The impact of foreign direct investment on host country's exports : Sector-based evidence from Indonesian manufacturing

Abstract

This study sought to elucidate the existence of a link between foreign direct investment (FDI) and exports in the manufacturing sectors of Indonesia. It contributes to the literature by investigating the sector-based impact of inward FDI on a host country's exports, using disaggregated data of manufacturing sectors categorized by factor intensity from 1990 to 2008. So doing enables one to test an FDI-substitute or FDI-complementary effect on sector-based export performance. The FDI theory proposes the possibility of an export-promoting effect in host economies. Employing panel analysis on the full sample and subsamples, and by later applying a differentiated cross-section effect, we found that FDI flows significantly crowd-in manufacturing exports in most panel observations. Interestingly, such an export effect is even stronger in physical capital, human capital, and technology-intensive sectors, without any significant evidence of a crowd-out effect in natural resource-intensive and unskilled labor-intensive industries, sectors in which Indonesia has a comparative advantage. In addition, this study uncovered the importance of other determinants of export performance. The findings draw some main policy implications, namely the importance of targeted sector-based policy, competitive exchange rate management, and further development of industrialization towards high value-added activities.