The Role of Domestic Investment, Foreign Direct Investment, Labor, and Net Exports in Economic Growth Across 34 Provinces in Indonesia

Abstract

Economic growth is a key indicator of a nation's development. This study examines the effects of Domestic Investment (PMDN), Foreign Direct Investment (PMA), labour, and net exports on economic growth in 34 Indonesian provinces over the period 2016–2024. Economic growth is proxied by real Gross Regional Domestic Product (GRDP) at constant 2010 prices in natural logarithms, labour is measured by the employed population from the National Labour Force Survey (Sakernas), and net exports, which are negative in several provinces, are transformed using the inverse hyperbolic sine (IHS). Using an unbalanced panel of 302 observations, the Fixed Effect Model (FEM) is selected through the Chow, Lagrange Multiplier, and robust Hausman tests and is estimated with Driscoll–Kraay standard errors because the diagnostic tests indicate heteroskedasticity, autocorrelation, and cross-sectional dependence. The results show that all four variables have a positive and significant effect on GRDP. A 1% increase in domestic investment, foreign direct investment, and labour is associated with an increase in GRDP of 0.0188%, 0.0360%, and 1.1357%, respectively, and the IHS coefficient of net exports is 0.0038. Foreign direct investment is the most robust determinant across all alternative specifications, whereas the effects of domestic investment, labour, and net exports are sensitive to the model specification. These findings imply that attracting productive foreign investment, improving labour absorption, and increasing export competitiveness are important for sustaining regional economic growth.