawa Island, eventhough the level of UMR
of those provinces are always increasing but the FDI flow of which are also fluctuating.
4.6 Equation 4: The FDI Flow to a Number of Multinational Companies
FDI: mnc 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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DKI Jakarta Increasing Increasing Increasing Decreasing Increasing Increasing Decreasing Decreasing Decreasing
West Java Increasing Decreasing Increasing Decreasing Increasing Increasing Stable Increasing Increasing
Central Java Increasing Increasing Increasing Decreasing Decreasing Increasing Decreasing Increasing Increasing
DI Yogyakarta Increasing Decreasing Increasing Increasing Decreasing Increasing Decreasing Increasing Increasing
East Java Decreasing Increasing Decreasing Decreasing Increasing Increasing Decreasing Increasing Increasing
Banten Increasing Decreasing Increasing Decreasing Increasing Decreasing Increasing Increasing Increasing
From the table above, we can conclude that inconsistencies are there, i.e. in every provinces in Jawa Island, the level of the UMR of those
areas are always increasing and their FDI flow are also fluctuating as well.
Output price is high and No recommendation

Manpower costs are high their level of for further investment
competitiveness are bad.

Related to the above-mentioned table, in DKI Jakarta and Banten provinces, the work force costs of those areas are high, and the FDI flow in
those areas are consistenly decreasing. But as a matter of factly, the nature of which is fluctuating.

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Output price is low and Level of demand is

Man forces costs are low.
the level of relatively high.
competitiveness is high.
Recommendations from
the Investors
Based on the table above, West Jawa, DI Yogyakarta, East Jawa, and Central Jawa Provinces belong to the provinces of which manpowers’
forces are high, and therefore the FDI flow of those provinces are increasing. But the real condition in those provinces are fluctuating.
High level Work force productivity is Companies’ profit is

of wages. increasing. increasing.

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The number of senior work forces is
High level The Number of Workforces reducing.
of Wages can be Reduced
The number of new work cannot be
estimated yet.
Chapter 4.7. Channeling 7 Analysis
The number of skillful workers are

The level of Man forces are changing in reducing
wage is numbers.
decreasing The number of unskilled workers are
always the same.

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It can be observed that in this research the decreasing level of wages is not found.
The level of Employees’ productivity is

wages is increasing.
high
Figure 4.9. Channeling 9
Tabel 4.12. Channeling 3 Analysis
Monthly Minimum W
age 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Monthly Minimum W 556,08 708,64 667,88 754,98 690,81 706,87 682,25
age: DKI Jakarta 650,392 6 3 674,949 3 5 6 1 7 669,033.0000
Monthly Minimum W 2,699,25 2,767,10 3,073,49 3,389,28 3,571,91 3,863,39 3,916,70
age: West Jawa 2,616,946 0 5 2,935,324 9 7 5 2 2 3,902,850.0000
age: Central Jawa 2,782,008 8 4 2,703,427 3 2 4 7 8 3,173,217.0000
Monthly Minimum W 239,82 209,45 237,24 247,09 266,76 282,60 248,47
age: DI Yogyakarta 223,818 9 6 250,507 0 3 8 2 3 273,329.0000
age: East Java 2,323,652 8 1 2,412,284 6 3 3 9 4 2,776,552.0000
Monthly Minimum W 660,74 695,16 842,30 1,053,92 1,140,42 1,190,18 1,201,65
age: Banten 686,210 2 1 705,831 3 2 7 5 6 1,273,015.0000
1,547,171.0000 1,529,963.8333 1,600,735.0000 1,613,720.3333 1,643,880.6667 1,790,523.6667 1,897,020.5000 2,029,282.6667 1,978,003.3333 2,011,332.6667
Monthly Minimum W 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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age
Monthly Minimum W
age: DKI Jakarta Decreasing Increasing Decreasing Decreasing Increasing Decreasing Increasing Decreasing Decreasing
Monthly Minimum W
age: West Java Increasing Increasing Increasing Increasing Increasing Increasing Increasing Increasing Decreasing
Monthly Minimum W
age: Central Java Decreasing Increasing Decreasing Decreasing Increasing Increasing Increasing Decreasing Increasing
Monthly Minimum W
age: DI Yogyakarta Increasing Decreasing Increasing Decreasing Increasing Increasing Increasing Decreasing Increasing
Monthly Minimum W
age: East Java Increasing Increasing Decreasing Decreasing Increasing Increasing Increasing Decreasing Increasing
Monthly Minimum W
age: Banten Decreasing Increasing Increasing Increasing Increasing Increasing Increasing Decreasing Increasing
Summary of 6, 7, and 9 chanelling. With high level of UMR, the number of workforces in industrial sectors in the Island of Jawa, mainly in
DKI Jakarta and Banten Provinces, are reducing in such a consistent manner. Nonetheless, the real conditions in the fields are still fluctuating.
The amount of wages in those four provinces in Indonesia is still low, therefore the amount of man forces of the sector of industry in those
provinces of Jawa, is consistently increasing. Nonetheless, as a matter of factly the real condition in those areas are still fluctuating.

