The Determinant Factors of Automobile Production in Indonesia

Abstract

As the fourth populated country in the world, Indonesia’s automobile production is the seventh
rank among automobile producer developing countries. With the production capacity of more than
2 million units, the industry only produces less than 60% of its capacity. To increase the production
performance, the role of Foreign Direct Investment (FDI) is essential. However, previous empirical
studies do not explain the nexus between FDI and the development of the Indonesian automobile
industry. Based on the Ordinary Least Square (OLS) regression analysis, FDI inward stock,
domestic sales, imported components, and exchange rate are significant determinants factors in
automobile 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 to
increase automobile production. Unfortunately, the competitiveness of Indonesia’s automobile is
still weak and need to be improved because the Indonesian automobile industry still produces
Euro2 automobile products and depends highly on raw material import for upstream industries.
Therefore, transfer technology through FDI mechanism is required to develop Indonesia’s
automobile competitiveness. This paper suggests that FDI should be used focusing on Euro4
standard upgrade and local upstream industries development.