Dynamic Panel Analysis of the Effect of FDI, DDI, and Remittances on Per Capita Income in Indonesia

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FORMOSA NEWS

Research conducted by Eka Agustiani and Endang Astuti from the Universitas Mataram in April 2026 examines the contribution and dynamic influence of Foreign Direct Investment (FDI), Domestic Direct Investment (DDI), and remittances on per capita income at the provincial level in Indonesia.

Background and Problem

An increase in per capita income is a primary indicator of a region's economic development success, as it reflects public welfare levels and the capacity for sustainable value-added production. The Indonesian government continues to rely on various financing instruments to trigger regional economic growth, through both physical investment capital and external capital flows. However, the causal relationship between investment, remittances, and per capita income is often hindered by endogeneity issues and dynamic bias effects caused by the influence of income levels from previous periods. This study aims to fill the scarcity of literature that examines these three financing variables simultaneously within a dynamic panel data framework across Indonesian provinces.

Research Methodology

This study applies an explanatory quantitative approach using a balanced panel database covering 38 provinces in Indonesia during the 2013–2023 period, resulting in a total of 418 observations sourced from the Central Statistics Agency (BPS). To address endogeneity issues and dependent variable lag bias, the estimation method used is the Arellano-Bond Difference Generalized Method of Moments (GMM). The validity and consistency of this model have been statistically tested through the Sargan test for instrument validity (probability of 0.3082) and the Arellano-Bond AR(2) test to ensure the absence of second-order autocorrelation (probability of 0.2840).

Key Findings

1. Significant Effect of All Variables: Estimation results show that FDI, DDI, and remittances partially have a positive and significant effect on provincial per capita income in Indonesia at a 99% confidence level.
2. Dominance of Remittance Inflows: Remittances are recorded as the variable with the largest impact on increasing public income, with a coefficient value of $\beta = 0.2314$. These funds from migrant workers instantly increase purchasing power, household consumption stability, and circulate quickly into local productive investments.
3. Strategic Role of FDI and DDI: Foreign Direct Investment occupies the second position in terms of impact magnitude ($\beta = 0.1128$), driven by mechanisms of technology transfer, productivity enhancement, and global supply chain integration. Meanwhile, Domestic Direct Investment has the smallest coefficient ($\beta = 0.0654$) but remains crucial in absorbing local labor and strengthening domestic industry foundations in the real sector.
4. Occurrence of Income Convergence: Empirical evidence was found for conditional income convergence across provinces in Indonesia, characterized by a negative coefficient on the lagged per capita income variable of -0.1076. This indicates that provinces with lower initial incomes tend to grow faster than developed regions, with an adjustment speed toward long-term equilibrium reaching 10.76% per year.

Policy Implications

Based on the conclusions above, the researchers formulated strategic recommendations for policymakers:

1. Regional Investment Climate Improvement: Local governments need to continue promoting regulatory simplification and connectivity infrastructure improvements to attract FDI and DDI interest more evenly outside Java Island.
2. Remittance Flow Optimization: Remittance management policies should be directed toward education programs and economic empowerment for the families of Indonesian migrant workers. This step is important so that transferred funds are not spent solely on short-term consumption, but instead shift toward human capital investment and micro-enterprise development for regional economic sustainability.

Author Profile:

• Eka Agustiani and Endang Astuti – Universitas Mataram, Indonesia.

Research Source: Agustiani, E., & Astuti, E. (2026). "Dynamic Panel Analysis of the Effect of Foreign Direct Investment (PMA), Domestic Direct Investment (PMDN), and Remittances on Per Capita Income in Indonesia". International Journal of Educational Technology Research (IJETR), 4(6), 81–95.

DOI: 

https://doi.org/10.55927/ijba.v6i3.16624