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Infrastructure
productivity
(road, airport, and bullet train)
Stimulative
 Investment
The increase of infrastructure funding Company  Productivity

operational
/overall costs is  Economic
reducing Growth
By the addition of facilities and infrastructures, the amount of investment will also increase in figures, especially for all types of industries,
i.e. capital investment, labour investment, and the number of foreign countries.

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Road 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta 7130 6185 6185 6185 6410 6743 7094 7094 7094 7094
West Java 26332 25679 25679 25857 26881 25494 25500 24549 24608 24607
Central Java 29056 28358 28490 28904 29674 29203 29110 29342 29703 29703
DI Yogyakarta 4825 4859 4833 4859 4890 4753 4592 4592 4267 4267
East Java 36803 36337 37027 37814 38565 44044 45589 42512 42555 42555
Banten 4473 4326 4773 4856 5211 6456 6456 6506 6845 6845
18,103.1667 17,624.0000 17,831.1667 20,723.8000 21,284.0000 22,047.4000 22,377.0000 21,617.8000 21,645.4000 21,645.2000
The change of
road volume
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
DKI Jakarta turun tetap tetap naik naik naik tetap tetap tetap
West Java turun tetap naik naik turun naik turun naik turun
Central Java turun naik naik naik turun turun naik naik tetap
DI Yogyakarta naik turun naik naik turun turun tetap turun tetap
East Java turun naik turun naik naik naik turun naik tetap
Banten turun naik naik naik naik tetap turun naik tetap

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From the above-mentioned table, we can conclude that the total of road length in Jawa Island is increasing from year to year in order to
stimulate investment. Nonetheless, as a matter of factly the length of road is fluctuating so the amount of FDI flow is also fluctuating.
3. Why economists never gain a consensus

Economists may disagree with the validity of alternatively positive theory on how economists implement different values and, therefore, they must know the
normative value on how to implement their policies.
CHAPTER 5
CONCLUSION AND RECOMMENDATION OF THE POLICIES
5.1 Conclusion
5.1.1 Correlation between the Results of Descriptive Statistical Calculation and Theoretical Framework
There are some ways of channeling which can be proven by a set of data processing, i.e.: channeling 1 and channeling 2. Channeling 1
explains the correlation of high level of the wages of work force towards low level of FDI flow. We collect the results of the calculation in D
KI Jakarta and its result is appropriate, whereas in Banten province misappropriate results are found. For channeling 2, low level of man
power’s cost is influencing the amount of FDI flow, and the flow in that channel is high. We collect appropriate results for West Jawa and
East Jawa Provinces, whereas for Central Jawa Province and DIY the results is inappropriate.

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Moreover, the data processing cannot prove the hypothesis because there are inconsistencies in the results of the calculation, i.e.: chan
neling 3, channeling 4, channeling 5, channeling 6, 7, and 9, and channeling 10. Channeling 3 explains the influence of the increase in the
level of waging (UMR) towards less amount of FDI consequences. We find inconsistencies in the results of calculation in all provinces that
meet those all and every equation (1,2,3,4 equations). Similar issues are found in channeling 4, i.e. high amount of man powers costs, and
therefore no recommendation of investment is there. These results are not consistent for all and every province . Besides, in channeling 5,
with lower cost of man forces, recommendations of investment are there, but the results are inconsistent to be implemented in all and every
province under discussion. The same situation also applicable in channeling 6, 7, and 9, i.e. the higher the wage, the lower amount of wage
they receive. These results are not consistent for every province. In the same manner with channeling 10, if the infrastructures for transport
ation is increasing, the FDI flow of which is also increasing. As a results, the inconsistencies are found in all and every province.
Furthermore, there are channelings which cannot be proved, i.e. in channeling 8 due to the absence of policies or expected conditions.
As an illustration, in channeling 8 the level of wages is decreasing, and the amount of man powers, therefore, the amount of work forces is
also experiencing a change in number. Therefore, this cannot be proven because in the Island of Jawa the reduction in the level of wage in ind
ustrial sector does not occur.
a. Contra-Paradigms in Scientific Assessment

Economists are arguing on their statements due to their unique ways to develop of their hypotheses on the validity of some alternative theories or some
instruments not only to measure important parametrics of the research but also on how the economics variables are correlating to each other.
On the Results of Regression Test and the Empirical Framework of the Theories

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There are some variables in this research, i.e.: minimum level of wage and relative amount of wage. Those two variables are used as
controlled variables and both of them are hypothetically not influenced by the foreign direct investment (FDI) flow.
It is quite different with the variables of electricity bills, road length, and significant market size which influence the FDI flow. The
first model is closely related to the determinant of FDI flow to all types of industries and the said is significantly affected by the electricity
bill and the size of the market. The second model is related to the determinant of FDI flow to labour intensive industry which is significantly
affected by electricity bills and road length. In the third model, related to the FDI flow to capital intensive industry, the industry is significa
ntly affected by electricity bill and market size. In the fourth model, which is closely related to the determinant of the FDI flow to a number
of foreign companies which are significantly affected by the variables of electricity bills, road length, and market size, in which other variab
les, i.e. Consumers Index Price (IHK), market openness, man forces, and the dummy of RTRWN. Those variables are insignificantly
influence FDI flow.
b. Perception versus Reality

