Clustering and firm productivity spillovers in Indonesian manufacturing

Abstract

Earlier studies on foreign direct investment (FDI) and firm productivity have mainly focused on the general impacts of FDI on local firms’ productivity. This current research extends the existing literature by examining the heterogeneity issue in firm productivity by clustering Indonesian manufacturing firms into nine industrial groups. Two estimation methods are applied: stochastic frontier analysis and panel data analysis, which emerge three key findings. Firstly, the impacts of FDI vary among firm clusters, with six out of nine clusters are able to grasp the positive benefits of FDI, whereas three out of nine clusters experience negative productivity effects. Secondly, the labor-intensive clusters tend to receive negative productivity effects, whereas the capital-intensives clusters receive positive productivity impacts. Thirdly, the sources of FDI-productivity vary across clusters, with scale-efficiency as the most dominant source and technology advancement as the second dominant source. These findings justify the importance of estimating firms in homogenous industrial groups to gain precision findings of productivity benefits.