Analysis of Factors Affecting Private Investment in East Ogan
Komering Ulu (East Oku)
Arjuna Sumarto
STIE Trisna Negara, East Oku, Sumatra Selatan, Indonesia
Keywords: Investment, Government Expenditure, Inflation, Interest Rates.
Abstract: This study aimed to analyze the effect of government spending, Economic Growth, Inflation, Interest Rate
on Investment East Oku period 2014-2018. The data used are secondary time series data 2014-2018. The
results showed that government spending, economic growth, inflation, and interest rates influence the
amount of Domestic Investment (PMDN). Government spending and economic growth have a positive
effect on Domestic Investment (PMDN). While inflation and interest rates, both of these variables have a
negative influence on East OKU Domestic Investment.
1 INTRODUCTION
Exports and investments play an important role in an
open country's economy. Exports will generate
foreign exchange; foreign exchange will be used to
finance imports of raw materials and capital goods
needed in the production process, which will form
added value to the economy. The aggregation of the
added value generated by all production units in the
economy is the Gross Domestic Product. Investment
or investment is a component of forming national
value-added, which is the purchase of capital goods
and production equipment to increase the ability to
produce goods and services available in the
economy.
Increased economic activity is highly dependent
on capital flows for productive ventures. Some
experts say that exports and investment are "engines
of growth". Therefore, high and sustainable
economic growth rates are generally supported by
increased exports and investment.
The economic theory defines investment as
expenditures to buy capital goods and production
equipment to replace and especially adding capital
goods in the economy that will be used to produce
goods and services in the future.
In other words, investment means shopping
activities to increase the production capacity of an
economy (Sasana, 2008). Investment is the first step
in development activities, and investment is
essentially the beginning of economic development
activities.
The dynamics of investment affect the high and
low economic growth. The urgency of capital
formation in the region has received attention and
emphasis, that private investment plays an important
role in shaping patterns of development in the
region. This investment will lead to regional capital
formation (Zaris, 1987).
From various economic theories explain that
investment is a function of the interest rate. An
increase in the interest rate will result in reduced
investment spending, and conversely, a decrease in
the interest rate will result in increased investment
spending. The interest rate is a factor that determines
the size of the investment made by the public
(private) (Sukirno, 1994).
Lower interest rates will increase investment
demand. High-interest rates can be an obstacle to
private and public sector growth. Therefore low-
interest rates are an important condition for
encouraging private investment.
Several previous studies on private investment
have been carried out by Radianto (1995), which
shows that the GRDP variable and the interest rate
variable are not able to explain the phenomenon of
private investment in Maluku, only the variety of
work departures can explain the variation of private
investment. Variables of investment in the previous
year, economic growth, development spending,
exchange rates, and reform policies in the
investment sector affect FDI (Kodoatie, 1998). Neo-
Sumarto, A.
Analysis of Factors Affecting Private Investment in East Ogan Komering Ulu (East Oku).
DOI: 10.5220/0009967703910395
In Proceedings of the International Conference of Business, Economy, Entrepreneurship and Management (ICBEEM 2019), pages 391-395
ISBN: 978-989-758-471-8
Copyright
c
2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
391
Classical Investment Theory shows that real GDP
growth rates have a positive influence on private
investment (Wai and Wong, 1982; Greene and
Villanueva, 1991; Fielding, 1997). This is also
known as the "selerator effect" (Ouattara, 2005).
Also, the value of capital desired by a company has
a positive effect on the level of demand (Bayai &
Nyangara, 2013).
National income is the number of goods and
services that can be produced by a country's
economy in one period, where the high level of
national income reflects the number of goods and
services produced by that economy to multiply. To
achieve a high level of national income, it is
necessary first to attain a high level of employment
opportunities and increase national production
capacity. In other words, achieving a high level of
employment opportunities means that national
production capacity is in full use.
One component of national products undertaken
by companies is investment expenditure (investment
expenditure) so that investment is a function of
national income. Several other studies on private
investment include the element of government
expenditure as a determining factor for the size of
private investment in a country (Sakr, 1993; Haque,
Husain, and Montiel, 1991; Naqvi, 2002; Ahmad,
Imtiaz, and Qayyum, Abdul, 2008). These studies
show that there is a positive relationship between
government spending and private investment.
2 LITERATURE REVIEW
2.1 Investment
Investment can be interpreted as expenditure or
investment expenditures made by companies to buy
capital goods or production equipment to increase
the ability to produce goods and services available in
the economy. This increase in the number of capital
goods enables the economy to produce more goods
and services in the future (Sukirno, 2006).
There are three types of investment spending.
