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Gifted Kids or Pushy Parents? Foreign Direct Investment and Plant Productivity in Indonesia

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  • Beata Javorcik
  • Jens Matthias Arnold

Abstract

This paper uses micro data from the Indonesian Census�of Manufacturing to analyze the causal relationship between foreign ownership and various aspects of plant performance.� It examines the implications of foreign ownership in three different contexts: entry of foreign investors through greenfield projects, foreign acquisitions and foreign privatizations.� To control for the possible endogeneity of FDI decision propensity score matching is combined with a difference-in-differences approach when the latter two settings are considered.� The results suggest that new greenfield entrants outperform new domestic producers in terms of productivity.� They also tend to be larger, more capital intensive and more involved in international trade.� Further, the findings indicate that foreign ownership leads to significant productivity improvements in the acquired plants.� The improvements become visible in the acquisition year and continue in subsequent periods.� After three years, the acquired plants exhibit a 13.5 percent higher productivity than the control group.� The rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages.� Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.� Finally, productivity improvements and evidence of restructuring are also found in the context of foreign privatizations.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 434.

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Date of creation: 01 May 2009
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Handle: RePEc:oxf:wpaper:434

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Keywords: Foreign direct investment; Productivity;

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