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Do all firms benefit equally from downstream FDI? The moderating effect of local suppliers’ capabilities on productivity gains

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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.

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Notes

  1. See, for example, Aitken and Harrison (1999), Blomstrom and Wolff (1994), Caves (1974), Feinberg and Majumdar (2001), Globerman (1979), Haddad and Harrison (1993), Haskel, Pereira, and Slaughter (2002), and Kokko (1994).

  2. See, for example, Blalock (2002), Blalock and Gertler (2008), Jabbour and Mucchielli (2007), and Javorcik (2004).

  3. See, for example, Blalock and Gertler (2009) and Chung et al. (2003).

  4. In a handful of industries deemed strategically important, a nominal 5% Indonesian holding was required with no further requirement to divest.

  5. We identify names in Bahasa Indonesia, the language of most government publications, with italics. Subsequently, we use the English equivalent or the acronym.

  6. 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.

  7. 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.

  8. Estimation using continuous measures of R&D expenditures shows an effect only at the discontinuity from zero to a positive value.

  9. 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.

  10. 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.

  11. The average is not weighted by firm size, so it does not indicate that 21% of all workers have senior high school degrees.

  12. In a semilog model, like ours, the marginal effect of coefficient b=exp(bδx)−1(Thornton & Innes, 1989).

  13. Including it in subsequent models does not change our results.

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Acknowledgements

We thank Miles Shaver and two anonymous referees for extensive comments.

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Correspondence to Garrick Blalock.

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Accepted by J. Myles Shaver, Consulting Editor, 20 May 2008. This paper has been with the authors for two revisions.

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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

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  • DOI: https://doi.org/10.1057/jibs.2009.21

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