THE SPILLOVER EFFECTS OF FDI ON LABOR PRODUCTIVITY OF FIRMS: EVIDENCE FROM THE FIVE PRIORITY MANUFACTURING INDUSTRIES IN INDONESIA

  • Martin Juda Universitas Indonesia
  • Toshihiro Kudo National Graduate Institute for Policy Studies, Tokyo Japan
Keywords: Foreign direct investment, spillover effects, productivity, manufacturing, Indonesia

Abstract

This study aims to investigate the effects of FDI spillover on labor productivity of the firms in the five priority manufacturing sector industries in Indonesia, namely food and beverages, textiles, wearing apparel and footwear, chemicals and pharmaceuticals, electronics, and automotive and transport equipment industries. Using unbalanced firm-level data from 2000 to 2015, we find positive spillover effects in the horizontal linkages, which measure the presence of foreign firms on the labor productivity of local firms in the same industry. However, the effects of FDI on the labor productivity of domestic in backward linkages shows negative results, which means foreign buyers fail to give benefits to domestic suppliers. Moreover, the relationship between foreign suppliers and domestic buyers in the forward linkages also show negative spillover effects. These findings are also in line when the analyses are disaggregated into each industry, except for the electronics industry. Based on the different results of the three linkages of spillover effects, our findings suggest that the FDI spillover has not provided comprehensive benefits for local firms.

Downloads

Download data is not yet available.

Author Biography

Toshihiro Kudo, National Graduate Institute for Policy Studies, Tokyo Japan

Professor at Economics, Planning, and Public Policy Program

References

Aitken, B. J., & Harrison, A. E. (1999). Do local firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89(3): 605-618.

Amani, M. (2017). The impact of foreign direct investment on the manufacturing sector in Indonesia. National Graduate Institute for Policy Studies. Tokyo.

Athukorala, P. (2003). Foreign direct investment in crisis and recovery: Lessons from the 1997–1998 Asian crisis. Australian Economic History Review 43(2): 197–213.

Blalock, G., & Gertler, P. J. (2008). Welfare gains from foreign direct investment through technology transfer to local suppliers. Journal of International Economics 74(2): 402–21. https://doi.org/10.1016/j.jinteco.2007.05.011

Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy 23(2): 397–415. https://doi.org/https://doi.org/10.1016/j.ejpoleco.2006.02.003
Central Agency on Statistics (2019). PDB lapangan usaha [Data file]. Retrieved from https://www.bps.go.id/site/resultTab

Central Bank of Indonesia (2018). Aliran investasi langsung di Indonesia menurut sektor ekonomi [Data file]. Retrieved from https://www.bi.go.id/id/statistik/seki/terkini/eksternal/Contents/Default.aspx

Central Bank of Indonesia (2019). Nilai ekspor menurut komoditas [Data file]. Retrieved from https://www.bi.go.id/id/statistik/seki/terkini/eksternal/Contents/Default.aspx

Chung, W. (2001). Identifying technology transfer in foreign direct investment: Influence of industry conditions and investing firm motives. Journal of International Business Studies 32(2): 211–29. https://doi.org/10.1057/palgrave.jibs.8490949

Crespo, N., & Fontoura, M. P. (2007). Determinant factors of FDI spillovers—what do we really know? World Development 35(3): 410–425. Retrieved from https://econpapers.repec.org/RePEc:eee:wdevel:v:35:y:2007:i:3:p:410-425

Djankov, S., & Hoekman, B. (2000). Foreign investment and productivity growth in Czech enterprises. The World Bank Economic Review 14(1): 49–64. https:// doi:10.1093/wber/14.1.49

Glass, A., & Saggi, K. (2002). Multinational firms and technology transfer. Scandinavian Journal of Economics 104(4): 495–513. Retrieved from https://econpapers.repec.org/RePEc:bla:scandj:v:104:y:2002:i:4:p:495-513

Howard, E., Newman, C., Rand, J., & Tarp, F. (2014). Productivity-enhancing manufacturing clusters: Evidence from Vietnam. Helsinki: World Institute for Development Economic Research (UNU-WIDER)

Javorcik, B. S. (2004). Does foreign direct investment increase the productivity of local firms? In search of spillovers through backward linkages. The American Economic Review 94(3): 605–27. Retrieved from http://www.jstor.org/stable/3592945

Keller, W., & Keller, W. (2009). International trade, foreign direct investment, and technology spillovers. Cambridge: National Bureau of Economic Research

Konings, J. (2001). The effects of foreign direct investment on local firms. Economics of Transition and Institutional Change 9(3): 619–33. https://doi.org/10.1111/1468-0351.00091

Laenarts, K., & Merlevede, B. (2011). Horizontal or Backward? FDI Spillovers and Industry Aggregation. Ghent University, Department of Economics Working Paper.

