Identifying Simultaneous Equation Modelling for the Digital Competitiveness Index (IDSD) and Foreign Direct Investment (FDI) in their Influence on Economic Digitalization

Abstract

Technological advances are causing rapid and comprehensive changes, especially in the digital economy sector. The strength of a society's digital competitiveness is an important asset to support the growth of the national digital economy and attract foreign direct investment. This study aims to identify the simultaneous relationship between the Digital Competitiveness Index (IDSD) and Foreign Direct Investment (FDI). The method used is Two Stage Least Squares (2SLS) to overcome endogeneity problems in existing regression models, using STATA 17 software for calculations. The data analyzed are panel data from 34 provinces in Indonesia for 4 years (2020, 2021, 2022, and 2023). The analysis shows that in the FDI model, IDSD, GRDP growth rate, and non-oil and gas exports have a significant effect on FDI. However, in the IDSD model, FDI has no significant effect on IDSD, while fintech lending and ICT capability of the community have a significant effect on IDSD. Based on the results, there is no simultaneous relationship between FDI and IDSD.