Foreign Direct Investment and Inclusive Growth: Does FDI Reduce Income Inequality in Indonesia?

This study aims to analyze the effect of FDI, economics growth and the initial human capital on across regional and within regional inequality. Despite the fact that numerous papers studied FDI at cross countries levels, this research focuses on analyzing the dynamic of FDI and income inequality as well as addressing the effects of FDI on income inequality in Indonesia with two different income inequality measurements, namely the Gini Coefficient and Williamson index. This study employs time series data in Indonesia from 1996 to 2020 obtained from BPS, BKPM, and Word Development Indicator. The ARDL statistical results of this study indicate that FDI has no significant effect on household income distribution (Gini Coefficient) in Indonesia. However, FDI can reduce the regional inequality of the Williamson Inequality Index. It means that the spillover of FDI through the transfer of technology, the transfer of more advanced knowledge, and the opening of new jobs are able to close the income gap between the regions from the West to the East of Indonesia but cannot reduce the inequality within the province of Indonesia. Finally, one of the possible recommendations derived from this study is to promote more FDI inflows to underdeveloped regions in Indonesia with the specification, strength, and uniqueness of each province in order to achieve equal distribution of income in Indonesia