Liu, X., & Parker, D. (2001). The impact of foreign direct investment on labour productivity in the Chinese electronics industry. International Business Review 10(4): 421–39. https://doi.org/10.1016/S0969-5931(01)00024-5

Liu, Z. (2008). Foreign direct investment and technology spillovers: Theory and evidence. Journal of Development Economics 85(1-2): 176–93. https://doi.org/10.1016/j.jdeveco.2006.07.001

Mahmood, M. (2008). Labour productivity and employment in Australian manufacturing SMEs. International Entrepreneurship and Management Journal 4(1):51–62. https://doi.org/10.1007/s11365-006-0025-9

Ministry of Industry (2017). Rencana Kerja Direktorat Jenderal Industri Kimia, Tekstil, dan Aneka 2018 [Performance Plan of the Chemical, Textile, and Miscellenous Industries General Directorate]. Retrieved from http://ikta.kemenperin.go.id/wp-content/uploads/2018/08/Rencana-Kinerja-Sekretariat-Direktorat-Jenderal-Industri-Kimia-Tekstil-dan-Aneka-Tahun-2018.pdf

Ministry of Industry (2018). Making Indonesia 4.0. Retrieved from https://www.kemenperin.go.id/download/18384

Moran, T., Graham, E. M., & Blomstrom, M. (2005). Does foreign direct investment promote development?. Washington. D.C.: Peterson Institute for International Economics. Retrieved from https://econpapers.repec.org/RePEc:iie:ppress:3810

Negara, S. D., & Adam, L. (2012). Foreign direct investment and firms’ productivity level: Lesson learned from Indonesia. ASEAN Economic Bulletin 29(2): 116–27. Retrieved from http://www.jstor.org/stable/43184869

OECD/Eurostat (2005). The measurement of scientific and technological activities: guidelines for collecting and interpreting innovation data: Oslo manual, third edition. Retrieved from https://www.oecd-ilibrary.org/oslo-manual_5lgpbvqfq4g5.pdf?itemId=%2Fcontent%2Fpublication%2F9789264013100-en&mimeType=pdf

OECD (2008). OECD benchmark definition of foreign direct investment –fourth edition– 2008. Retrieved from https://www.oecd.org/daf/inv/investmentstatisticsandanalysis/40193734.pdf

Robiani, B. (2008). The Performance of Indonesia’s Food and Beverages Industry. Paper presented in The 33rd Annual Conference of The Federation Of Asean's Economic Associations, Hanoi

Sari, D. W., Khalifah, N. A., & Suyanto, S. (2016). The spillover effects of foreign direct investment on the firms’ productivity performances. Journal of Productivity Analysis 46(2): 199–233. https://doi.org/10.1007/s11123-016-0484-0

Sedane Labor Information Agency (2018). Regional Risk Assessment: Electronics Industry, Indonesia. Retrieved from http://electronicswatch.org/regional-risk-assessment-electronics-industry-indonesia-december-2018_2554862.pdf

Suyanto, Bloch, H., & Salim, R. A. (2012). Foreign direct investment spillovers and productivity growth in Indonesian garment and electronics manufacturing. The Journal of Development Studies 48(10): 1397–411. https://doi.org/10.1080/00220388.2011.646992

Suyanto, & Salim, R. A. (2010). Sources of productivity gains from FDI in Indonesia: Is it efficiency improvement or technological progress? The Developing Economies 48(4) 450–72. https://doi.org/10.1111/j.1746-1049.2010.00115.x

Suyanto, & Salim, R. (2011). Foreign direct investment spillovers and technical efficiency in the Indonesian pharmaceutical sector: firm level evidence. Applied Economics, 45(3), 383-395.

UNCTAD. (2017). World investment report 2017: Investment and the digital economy. Retrieved from https://unctad.org/en/PublicationsLibrary/wir2017_en.pdf

Xaypanya, P., Rangkakulnuwat, P., & Paweenawat, S. W. (2015). The determinants of foreign direct investment in ASEAN: The first differencing panel data analysis. International Journal of Social Economics 42(3): 239–50. https://doi.org/10.1108/IJSE-10-2013-0238
Published
2020-06-30
How to Cite
Juda, Martin, and Toshihiro Kudo. 2020. “THE SPILLOVER EFFECTS OF FDI ON LABOR PRODUCTIVITY OF FIRMS: EVIDENCE FROM THE FIVE PRIORITY MANUFACTURING INDUSTRIES IN INDONESIA”. Jurnal Ekonomi Dan Pembangunan 28 (1). https://jurnalekonomi.lipi.go.id/JEP/article/view/375.