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Making Indonesia More Attractive To Foreign Investors: A Computable General Equilibrium Analysis Of Reducing The Risk Premium In Central Java

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  • Djauhari Pambudi
  • Russell Smyth

Abstract

Indonesia aims to increase inward foreign direct investment. However, widespread discrimination in how investments are treated, the weak application of the rule of law and opaque regulations have increased the risk premium confronting potential investors and impaired foreign direct investment. This study employs a Computable General Equilibrium Model to simulate the economic effect of a reduction in the risk premium in Central Java on investors in the chemical sector and a select range of sectors nominated by the Central Java government as representing investment opportunities. The results suggest capital flows to Central Java increase, generating higher employment, labor productivity, real wages and GDP in Central Java. At the national level, real investment, aggregate capital stock and GDP increase for Indonesia as a whole. The policy implications are that greater transparency and consistency in the application of the rule of law, will increase capital inflow and result in improved macroeconomic performance.

Suggested Citation

  • Djauhari Pambudi & Russell Smyth, 2008. "Making Indonesia More Attractive To Foreign Investors: A Computable General Equilibrium Analysis Of Reducing The Risk Premium In Central Java," Review of Urban & Regional Development Studies, Wiley Blackwell, vol. 20(3), pages 226-240, November.
    • Handle: RePEc:bla:revurb:v:20:y:2008:i:3:p:226-240
    DOI: 10.1111/j.1467-940X.2008.00150.x
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    Cited by:

    1. Glyn Wittwer, 2022. "Preparing a multi-country, sub-national CGE model: EuroTERM including Ukraine," Centre of Policy Studies/IMPACT Centre Working Papers g-334, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. Terciane Sabadini Carvalho & Edson Paulo Domingues, 2016. "Controlling Deforestation In The Brazilian Amazon: Regional Economic Impacts And Land-Use Change," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 192, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].

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