Abstract
Using a panel data set on Indonesian manufacturers from 1988 to 1996, this paper examines how host-country firms’ capabilities influence their propensity to benefit from downstream foreign direct investment (FDI). We estimate local suppliers’ productivity response to multinational entry in downstream industries. We find that firms with stronger production capabilities benefit less than others. In contrast, firms with greater absorptive capacity benefit more. These results are largely robust to the inclusion of firm fixed effects, industry-year and region-year fixed effects, and other controls, and indicate the importance of firm capabilities in moderating the effect of downstream FDI on productivity. Finally, we also find some evidence, though less robust, that firms with greater complementary capabilities (proxied by firm size) also benefit more from downstream FDI.
Similar content being viewed by others
Notes
See, for example, Blalock (2002), Blalock and Gertler (2008), Jabbour and Mucchielli (2007), and Javorcik (2004).
See, for example, Blalock and Gertler (2009) and Chung et al. (2003).
In a handful of industries deemed strategically important, a nominal 5% Indonesian holding was required with no further requirement to divest.
We identify names in Bahasa Indonesia, the language of most government publications, with italics. Subsequently, we use the English equivalent or the acronym.
Some firms may have more than one factory (establishment). However, analysis by BPS suggests that fewer than 5% of factories belong to multi-factory firms. Therefore, from this point onward, we refer to establishments as firms for simplicity.
Our results change little with alternative definitions of regions. Note that the number of provinces has since changed owing to government restructuring and the independence of East Timor.
Estimation using continuous measures of R&D expenditures shows an effect only at the discontinuity from zero to a positive value.
We obtain similar results when we use the percentage of employees with junior college degrees. Four-year college and higher degrees are rare in Indonesia.
We deflated output, materials, and capital to express values in real terms. The deflators are based on Indeks Harga Perdangangan Besar (IHPB), wholesale price indexes (WPI) published by BPS.
The average is not weighted by firm size, so it does not indicate that 21% of all workers have senior high school degrees.
In a semilog model, like ours, the marginal effect of coefficient b=exp(bδx)−1(Thornton & Innes, 1989).
Including it in subsequent models does not change our results.
References
Aitken, B., & Harrison, A. 1999. Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89 (3): 605–618.
Blalock, G. 2002. Technology adoption from foreign direct investment and exporting: Evidence from Indonesian manufacturing, PhD thesis, University of California, Berkeley.
Blalock, G., & Gertler, P. 2008. Welfare gains from foreign direct investment through technology transfer to local suppliers. Journal of International Economics, 74 (2): 402–421.
Blalock, G., & Gertler, P. 2009. How firm capabilities affect who benefits from foreign technology. Journal of Development Economics, forthcoming. doi:10.1016/j.jdeveco.2008.11.011.
Blomstrom, M., & Wolff, E. 1994. Multinational corporations and productivity convergence in Mexico. In W. Baumol, R. Nelson, & E. Wolff (Eds), Convergence of productivity: Cross-national studies and historical evidence: 263–284. New York: Oxford University Press.
Caves, R. 1974. Multinational firms, competition, and productivity in host-country markets. Economica, 41 (162): 176–193.
Chung, W., Mitchell, W., & Yeung, B. 2003. Foreign direct investment and host country productivity: The American automotive component industry in the 1980s. Journal of International Business Studies, 34 (2): 199–218.
Cohen, W., & Levinthal, D. 1990. Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35 (1): 128–152.
Feinberg, S., & Majumdar, S. 2001. Technology spillovers from foreign direct investment in the Indian pharmaceutical industry. Journal of International Business Studies, 32 (3): 421–438.
Globerman, S. 1979. Foreign direct investment and spillover efficiency benefits in Canadian manufacturing industries. Canadian Journal of Economics, 12 (1): 42–56.
Haddad, M., & Harrison, A. 1993. Are there positive spillovers from direct foreign investment? Evidence from panel data for Morocco. Journal of Development Economics, 42 (1): 51–74.
Haskel, J., Pereira, S., & Slaughter, M. 2002. Does inward foreign direct investment boost the productivity of domestic firms? Discussion Paper 8433, National Bureau of Economic Research.
Hoxby, C. 2005. Competition among public schools: A reply to Rothstein (2004), Working Paper 11216, National Bureau of Economic Research.
Jabbour, L., & Mucchielli, J. L. 2007. Technology transfer through vertical linkages: The case of the Spanish manufacturing industry. Journal of Applied Economics, 10 (1): 115–136.
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 (3): 605–627.
Kinoshita, Y. 2000. R&D and technology spillovers via FDI: Innovation and absorptive capacity, Working Paper No. 349, William Davidson Institute.
Kokko, A. 1994. Technology, market characteristics, and spillovers. Journal of Development Economics, 43 (2): 279–293.
Lane, P., Salk, J., & Lyles, M. 2001. Absorptive capacity, learning, and performance in international joint ventures. Strategic Management Journal, 22 (12): 1139–1161.
Levinsohn, J., & Petrin, A. 2003. Estimating production functions using inputs to control for unobservables. Review of Economic Studies, 70 (2): 317–341.
Liu, X., Siler, P., Wang, C., & Wei, Y. 2000. Productivity spillovers from foreign direct investment: Evidence from UK industry level panel data. Journal of International Business Studies, 31 (3): 407–426.
Moulton, B. R. 1990. An illustration of a pitfall in estimating the effects of aggregate variables on micro units. Review of Economics and Statistics, 72 (2): 334–338.
Pack, H., & Saggi, K. 2001. Vertical technology transfer via international outsourcing. Journal of Development Economics, 65 (2): 389–415.
Rodrik, D. 1999. The new global economy and developing countries: Making openness work, Policy Essay 24, Overseas Development Council, Washington, DC: Johns Hopkins University Press.
Szulanski, G. 1996. Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17 (Winter special issue): 27–43.
Thornton, R. J., & Innes, J. T. 1989. Interpreting semilogarithmic regression coefficients in labor research. Journal of Labor Research, 10 (4): 443–447.
World Bank. 1993. Foreign direct investment: Benefits beyond insurance. Washington, DC: Development Brief 14, Development Economics Vice-Presidency.
Zahra, S., & George, G. 2002. Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27 (2): 185–203.
Acknowledgements
We thank Miles Shaver and two anonymous referees for extensive comments.
Author information
Authors and Affiliations
Corresponding author
Additional information
Accepted by J. Myles Shaver, Consulting Editor, 20 May 2008. This paper has been with the authors for two revisions.
Rights and permissions
About this article
Cite this article
Blalock, G., Simon, D. Do all firms benefit equally from downstream FDI? The moderating effect of local suppliers’ capabilities on productivity gains. J Int Bus Stud 40, 1095–1112 (2009). https://doi.org/10.1057/jibs.2009.21
Received:
Revised:
Published:
Issue Date:
DOI: https://doi.org/10.1057/jibs.2009.21