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The impact of foreign direct investment on host country exports: Sector based evidence from Indonesian manufacturing

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  • Rudy Rahmaddi

    (Graduate School for International Development and Cooperation, Hiroshima University)

  • Masaru Ichihashi

    (Graduate School for International Development and Cooperation, Hiroshima University)

Abstract

This study sought to elucidate the existence of a link between foreign direct investment (FDI) and exports in the manufacturing sectors of Indonesia. It contributes to the literature by investigating the sector-based impact of inward FDI on a host country's exports, using disaggregated data of manufacturing sectors categorized by factor intensity from 1990 to 2008. So doing enables one to test an FDI-substitute or FDI-complementary effect on sector-based export performance. The FDI theory proposes the possibility of an export-promoting effect in host economies. Employing panel analysis on the full sample and subsamples, and by later applying a differentiated cross-section effect, we found that FDI flows significantly crowd-in manufacturing exports in most panel observations. Interestingly, such an export effect is even stronger in physical capital, human capital, and technology-intensive sectors, without any significant evidence of a crowd-out effect in natural resource-intensive and unskilled labor-intensive industries, sectors in which Indonesia has a comparative advantage. In addition, this study uncovered the importance of other determinants of export performance. The findings draw some main policy implications, namely the importance of targeted sector-based policy, competitive exchange rate management, and further development of industrialization towards high value-added activities.

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Bibliographic Info

Paper provided by Hiroshima University, Graduate School for International Development and Cooperation (IDEC) in its series IDEC DP2 Series with number 2-10.

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Length: 29 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:hir:idecdp:2-10

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Web page: http://www.hiroshima-u.ac.jp/en/idec/
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Keywords: Exports performance; foreign direct investment; Indonesia; panel analysis;

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  1. Thee Kian Wie, 2010. "Technology and Indonesia’s Industrial Competitiveness," Working Papers id:3295, eSocialSciences.
  2. Purvis, Douglas D, 1972. "Technology, Trade and Factor Mobility," Economic Journal, Royal Economic Society, vol. 82(327), pages 991-99, September.
  3. Hiau Looi Kee & Hian Teck Hoon, 2004. "Trade, capital accumulation, and structural unemployment : An empirical study of the Singapore economy," Policy Research Working Paper Series 3272, The World Bank.
  4. Zhang, Kevin Honglin & Song, Shunfeng, 2001. "Promoting exports: the role of inward FDI in China," China Economic Review, Elsevier, vol. 11(4), pages 385-396.
  5. Brezis, Elise S & Krugman, Paul R & Tsiddon, Daniel, 1993. "Leapfrogging in International Competition: A Theory of Cycles in National Technological Leadership," American Economic Review, American Economic Association, vol. 83(5), pages 1211-19, December.
  6. Haddad, Mona & Harrison, Ann, 1993. "Are there positive spillovers from direct foreign investment? : Evidence from panel data for Morocco," Journal of Development Economics, Elsevier, vol. 42(1), pages 51-74, October.
  7. Ishida, Masami, 2003. "Industrialization in Indonesia since the 1970s," IDE Research Papers 5, Institute of Developing Economies, Japan External Trade Organization(JETRO).
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