Factors Affecting Financial Condition of Local Government in Indonesia

This study empirically examines factors affecting the financial conditions of local governments (LGs) in Indonesia. This study utilizes a quantitative approach to achieve the research objective. The theory used to achieve the objective is the theory of demand and supply. To test the hypothesis, this study employs multiple regression analysis. The results show that four of seven factors identified in previous literature (namely, financial efficiency, cost of services and goods, population, and revenue-base) significantly influence the financial conditions of LGs, whereas the remaining three factors (namely population density, age profile of the community, and wealth of community) do not. Based on the law of supply, technology is known as one factor that influences the number of products and services produced by an organization. This study does not examine the impact of this variable on financial conditions of LGs because there was no data available about the level of technology utilization in LGs in Indonesia when this study was undertaken. These findings have implications for central government, LG executives and legislators in Indonesia in formulating policies pertaining to the financial conditions of LGs, for example, policy for decentralization funds. Such policies can enable quality decision-making to improve their financial conditions