DECENTRALIZATION AND TAX HOLIDAY AS STRATEGIES TO BOOST FOREIGN DIRECT INVESTMENT OF INDONESIA

Investment is one of the keys to the economic development of a country, one of which is Foreign Direct Investment, which turns out to bring not only physical capital but also affects the absorption of technology in a country. The number of FDI inflows to Indonesia increased significantly after the decentralization system was implemented. This study aims to test and analyze the relationship of the variables of Fiscal Decentralization, Tax Holiday, GDP Growth, Inflation, and Openness with Trade on Foreign Direct Investment in Indonesia. The method used in this study is the Error Correction Model using the period 1975-2016. In the long term, we found that fiscal decentralization variables have a negative relationship with FDI and tax holidays have a positive relationship with FDI in Indonesia. Inversely, both fiscal decentralization and tax holiday variables have no relationship with FDI in the short term. This result posits crucial implication for the government not to rely on fiscal decentralization and tax holidays to enhance FDI amount in the short-term. The government must come up with different strategies if wanted to increase the FDI amount in the short-term.