FOREIGN DIRECT INVESTMENT AND WAGE SPILLOVERS IN THE INDONESIAN MANUFACTURING INDUSTRY

  • Mohammad Zeqi Yasin The University of Jember
  • Miguel Angel Esquivias Department of Economics, Universitas Airlangga
  • Nur Arifin BPS-Statistics Indonesia
Keywords: FDI, Wage Spillovers, Manufacturing Industry, Indonesia

Abstract

We examine whether foreign direct investment (FDI) influences wage spillover in the manufacturing sector in Indonesia from the perspective of three recipients (dimensions): industry, province, and technology intensity. Annual data of Indonesian manufacturing firms from 2011 to 2015 is employed. Using the Fixed Effect Model, we found the spatial (province) dimension to matter the most as it consistently indicates that inward FDI depresses wages in the recipient province. When we split the observation based on firm size, FDI inflows within the same technological intensive subsectors were found to discourage wages. Only FDI inflows within the host industries support higher salaries for smaller domestic firms. The coordination between central and local governments remains essential to ensure that local companies are sufficiently competitive with foreign companies.

Downloads

Download data is not yet available.

References

Arnold, J. M., & Javorcik, B. S. (2009). Gifted Kids or Pushy Parents? Foreign Direct Investment and Plant Productivity in Indonesia. Journal of International Economics, 79, 42–53. https://doi.org/10.1016/j.jinteco.2009.05.004

Baltagi, B. H., & M. Hashem Pesaran. (2007). Heterogeneity and Cross Section Dependence in Panel Data Model: Theory and Application. Journal of Applied Econometrics, 22, 229–232. https://doi.org/10.1002/jae

Bayraktar-Sağlam, B., & Böke, S. S. (2017). Labor Costs and foreign Direct Investment: A Panel VAR Approach. Economies, 5, 36. https://doi.org/10.3390/economies5040036

Beenstock, M., Felsenstein, D., & Rubin, Z. (2017). Does foreign Direct Investment Polarize Regional Earnings? Some Evidence from Israel. Letters in Spatial and Resource Sciences, 10, 385–409. https://doi.org/10.1007/s12076-017-0192-z

Cantwell, J. (1989). Technological Innovation and Multinational Corporations. Blackwell.

Charoenrat, T., Harvie, C., & Amornkitvikai, Y. (2013). Thai Manufacturing Small and Medium-sized Enterprise Technical Efficiency: Evidence from Firm-level Industrial Census Data §. Journal of Asian Economics, 27, 42–56.

https://doi.org/10.1016/j.asieco.2013.04.011

Chen, Z., Ge, Y., & Lai, H. (2011). Foreign Direct Investment and Wage Inequality: Evidence from China. World Development, 39, 1322–1332. https://doi.org/10.1016/j.worlddev.2010.12.006

Ciani, A., Hyland, M. C., Karalashvili, N., Keller, J. L., Ragoussis, A., & Tran, T. T. (2020). Making it Big: Why Developing Countries Need More Large Firms. The World Bank. https://doi.org/10.1596/978-1-4648-1557-7.

De Hoyos, R. E., & Sarafidis, V. (2006). Testing for Cross-sectional Dependence in Panel-data Models. Stata Journal, 6, 482–496. https://doi.org/10.1177/1536867x0600600403

Diaz, M. A., & Sanchez, R. (2008). Firm Size and Productivity in Spain: A Stochastic Frontier Analysis. 315–323. https://doi.org/10.1007/s11187-007-9058-x

Driscoll, J. C., & Kraay, A. C. (1998). Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data. Review of Economics and Statistics, 80, 549-560. https://doi.org/10.1162/003465398557825

Drbevich, P. L., & Kriauciunas, A. P. (2011). Clarifying the Conditions and Limits of the Contributions of Ordinary and Dynamic Capabilities to Relative Firm Performance. Strategic Management Journal, 32, 254–279.

https://doi.org/10.1002/smj

Esquivias, M. A., & Harianto, S. K. (2020). Does Competition and Foreign Investment Spur Industrial Efficiency?: Firm-level Evidence from Indonesia. Heliyon, 6, e04494. https://doi.org/10.1016/j.heliyon.2020.e04494

Frees, E. W. (1995). Assessing Cross-sectional Correlation in Panel Data. Journal of Econometrics, 69, 393–414. https://doi.org/10.1016/0304-4076(94)01658-M

