The Effect of Foreign Direct Investment on Productivity in the Indonesian Manufacturing Industry
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Date
2018-12-22
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Abstract
Foreign Direct Investment (FDI) has been expected to not only benefit capital and saving, but also benefit in terms of knowledge and technology transfer. These inflows of FDI create externalities and generate spillover which increase the firm’s productivity. This study investigates the effect of FDI on the productivity of selected manufacturing industries in Indonesia during 2001–2014. Food industry (ISIC 10), wearing apparel industry (ISI C 14), and motor vehicles, trailers, and semi-trailers industries (ISIC 29) are the selected manufacturing industries in this study. Using data from the Annual Manufacturing Survey of Medium and Large Industry in Indonesia, the impact of FDI spillover on firm’s productivity employing panel fixed effect model regression would be analyzed. The empirical result demonstrates that FDI has positive and significant impacts on firm’s productivity. Backward spillover also affects the productivity of firms positively. However,the results indicate that FDI has negligible influence on horizontal and forward spillover. These findings suggest that FDI has not strong effect in terms of inter-industry spillover within the same industry and local firms have not benefitted from the presence of foreign firms.
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Foreign direct investment, productivity, spillover