Labor Productivity and Foreign Direct Investment in the Indonesian Manufacturing Sector (original) (raw)
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The contribution of the manufacturing sector to Indonesia's GDP reaches more than 20 percent. However, Indonesia has challenges to increase the productivity of workers who work in the industrial sector. The Omnibus law requires the assistance of foreign workers to work in Indonesia so that technology and expertise transfer happen. Foreign workers are believed to have a spillover effect in the form of skills and technology transfer through Foreign Direct Investment (FDI). FDI in the manufacturing sector allows an increase in labor productivity as a result of the spillover effect in the form of the transfer of skills and technology. This study aims to examine the impact of FDI spillover by making a comparison between labor productivity in companies whose ownership is dominated by foreign and domestic. Using data used from a large medium industry survey in 2010-2014. The method used in this research is panel data regression analysis with a cross-section of 28 industry subcategories derived from ISIC and a 5-year time series from 2010-2014, when the manufacturing sector became a source of growth in Indonesia of more than one percent. The results are in general FDI has a positive effect on labor productivity in companies whose ownership is dominated by foreign and domestic ownership. Meanwhile, FDI spillovers on labor productivity did not occur in companies whose ownership was dominated by domestic but occurred in companies whose ownership was dominated by foreigners.
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There have been extensive studies on the effects of foreign direct investment (FDI) on economic growth, either at the firm level or at national level. The researchs in this area have been extensified during this last decade due to the increased role of FDI in total capital flows. The direction of the flow is from the North (developed countries) to the South (developing countries). In 1999, FDI accounted for more than half of all private capital flows to developing countries. 1 The main argument in favor of FDI is the belief that FDI has several positive effects which include productivity gains, technology transfers, the introduction of new processes, managerial skills, and know-how in the domestic market, employee training, international production networks, and access to markets. 2 For developing countries, FDI is also viewed as an attractive alternative to long-term bank loans as a form of capital inflow. The opposing arguments, for example , states that FDI has a detrimental effect on the process of development of developing countries and leads to uneven global development.
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Foreign direct investment (FDI) is especially important for developing countries. This study investigates the determinants of FDI in the case of Indonesia. Most empirical researches in this field used time series data of a single country or panel data of several countries. Although panel data analysis is more comprehensive, however results taken from crosscountry analysis cannot be directly applied to any specific country in the dataset and therefore lacks practicality. In this research, panel data analysis of a single country is performed to overcome the aforementioned shortcomings. Five determinants of FDI are tested using panel data of 33 Indonesian provinces over 10-year period of time. Two methodologies are adopted, random/fixed effects model and Granger Causality. The results show that only market size significantly affects FDI when tested using both methodologies. Human capital and financial market development show significant result in one of the two methodologies. While, economic growth and infrastructure did not show any significant results at all. This research stresses the importance of comprehensive single country analysis since only one out of five commonly discussed determinants is applicable in the case of Indonesia. Governments should therefore carefully reconsider the use of crosscountry analysis as a basis of their policy formulations.
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The establishment of the ASEAN Economic Community (AEC) makes the movement of labor in the ASEAN region more free and dynamic. This provides wider opportunities for Indonesian workers to get better jobs. On the other hand, the same opportunity is also owned by citizens of other ASEAN countries to enter the labor market in Indonesia. Based on several previous empirical studies, the entry of foreign workers into a country can significantly impact economic growth, both positively and negatively. The impact is greatly influenced by the skill level of a worker. High skilled labor tends to have a positive impact on economic growth. The increase in the number of foreign workers is also influenced by FDI and GDP. The amount of FDI received by a country tends to be positively correlated with the number of foreign workers. This is because the FDI provided has applied high technology so that the knowledge transfer process is needed by foreign experts. The tendency of foreign skilled workers wh...
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