Friedman, M. (1937). The Use of Ranks to Avoid the Assumption of Normality Implicit in the Analysis of Variance. Journal of the American Statistical Association, 32, 605–701. https://doi.org/10.1080/01621459.1937.10503522

Hernández-linares, R., Kellermanns, F. W., & López-fernández, C. (2018). Dynamic Capabilities and SME Performance: The Moderating Effect of Market Orientation. Journal of Small Business Management, 00, 1–26. https://doi.org/10.1111/jsbm.12474

Hoechle, D. (2007). Robust Standard Errors for Panel Regressions with Cross-sectional Dependence. Stata Journal, 7, 281–312. https://doi.org/10.1177/1536867x0700700301

Javorcik, B., Fitriani, F., Iacovone, L., Varela, G., & Duggan, V. (2012). Productivity Performance in Indonesia’s Manufacturing Sector. In Policy Notes. World Bank. https://doi.org/doi:10.1596/26715

Javorcik, B. S. (2004). Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages. American Economic Review, 94, 605–627. https://doi.org/10.1257/0002828041464605

Keller, W. (2010). International Trade, Foreign Direct Investment, and Technology Spillovers. In Handbook of the Economics of Innovation, 2. Elsevier B.V. https://doi.org/10.1016/S0169-7218(10)02003-4

Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2018). International Trade: Theory and Policy (11th ed.). Pearson Education.

Lee, J. W., & Wie, D. (2015). Technological Change, Skill Demand, and Wage Inequality: Evidence from Indonesia. World Development, 67, 238–250. https://doi.org/10.1016/j.worlddev.2014.10.020

Li, C., & Tanna, S. (2018). FDI Spillover Effects in China’s Manufacturing Sector: New Evidence from Forward and Backward Linkages. In Advances in Panel Data Analysis in Applied Economic Research (pp. 203–222). Springer, Cham. https://doi.org/10.1007/978-3-319-70055-7_15

Li, J., Chen, D., & Shapiro, D. M. (2013). FDI Spillovers at the National and Subnational Level: The Impact on Product Innovation by Chinese Firms. Management and Organization Review, 9, 413–435. https://doi.org/10.1111/more.12025

Lipsey, R. E., & Sjöholm, F. (2004). Foreign Direct Investment, Education and Wages in Indonesian Manufacturing. Journal of Development Economics, 73, 415-422. https://doi.org/10.1016/j.jdeveco.2002.12.004

Nguyen, D. T. H. (2019). Inward Foreign Direct Investment and Local Wages: The Case of Vietnam’s Wholesale and Retail Industry. Journal of Asian Economics, 65, 101134. https://doi.org/10.1016/j.asieco.2019.101134

Nguyen, D. T. H., Sun, S., & Beg, A. B. M. R. A. (2019). How Does FDI Affect Domestic Firms’ Wages? Theory and Evidence from Vietnam. Applied Economics, 51, 5311–5327. https://doi.org/10.1080/00036846.2019.1610717

Ni, B., Spatareanu, M., Manole, V., Otsuki, T., & Yamada, H. (2017). The Origin of FDI and Domestic Firms’ Productivity—Evidence from Vietnam. Journal of Asian Economics, 52, 56–76. https://doi.org/10.1016/j.asieco.2017.08.004

OECD. (2009). OECD Benchmark Definition of Foreign Direct Investment 2008. Organization for Economic Co-operation and Development Publishing.

OECD. (2011). Classification of Manufacturing Industries into Categories based on R&D Intensities. ISIC REV. 3 Technology Intensity Definition, 6. https://doi.org/10.1787/sti

Pangestu, M., Rahardja, S., & Ing, L. Y. (2015). Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments. Bulletin of Indonesian Economic Studies, 51, 239–261. https://doi.org/10.1080/00074918.2015.1061915

Pesaran, M. H. (2004). General Diagnostic Tests for Cross Section Dependence in Panels. Cambridge Working Papers in Economics No. 0435, University of Cambridge. https://doi.org/10.2139/ssrn.572504

Pittiglio, R., Reganati, F., & Sica, E. (2014). Do Multinational Enterprises Push up the Wages of Domestic Firms in the Italian Manufacturing Sector? Manchester School, 83, 346–378. https://doi.org/10.1111/manc.12076

