The Influence of Gross Regional Domestic Product, Interest Rates, and Labor Force on Domestic Investment in the City of Surabaya

Abstract

Domestic Investment (Penanaman Modal Dalam Negeri/PMDN) is a strategic pillar of regional economic independence because it is comparatively more resilient to external shocks than foreign direct investment. This study examines the long-run effect of the Gross Regional Domestic Product (GRDP), the interest rate, and the labor force on domestic investment realization in the City of Surabaya, Indonesia, over the period 2009–2024. The study is motivated by the fluctuating trajectory of PMDN realization in Surabaya, which has not always moved in line with the city's steadily rising GRDP, suggesting that market size alone is an insufficient predictor of domestic capital inflows. Using annual secondary time-series data obtained from the Central Statistics Agency (BPS), Bank Indonesia, and the Surabaya One-Stop Investment and Integrated Service Agency (DPMPTSP), the long-run relationship among the variables is estimated with the Fully Modified Ordinary Least Squares (FMOLS) method after confirming that all series are integrated of order one, I(1), and are cointegrated according to the Johansen test. The classical assumption tests indicate that the estimated model is normally distributed, free of serious multicollinearity, and homoskedastic. The FMOLS estimates show that GRDP exerts a positive and significant effect on PMDN, the interest rate exerts a negative and significant effect on PMDN, and the labor force exerts a positive and significant effect on PMDN, with the model explaining approximately 82.6 percent of the variation in domestic investment (Adjusted R² = 0.825828). These findings confirm that regional market size, the cost of capital, and labor availability jointly shape investors' long-run capital allocation decisions in a metropolitan setting, and they imply that sustaining GRDP growth, stabilizing borrowing costs, and strengthening workforce readiness are complementary levers for attracting domestic capital to Surabaya.