Productivity Spillovers from Foreign Direct Investment: Indonesian Manufacturing Industry’s Experience 1975-2000

In recent decades, foreign direct investment (FDI) played an important role in achieving economic growth and development especially for developing countries. FDI bring capital and introduced new technology. Moreover, the new technology can also spill over to the local firms in the host country. For this reason, FDI often considered as the most significant channel for technology transfer. However, the empirical studies provide mixed evidence on the role of foreign investment in generating technology transfer to local firms. This paper attempts to provide some evidence to help reconcile the difference in empirical evidence by examining Indonesian manufacturing industries’ experienced from 1975-2000. This would provide an opportunity to examine the effect of host country economic development and policy environment to the technology spillovers process. In general, the result found positive and significant productivity spillovers in Indonesian manufacturing industry for the whole period. Interestingly, the estimation result for each economic episodes support the hypothesis on the effect of local firm absorptive capacity and host country economic policy. We found negative and significant spillovers during the pre-liberalization period (1975-1986) and found positive and significant spillovers in the post-liberalization period (1987-2000). This study also found that the spillovers effect is different between each 2-digit ISIC industry, proving that the sectoral characteristics do affect the local firm ability to learn and adopt new technology.