Sari, D. W., Khalifah, N. A., & Suyanto, S. (2016). The Spillover Effects of Foreign Direct Investment on the Firms’ Productivity Performances. Journal of Productivity Analysis, 46, 199–233. https://doi.org/10.1007/s11123-016-0484-0

Sari, D. W. (2019). The Potential Horizontal and Vertical Spillovers from Foreign Direct Investment on Indonesian Manufacturing Industries. Economic Papers: A Journal of Applied Economics and Policy, 38, 299-310. https://doi.org/10.1111/1759-3441.12264

Sjöholm, F. (2017). Foreign Direct Investment and Value Added in Indonesia. In The Indonesian Economy (pp. 238–260). Routledge. https://doi.org/10.4324/9781315161976-10

Sjöholm, F., & Lipsey, R. E. (2006). Foreign Firms and Indonesian Manufacturing Wages: An Analysis with Panel Data. Economic Development and Cultural Change, 55, 201–221. https://doi.org/10.1086/505723

Sugiharti, L., Purwono, R., Primanthi, M. R., & Esquivias, M. A. P. (2019). Indonesia industrial Productivity Growth: Evidence of Re-industrialization or De-industrialization? Periodica Polytechnica Social and Management Sciences, 27, 108-118. https://doi.org/10.3311/PPso.12489

Suyanto, S., Salim, R., & Bloch, H. (2014). Which Firms Benefit from Foreign Direct Investment? Empirical Evidence from Indonesian Manufacturing. Journal of Asian Economics, 33, 16-29. https://doi.org/10.1016/j.asieco.2014.05.003

Suyanto, S., Sugiarti, Y., & Setyaningrum, I. (2021). Clustering and Firm Productivity Spillovers in Indonesian Manufacturing. Heliyon, 7. https://doi.org/10.1016/j.heliyon.2021.e06504

Suyanto, & Salim, R. (2011). Foreign Direct Investment Spillovers and Technical Efficiency in the Indonesian Pharmaceutical Sector: Firm Level Evidencey. Applied Economics, 45, 383–395. https://doi.org/10.1080/00036846.2011.605554

Toma, P. (2020). Size and Productivity: A Conditional Approach for Italian Pharmaceutical Sector. Journal of Productivity Analysis, 54, 1–12. https://doi.org/10.1007/s11123-020-00580-y

Tomohara, A., & Takii, S. (2011). Does Globalization Benefit Developing Countries? Effects of FDI on Local Wages. Journal of Policy Modeling, 33, 511–521. https://doi.org/10.1016/j.jpolmod.2010.12.010

Wang, J. Y., & Blomström, M. (1992). Foreign Investment and Technology Transfer. A Simple Model. European Economic Review, 36, 137–155. https://doi.org/10.1016/0014-2921(92)90021-N

Wiboonchutikula, P., Phucharoen, C., & Pruektanakul, N. (2016). Spillover Effects of Foreign Direct Investment on Domestic Manufacturing Firms in Thailand. Singapore Economic Review, 61, 1–32. https://doi.org/10.1142/S0217590816400282

Widodo, W., Salim, R., & Bloch, H. (2015). The Effects of Agglomeration Economies on Technical Efficiency of Manufacturing Firms: Evidence from Indonesia. Applied Economics, 47, 3258–3275. https://doi.org/10.1080/00036846.2015.1013614

Wooldridge, J. M. (2016). Introductory Econometrics: A Modern Approach (6th ed.). Cengage Learning. https://doi.org/10.1198/jasa.2006.s154

Yasin, M. Z. (2020). Firm’s Trade Activities to Promote Technical Efficiency and Total Factor Productivity: The Growth Accounting and the Stochastic Frontier Approach. Economics Bulletin, 40, 3020–3032.

Yasin, M. Z. (2021). Technical Efficiency and Total Factor Productivity Growth of Indonesian Manufacturing Industry: Does Openness Matter? Studies in Microeconomics, 1–30. https://doi.org/10.1177/23210222211024438

Published
2022-01-31
How to Cite
Yasin, M. Z., Esquivias, M., & Arifin, N. (2022). FOREIGN DIRECT INVESTMENT AND WAGE SPILLOVERS IN THE INDONESIAN MANUFACTURING INDUSTRY. Buletin Ekonomi Moneter Dan Perbankan, 25, 125 - 160. https://doi.org/10.21098/bemp.v25i0.1821