First, investment in fixed goods (business fixed
investment), which covers the equipment and
structures that the business world buys for use in
production. Second, housing investment (residential
investment) covers new housing where people buy it
to be occupied, or the owners of capital buy it for
rent. Third, inventory investment includes raw
materials and supporting materials, semi-finished
goods, and finished goods (Herlambang, 2001).
2.2 Government Expenditure
Government expenditure is all purchases or
payments for goods and services for the national
interest, such as the purchase of weapons and
government office equipment, road and dam
construction, salaries of civil servants, armed forces,
and others (Samuelson & Nordhaus, 1997).
Government expenditure consists of three main
items which can be classified as follows: (a)
government expenditure for the purchase of goods
and services; (b) government spending on employee
salaries, changes in employee salaries that have a
macroeconomic process whereby changes in
employee salaries will affect the level of demand
indirectly; and (c) government purchases for
payment transfers. A transfer payment is not the
purchase of goods/services by the government in the
goods market, but this post records payments or
government giving directly to its citizens, for
example, payment of subsidies or direct cash
assistance to various groups of people: pension
payments, repayment of government loans to the
public. Economically, transfer payments have the
same effect as employee salary posts, although
administratively, they are different (Boediono,
2001).
2.3 Inflation
Inflation is an economic phenomenon related to its
very broad impact on macroeconomics. Inflation
plays an important role in influencing the
mobilization of funds through informal financial
institutions. Inflation is defined as a continuous and
persistent increase in the general prices of an
economy (Susanti, 2000). Inflation is a condition
where there is a sharp price increase that lasts
continuously for a long period. Along with the price
increase, the value of money fell sharply also in
proportion to the increase in those prices.
2.4 Interest Rates
Interest rates can be seen as income earned from
savings. A household will make more savings if the
interest rate is high because more income from
savers will be obtained. At low-interest rates, people
don't like to make savings because they feel it's
better to make consumption expenses or invest
rather than save. Thus, if the interest rate is low, the
community tends to increase their consumption
expenditure or investment expenditure (Sukirno,
2006).
ICBEEM 2019 - International Conference on Business, Economy, Entrepreneurship and Management
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3 RESEARCH METHODS
Research is carried out with library materials in the
form of scientific writings and scientific research
reports that have a relationship with the topic under
study. Data collection techniques used are direct
recordings in the form of time-series data (time
series) within a period of 10 years (2001- 2010).
Sources of data obtained from the publication of
the Central Statistics Agency (BPS) of South
Sulawesi Province. Also, other data supporting this
research were obtained from reading sources such as
journals, articles, and reading books related to this
research.
In analyzing the magnitude of the effects of
independent variables on the dependent variable, the
econometric model is used by regressing existing
variables using the method Ordinary Least Square
(OLS).
The issue to be discussed is the extent of the
influence of Government Expenditures, Economic
Growth, Inflation, and Interest Rates on investment
in the transportation sector in Indonesia by using
multiple linear regression analysis. Its function is as
follows (Soekartawi, 1990):
Y = f (X1, X2, X3, X4) (1)
Then the function is expressed in terms of Y and
X then,
= 〖1〗 ^ (1) ^ (22 +
33 + 44 + )............. (2)
The above equation is converted into multiple
linear forms to:
LnYlnαβ1lnX1β2X2β3X3β4X4
µ 3
Where:
Y = Investment (rupiah)
α = Intercept / constant
β1 β2 β3 = Regression Coefficient X1 =
Government Spending (rupiah) X2 = Economic
Growth (Percent) X3 = Inflation (Percent)
X4 = Interest Rate (Percent)
μ = term of error
4 RESULTS
According to WW. Rostow and RA. Musgrave in
Guritno (1995), the development of government
spending is in line with the stage of economic
development of a country. This was also
experienced by Indonesia, where both the nominal
and real value of total government spending
continued to increase throughout the year. Using the
latest state expenditure classification, state spending
was classified as central government spending and
regional transfers. Furthermore, central government
expenditure can be divided into K / L and Non-K / L
spending, which as a whole includes employee
expenditure, goods expenditure, capital expenditure,
grant expenditure, social assistance, debt interest
payments, subsidies, and other expenditures.
Meanwhile, transfers to the regions are divided into
balancing funds as well as special autonomy funds
and adjustment funds.
The development of prices of goods and services
can still be relatively controlled, as seen from a
fairly stable inflation rate, which is inseparable from
government policies in a prudent monetary sector
and tighter fiscal policies and is supported by the
supply of consumer goods at sufficient quantities
and reasonable price levels. A sharp decline in
inflation occurred in 2003, which was at the point of
5.06%, which fell almost 50% from the previous
year, namely in 2002 at the level of 10.03%.
