Impacts of Inward Foreign Direct Investments (FDI) on the Indonesian Manufacturing Sector

Abstract

Developing economies have shown increasing reliance toward FDI-assisted development policies in recent decades. However, pieces of evidence reveal no assurance on the effectiveness of those policies. This paper aims to study the impact of inward FDI on the productivity of the Indonesian manufacturing sector, particularly on two types of FDI, i.e. market and efficiency seeking. Another inquiry is to understand up to what extent different trade policy regimes may work as catalysts of the impacts of FDI.

 This study used a panel data set of manufacturing firms during the period of 1990–2010 from the Annual Manufacturing Survey of Indonesian Central Agency on Statistics. The econometric specifications employed the augmented Cobb-Douglas production function. To check for robustness, it ran the estimations under the OLS for both the fixed-effect and random-effect models.

 The findings showed that the positive impacts of inward FDI on the productivity of the Indonesian manufacturing sector during the period of study, either directly or indirectly, were not strong. It is also suggested that successive trade liberalizations had induced for more positive impacts from FDI, except in the period of crisis. Moreover, dissimilar to previous studies, it is argued that the types of FDI per se are not responsible for the positive impacts.