Imperfect market competition theory on foreign direct investment using regency-level data: evidence from Indonesian special economic zones

Purpose This study aims to enhance the current framework for decision-making regarding foreign direct investment (FDI) in developing countries, with consideration of the trend toward decentralized power. Design/methodology/approach The study uses static and dynamic panel data regression covering a period of 13 years (2010–2022) related to regencies and municipalities. The period includes the evolution of all 18 Indonesian Special Economic Zones (SEZs). This study integrates regional competitiveness factors such as local government capital expenditure, democratic, social welfare and economic fundamentals. Findings This paper argues that the level of government involvement should be decided according to the phase of SEZ development, the type of policy being implemented (countercyclical or procyclical), and the complexity of the FDI policy. These factors will determine the degree of interference, whether extensive or modest. Research limitations/implications The paper analyses the application of New Keynesian and public expenditure theory to address the complex variables involved in local-level FDI decisions, which have been insufficiently studied in emerging countries. Originality/value The paper does not include a comprehensive explanation of the complex processes that lead to improvements in wages.