1453 © 2020 AESS Publications. All Rights Reserved. THE DOUBLED-EDGE SWORD OF RAISING THE MINIMUM WAGE: THE CASE OF INDONESIA Fitriya 1 Abdul Basyith 2+ Rabin Ibnu Zainal 3 1,3 Universitas Bina Darma, Indonesia. 2 Universitas Muhammadiyah Palembang, Indonesia. (+ Corresponding author) ABSTRACT Article History Received: 21 October 2020 Revised: 13 November 2020 Accepted: 4 December 2020 Published: 18 December 2020 Keywords Minimum wage Productivity Financial performance Socio-economic impact FDI Indonesia. JEL Classification: J00. This study examines the impact of minimum wage on labor productivity, financial performance and foreign direct investment (FDI). The data was collected from the quarterly financial statements of listed firms from 2010 to 2018. The manufacturing sector was selected, which comprises 175 firms from 619 listed firms in 2018. The variables are salary expenditure, change in salary expenditure, productivity, financial performance, FDI and minimum wage. A random effect generalized least squares was employed and the results revealed that the minimum wage has a negative impact on labor productivity and financial performance but is not significant. The negative results indicate that an increase in minimum wage is slower than inflation rate, thus it can only cover the cost of living. Furthermore, an increase in minimum wage affects the higher cost of production thereby reducing company profits. It appears that changes in the minimum wage have a negative and significant impact on FDI in Indonesia. Contribution/Originality: This study is considered as novel since there has been little research conducted to date to investigate the impact of an increase in the regional minimum wage on labor productivity, firms ’ financial performance and FDI in the context of Indonesia using considerable data from firms in the manufacturing sector that are listed on the Indonesia Stock Exchange. 1. INTRODUCTION In 2015, Indonesia opened its gates when the Association of Southeast Asian Nations (ASEAN) Economic Community established ASEAN Economic Community (AEC) in which it is built on four interrelated characteristics: (a) a single market and production base, (b) a highly competitive economic region, (c) a region of equitable economic development, and (d) a region fully integrated into the global economy (ASEAN, 2016). The AEC is a major milestone in the regional economic integration agenda in ASEAN in which the integration was aimed at creating a competitive market of over 600 million people in ASEAN countries (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam), and goods, services, investment capital, and skilled labor can be transferred freely. Due to this development, many businesses have begun preparing themselves three years ahead of time to meet the challenges and opportunities. However, the readiness of each ASEAN country varies widely among the members. Indonesia, as one of ASEAN members, has to Asian Economic and Financial Review ISSN(e): 2222-6737 ISSN(p): 2305-2147 DOI: 10.18488/journal.aefr.2020.1012.1453.1465 Vol. 10, No. 12, 1453-1465. © 2020 AESS Publications. All Rights Reserved. URL: www.aessweb.com