However, in 2005 inflation increased again, namely,
at the point of 17.11% caused by the increase in fuel
prices. Although, in the following years, the
inflation rate can be suppressed, in 2008, inflation
returned to an increase that reached the point of
11.06% because, in 2008, there was a crisis in the
international world that caused domestic turmoil. In
2009 inflation had decreased, which was at 2.78%
from the previous year, which reached 11.06%.
Classical Theory states that the decision of
whether an investment will be made or not depends
on the interest rate, which is the cost of the use of
funds (Nopirin, 1992). The desire to invest will be
smaller if the interest rate is high. This is because the
amount of expenditure incurred by investors in
investment will increase as a result of the high-
interest rate, which is the cost of using funds (cost of
capital) that must be paid for the investment fund.
Conversely, the lower interest rates will increasingly
encourage investors to invest. This is because the
cost of using funds is getting smaller, so the
expected level of profits is greater (Samuelson &
Nordhaus, 1997).
Analysis of Factors Affecting Private Investment in East Ogan Komering Ulu (East Oku)
393
5 DISCUSSIONS
5.1 Effect of Government Expenditure
on Investment
The theory of state spending, outlines three stages
that must be passed by each country. In the initial
stages of economic development, large government
is required for government investment, primarily to
provide infrastructures such as roads, health, and
education. In the intermediate stage of economic
development, investment is still needed for
economic growth, but it is hoped that private sector
investment has begun to develop. Then in the
advanced stages of economic development,
government spending is still needed, primarily to
improve the welfare of the community, for example,
improving education, health, and social security.
Another idea was put forward by Adolph Wagner.
His empirical observations of European countries,
the United States, and Japan in the 19th century
show that in a country's economy, government
spending will increase in line with the increase in the
country's national income. So it can be said that
government spending has a positive effect on
investment.
5.2 Influence of Inflation on
Investment
The Relationship between inflation and investment
is negative. High inflation in a country, resulting in
the minor money supply increased, then followed by
high-interest rates, with interest rates that tend to be
high, the investment will fall. High inflation also
causes the purchasing power of the people to decline
which then leads to reduced returns or investment
returns, thereby reducing investor interest in
investing. An investor will tend to invest if the
inflation rate in a country is stable. This is because,
with the stability in the inflation rate, the price level
of goods, in general, will not increase significantly.
Therefore, investors will feel more secure to invest
when the inflation rate in a country tends to be stable
or low. In other words, an increase in inflation will
reduce the interest of investors to carry out
investment, and otherwise, if inflation falls, the
investment will increase.
5.3 Effect of Interest Rates on
Investment
Interest rates used in this thesis research are real
interest rates. Real interest rates are interest rates
after being reduced by inflation (real interest rate =
Nominal interest rate - inflation expectations). The
relationship between interest rates and investment is
negative.
The interest rate is one of the important factors
that influence investment. Fluctuations in interest
rates are a consideration for investors. If the interest
rate is lower than what he expected, then someone
will choose to invest their money rather than keep
the money in the bank or lend the money to someone
else. If investment funds are obtained from
borrowing banks or other parties with an interest
rates lower than the profits to be obtained, it can be
used to cover the loan interest rate.
The higher the interest rate, the less the desire to
invest. The reason is that an investor will increase
his investment expenses if the expected return on
investment is greater than the interest rate he has to
pay for the investment fund, which is the cost of
using the fund or the cost of capital. The lower the
interest rate, the more motivated entrepreneurs, will
be to invest because the cost of using funds is also
getting smaller.
6 CONCLUSIONS
Government expenditure variables, economic
growth, inflation, and credit interest rates
simultaneously affect the domestic investment
(PMDN) of the transportation sector in Indonesia.
The government must oversee the economy through
policies that are made so that the policy can further
turn on the economy in Indonesia and be able to
attract investors to invest more in Indonesia.
Government spending hurts domestic investment
in the transportation sector in Indonesia. It means
that every time there is an increase in the gross
domestic product of the transportation sector, the
domestic investment will increase. The government
should divide spending according to type so that it
can be known in more detail the effect of each type
of expenditure on investment.
Inflation hurts domestic investment in the
transportation sector in Indonesia. It means that
every time there is an increase in inflation, the
domestic investment will decrease. Maintaining the
level of domestic inflation to remain stable, thereby
ICBEEM 2019 - International Conference on Business, Economy, Entrepreneurship and Management
394
making domestic prices also remain stable so as to
encourage increased domestic investment.
Interest rates have a negative effect on domestic
investment in the transportation sector in Indonesia.
It means that every time there is an increase in the
interest rate, the domestic investment will decrease.
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