The Determinant Factors of Automobile Production in Indonesia

Abstract

As the fourth populated country in the world, Indonesia’s automobile production is the seventhrank among automobile producer developing countries. With the production capacity of more than2 million units, the industry only produces less than 60% of its capacity. To increase the productionperformance, the role of Foreign Direct Investment (FDI) is essential. However, previous empiricalstudies do not explain the nexus between FDI and the development of the Indonesian automobileindustry. Based on the Ordinary Least Square (OLS) regression analysis, FDI inward stock,domestic sales, imported components, and exchange rate are significant determinants factors inautomobile production. The domestic demand is the primary pillar of automobile production.Since the domestic market seems to be saturated, the export market can be an alternative toincrease automobile production. Unfortunately, the competitiveness of Indonesia’s automobile isstill weak and need to be improved because the Indonesian automobile industry still producesEuro2 automobile products and depends highly on raw material import for upstream industries.Therefore, transfer technology through FDI mechanism is required to develop Indonesia’sautomobile competitiveness. This paper suggests that FDI should be used focusing on Euro4standard upgrade and local upstream industries development.