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Foreign Direct Investment, Agglomeration, and Production Networks in Indonesian Manufacturing

Author

Listed:
  • Dionisius A. Narjoko

    (Economic Research Institute for ASEAN and East Asia)

Abstract

This study examines the importance of globalisation - defined by international production networks - in determining foreign direct investment (FDI) flows into Indonesian manufacturing since 2000. It is motivated by the fact that the extent of connection between the Indonesian and the global economy had increased after the 1997-98 Asian financial crisis. Models of FDI are estimated by utilising plant-level data and various trade and tariff data. Production networks or agglomeration are found to play an important role in driving FDI in Indonesia's manufacturing sector, at least for the period 2000-2015. This study provides the insight that agglomeration could be utilised to increase FDI in Indonesia. This not only improves the productivity of the sector targeted by the investment but also promotes productivity growth. Creating more agglomeration areas could therefore be a policy direction taken by Indonesia to help increase FDI.

Suggested Citation

  • Dionisius A. Narjoko, 2023. "Foreign Direct Investment, Agglomeration, and Production Networks in Indonesian Manufacturing," Working Papers DP-2023-01, Economic Research Institute for ASEAN and East Asia (ERIA).
    • Handle: RePEc:era:wpaper:dp-2023-01
    as

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    References listed on IDEAS

    as
    1. Primandita Fitriandi & Makoto Kakinaka & Koji Kotani, 2014. "Foreign Direct Investment and Infrastructure Development in Indonesia: Evidence from Province Level Data," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 4(1), pages 79-94.
    2. Edward L. Glaeser & Glenn Ellison, 1999. "The Geographic Concentration of Industry: Does Natural Advantage Explain Agglomeration?," American Economic Review, American Economic Association, vol. 89(2), pages 311-316, May.
    3. Primandita Fitriandi & Makoto Kakinaka & Koji Kotani, 2014. "Foreign direct investment and infrastructure development in Indonesia: Evidence from province level data," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 4(1), pages 79-94, January.
    4. Kimura, Fukunari & Ando, Mitsuyo, 2005. "Two-dimensional fragmentation in East Asia: Conceptual framework and empirics," International Review of Economics & Finance, Elsevier, vol. 14(3), pages 317-348.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Indonesia; foreign direct investment; production networks; agglomeration;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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