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Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia

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  • Duggan, Victor

    (World Bank)

  • Rahardja, Sjamsu

    () (World Bank)

  • Varela, Gonzalo

    () (World Bank)

Abstract

Drawing on the findings of recent research, this note examines the extent to which changes to policy restrictions on foreign direct investment (FDI) in the Indonesian service sector affected the performance of downstream manufacturers during 1997–2009. The analysis uncovers two important findings: first, that relaxing restrictions toward FDI in service sectors was associated with improvements in the perceived performance of those sectors, and second, more importantly, that this relaxation accounted for 8 percent of the total observed increase in manufacturers’ total factor productivity (TFP) during this period. The results show that these TFP gains accrue disproportionately to those firms that are relatively more productive and that gains are related to the relaxation of restrictions in the transport as well as the electricity, gas, and water sectors. TFP gains are associated, in particular, with the relaxation of foreign equity limits, screening and prior approval requirements, but less so with discriminatory regulations that prevent multinationals from hiring key personnel from abroad.

Suggested Citation

  • Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia," World Bank - Economic Premise, The World Bank, issue 106, pages 1-7, February.
  • Handle: RePEc:wbk:prmecp:ep106
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    References listed on IDEAS

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    1. Arnold, Jens M. & Javorcik, Beata S. & Mattoo, Aaditya, 2011. "Does services liberalization benefit manufacturing firms?: Evidence from the Czech Republic," Journal of International Economics, Elsevier, vol. 85(1), pages 136-146, September.
    2. Jens Matthias Arnold & Beata Javorcik & Molly Lipscomb & Aaditya Mattoo, 2016. "Services Reform and Manufacturing Performance: Evidence from India," Economic Journal, Royal Economic Society, vol. 126(590), pages 1-39, February.
    3. Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia," World Bank - Economic Premise, The World Bank, issue 106, pages 1-7, February.
    4. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
    5. Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Service sector reform and manufacturing productivity : evidence from Indonesia," Policy Research Working Paper Series 6349, The World Bank.
    6. Jens Matthias Arnold & Aaditya Mattoo & Gaia Narciso, 2008. "Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(4), pages 578-599, August.
    7. Blalock, Garrick & Gertler, Paul J., 2008. "Welfare gains from Foreign Direct Investment through technology transfer to local suppliers," Journal of International Economics, Elsevier, vol. 74(2), pages 402-421, March.
    8. Fernandes, Ana M. & Paunov, Caroline, 2012. "Foreign direct investment in services and manufacturing productivity: Evidence for Chile," Journal of Development Economics, Elsevier, vol. 97(2), pages 305-321.
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    Cited by:

    1. World Bank, "undated". "World Bank East Asia and Pacific Economic Update, April 2014 : Preserving Stability and Promoting Growth," World Bank Other Operational Studies 18378, The World Bank.
    2. Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia," World Bank - Economic Premise, The World Bank, issue 106, pages 1-7, February.
    3. repec:bla:worlde:v:40:y:2017:i:3:p:499-516 is not listed on IDEAS
    4. Bernard Hoekman & Ben Shepherd, 2017. "Services Productivity, Trade Policy and Manufacturing Exports," The World Economy, Wiley Blackwell, vol. 40(3), pages 499-516, March.

    More about this item

    JEL classification:

    • D0 - Microeconomics - - General
    • F2 - International Economics - - International Factor Movements and International Business
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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