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Foreign investment regulation and firm productivity: Granular evidence from Indonesia

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  • Genthner, Robert
  • Kis-Katos, Krisztina

Abstract

When regulating foreign direct investment (FDI), countries often face a trade-off between pursuing national policy interests and suffering efficiency losses due to FDI restrictions. We demonstrate the presence of this trade-off in the case of a protectionist FDI policy in Indonesia. Using a yearly census of Indonesian manufacturing firms from 2000 to 2015, we link product-level changes in binding FDI regulation due to major regulatory tightening to changes in firm-level productivity. Controlling for an extensive set of fixed effects as well as potential political economy drivers of regulation, we show that a tightening of the regulatory environment was successful in reducing foreign capital reliance among regulated firms, and led to increases in FDI among non-regulated firms producing the same product. Despite compensating increases in domestic capital, regulated firms experienced relative productivity losses. This points towards either a less efficient allocation of domestic capital or a general inferiority of domestic capital as compared to foreign investments.

Suggested Citation

  • Genthner, Robert & Kis-Katos, Krisztina, 2022. "Foreign investment regulation and firm productivity: Granular evidence from Indonesia," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 668-687.
    • Handle: RePEc:eee:jcecon:v:50:y:2022:i:3:p:668-687
    DOI: 10.1016/j.jce.2022.02.003
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    2. Ali, Nesma & Stiebale, Joel, 2021. "Foreign direct investment, prices and efficiency: Evidence from India," DICE Discussion Papers 363, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Wang, Feicheng & Kis-Katos, Krisztina & Zhou, Minghai, 2020. "Trade Liberalization and the Gender Employment Gap in China," IZA Discussion Papers 13626, Institute of Labor Economics (IZA).
    4. Robert Genthner, 2021. "What happens to FDI spillovers when input-output tables go granular?," Economics Bulletin, AccessEcon, vol. 41(3), pages 2099-2105.
    5. Genthner, Robert & Kis-Katos, Krisztina, 2020. "Local labor market effects of FDI regulation in Indonesia," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224524, Verein für Socialpolitik / German Economic Association.
    6. Robert Genthner, 2021. "What happens to FDI spillovers when input-output tables go granular?," Economics Bulletin, AccessEcon, vol. 41(3), pages 1425-1430.
    7. Nauval Hafiluddin & Arianto A. Patunru, 2022. "The Impact of Foreign Investment on Firm Performance: Indonesia After the 2007 FDI Reform," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 68, pages 37-50, Juni.

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    More about this item

    Keywords

    FDI regulation; Foreign capital; Domestic capital; Indonesia; Productivity;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • L6 - Industrial Organization - - Industry Studies: Manufacturing

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