Research Spotlight: Can Bureaucratic Capacity Attract Foreign Investment?

By Sidan Raeskyesa

Why do some provinces in Indonesia attract far more foreign direct investment (FDI) than others? Traditional explanations emphasize factors such as market size, infrastructure quality, natural resources, and regulatory incentives. While these structural conditions are important, they do not fully explain the significant differences in investment performance across provinces.

Our researcher Sidan Raeskyesa explores an alternative explanation by focusing on the role of provincial governments. Using a policy analytical capacity framework, he examines whether the capabilities of government officials influence a province’s ability to attract foreign investors. The central idea is that a capable bureaucracy can analyze economic opportunities, design investment strategies, and effectively communicate them to potential investors.

To test this idea, Sidan compiled a novel dataset by collaborating with the Indonesian government to obtain information on the number of provincial government officials by educational attainment: bachelor’s, master’s, and doctoral degrees. This measure serves as a proxy for the analytical and technical capacity within provincial administrations.

This research highlights an important factor that has received relatively little attention in FDI literature: the role of bureaucratic capacity at the subnational level.

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