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


  • Rudy Rahmaddi

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

  • Masaru Ichihashi

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


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.

Suggested Citation

  • Rudy Rahmaddi & Masaru Ichihashi, 2012. "The impact of foreign direct investment on host country exports: Sector based evidence from Indonesian manufacturing," IDEC DP2 Series 2-10, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
  • Handle: RePEc:hir:idecdp:2-10

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    References listed on IDEAS

    1. Eric Ramstetter, 1999. "Trade Propensities and Foreign Ownership Shares in Indonesian Manufacturing," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 35(2), pages 43-66.
    2. Purvis, Douglas D, 1972. "Technology, Trade and Factor Mobility," Economic Journal, Royal Economic Society, vol. 82(327), pages 991-999, September.
    3. Prema-Chandra Athukorala & James Riedel, 1996. "Modelling NIE exports: Aggregation, quantitative restrictions and choice of econometric methodology," Journal of Development Studies, Taylor & Francis Journals, vol. 33(1), pages 81-98.
    4. 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 1211-1219, December.
    5. Hill, Hal, 1996. "Indonesia's Industrial Policy and Performance: "Orthodoxy" Vindicated," Economic Development and Cultural Change, University of Chicago Press, vol. 45(1), pages 147-174, October.
    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. Thee Kian Wie, 2010. "Technology and Indonesia’s Industrial Competitiveness," Working Papers id:3295, eSocialSciences.
    8. Prema-chandra Athukorala & Suphat Suphachalasai, 2004. "Post-crisis Export Performance in Thailand," Departmental Working Papers 2004-04, The Australian National University, Arndt-Corden Department of Economics.
    9. Kee, Hiau Looi & Hoon, Hian Teck, 2005. "Trade, capital accumulation and structural unemployment: an empirical study of the Singapore economy," Journal of Development Economics, Elsevier, vol. 77(1), pages 125-152, June.
    10. 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.
    11. repec:nsr:niesrd:71 is not listed on IDEAS
    12. Hal Hill & Prema-chandra Athukorala, 1998. "Foreign Investment in East Asia: A Survey," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 12(2), pages 23-50, November.
    13. 石田, 正美, 2003. "Industrialization in Indonesia since the 1970s," IDE Research Papers 5, Institute of Developing Economies, Japan External Trade Organization(JETRO).
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    Cited by:

    1. International Monetary Fund, 2013. "Turkey; Selected Issues Paper," IMF Staff Country Reports 13/364, International Monetary Fund.

    More about this item


    Exports performance; foreign direct investment; Indonesia; panel analysis;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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