Why those policies, i.e. control to rental fees and limitation of trade, are still applicable, if the panel of experts are reaching their consensus to negotiate on these
issues. This is due to the fact that in reality, political negotiations are the best way to solve any possible problems that may arise during the terms of the project.
Besides, the statements of those economists are not sufficiently supported by a set of data. Those data collection have neither scientifically proved nor be ready
to announce to the wide-public, and therefore, those policies need to be reviewed, redirected, and readjusted.
Policy Recommendations
In formulating the policies on license and funding, both central and local government need to prioritize and rank the significances of v
ariables affecting FDI flow and at the same time put the increase of the frequency of distribution of electricity current to the industry as their

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priority and also set the FDI flow of all types of industries, the FDI flow to labour intensive industry, the FDI flow to capital intensive
industry, and the FDI flow to a number of foreign companies, the increase of Gross Regional Domestic Product (PDRB) (for the FDI flow of
all types of industries, the FDI flow to capital intensive industry, and the FDI flow to a number of foreign companies), and the additional
increase of road length (for the FDI flow of labour intensive industry and the FDI flow to a number of foreign companies).
Regarding to the direction of area development implemented by central and local governments, the goals of the development are
directed to existing conditions of each variable which significantly influences the FDI flow. The development of all types of industries are
directed to the industrial areas with high level of electricity distribution and big size of the market, i.e. DKI Jakarta and West Jawa, East Jawa,
Central Jawa, Banten, and DI Yogyakarta. The development of capital intensive industry for areas with high level of electricity distribution
and road length, i.e. East Jawa, DKI Jakarta, West Jawa, Central Jawa, Banten, and DI Yogyakarta. The development of capital intensive
industry for the provinces with electrical distribution industries and big market size, i.e. DKI Jakarta and West Jawa, East Jawa, Central Jawa,
Banten, and DI Yogyakarta. Meanwhile, the development of the number of foreign companies in provinces with electrical distribution
industries, road length, and bigger size of the market, i.e. West Jawa, DKI, East Jawa, Jawa Tengah, Banten, and DI Yogyakarta.
Regarding the funding directives per sector, government needs to put their focus on the significance and coefficient value of each pro
vinces. As quoted in chapter 4, significant variables of this research are electricity, road, and market size. Henceforth, the funding follows the
sequence of coefficient value of those variables. Within the scope of Banten province, it is better for the researchers to reduce the amount of
electrical bills, by calculating road and market size variables. Meanwhile, Central Jawa and Special Region of Yogyakarta need to increase

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the budget on electricity provision, road length, and market size. Whereas in the following provinces: Special Region of Jakarta Capital City,
West Jawa, and East Jawa, any changes in electricity budgeting, road length, and size of the market are not found.

92

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1

a. Scientific Method: Observation, Theory, and Re-Observation

b. The Role of Assumptions

Definition of the Problems

DESTARITA INDAH PERMATASARI_MINISTRY

1.3 Important Roles of the Research

1.5 Research Gap

1.6 Research Contribution

1.7 The Limitation of the Research

DESTARITA INDAH PERMATASARI_MINISTRY

d. First model: diagram of circular flow

THE APPROACH IN INDUSTRIAL DATA

capital / input value (per year) in millions rupiahs

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

capital / input value (per year)

indonesia west east

The amount of investment (per year) in people

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

labor amount (per year)

indonesia west east

The amount of labour cost (per year) in million rupiahs

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

labour cost (per year)

indonesia west east

Producer/Number of micro and small industries/companies (per year)

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

Producer / Number of Micro and Small Industries / Companies

indonesia west east

Output Value (per-year)

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

output value (per year)

indonesia west east

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

value added (per year)

indonesia west east

Production Growth (per year)

2013 2014 2015

DESTARITA INDAH PERMATASARI_MINISTRY

production growth (per year)

indonesia west east

DESTARITA INDAH PERMATASARI_MINISTRY

Capital Input (Trillion Rupiah)

DESTARITA INDAH PERMATASARI_MINISTRY

labor cost ( per year) and Capital Input in Trillion rupiahs

Capital Input (Trillion Rupiah)

DESTARITA INDAH PERMATASARI_MINISTRY

Producer / Number of Micro and Small Industries / Companies

DESTARITA INDAH PERMATASARI_MINISTRY

Output Value (per year) in Trillion rupiahs

Capital Input (Trillion Rupiah)

320 output value (per year) in Trillions

DESTARITA INDAH PERMATASARI_MINISTRY

Value added (per year) in trillions rupiahs