Purpose of the study: This article examines the impact of foreign investment—especially through the capital market—towards the economic stability and strategic policy in Indonesia. Despite being a member of G20, a group of states with the world’s highest Gross Domestic Products, Indonesia is still a developing state whose need for investment to support economic growth is high. On the other side, Indonesia has a low capital accumulation rate due to low people’s savings which inhibits the development projects. Therefore, the government prioritizes the incoming flow of foreign investment.

Methodology: This study applies the international political economy approach to provide critical analysis of Indonesian contemporary foreign investment, especially in the capital market. The data used is the investment activities through the Indonesia Stock Exchange during 2015-2016.

Main Findings: It argues that Indonesia’s considerable dependence on investment has enabled foreign investors to play the capital flow to influence the national economic stability for their interests. Such influence was a result of two strategies: (i) the transaction domination in the capital market through the Indonesia Stock Exchange, and (ii) the alliance with financial actors in accessing inside information—which is not commonly owned by domestic investors.

Implications/Applications: This study suggests that the politics of foreign investors has contributed towards the changes of government policies in the financial sectors to facilitate the process and to ensure the flow of foreign investment to Indonesia. Such policies include the government’s control of interest rates, fiscal policy, as well as currency stability through macroprudential regulation.

Novelty/Originality: Essentially, the capital market is not politically neutral. It has been used by foreign investors to augment their interests by dominating transactions and building political alliances at the domestic level.


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