The FDI Spillover Effect on the Efficiency and Productivity of Manufacturing Firms: Its Implication on Open Innovation

Abstract

In this study, we investigated the effects of foreign direct investment (FDI) spillovers on firm production and technical efficiency in Indonesia’s manufacturing sector from 2010 to 2015. We scrutinized three different channels of horizontal spillover, namely, demonstration, technology adoption, and competition channels. We also captured the heterogeneous effect of firms by categorizing them based on their technological intensity (low, medium, or high). Using time-varying stochastic production frontier analysis, we found that manufacturing firms in each technological group benefit from FDI, either from productivity improvement or technical efficiency improvement. High-technology firms mainly benefit from FDI due to their high technological absorption capability. Meanwhile, medium-high and medium-low tech firms increase productivity through the demonstration effect and the technology adoption channel, despite underperforming in technical efficiency. Finally, low-tech firms, which primarily employ unskilled workers, suffer from large inefficiency. We found that increased FDI, combined with improvements in technology absorption capacity, can help revitalize the productivity of low-tech firms. FDI, firm size, and access to foreign inputs all support production effects but have no direct positive impact on firms’ technical efficiency. The results of this study suggest that the government should ensure that domestic firms can absorb the technical capability of a foreign presence. Open innovation can help strengthen foreign–domestic linkages to contribute to growth through the transfer of knowledge, skills, and technologies.

Does FDI foster technological innovations? Empirical evidence from BRICS economies

“…Recently Sugiharti et al [25] investigated the effects of FDI spillovers on output and productivity in Indonesia's manufacturing industry from 2010 to 2015. Results revealed that FDI benefits all technological groups through productivity and efficiency improvement, with hightech firms seeing the most benefit because they have a strong ability to adopt the technology.…”

Gender diversity, foreign direct investment spillovers, and productivity: Unraveling the role of female workers in Indonesia

“…Importing higher-quality materials often necessitates more human resources, which can enhance TFP. Similarly, import activities in the context of technology allow firms to gain access to higher technologies, which is more viable because they may not have the resources to conduct their research and development (Sugiharti et al, 2022).…”

“…Recent studies have scrutinized the channels that facilitate externalities (FDI spillovers) to local economies, such as demonstration, competition, knowledge, and labor mobility. The first three channels have received increasing attention and have been examined by Esquivias and Harianto (2020), Sugiharti et al (2022), Sari et al (2016), and Suyanto et al (2014). Meanwhile, labor mobility, which captures how knowledge is transferred through informal exchanges between workers, has not been extensively researched.…”

Spillover effects of foreign direct investment on manufacturing exports and imports in Indonesia

“…MNCs can also have a spillover effect on non-FDI recipient firms in the sector and region where they operate in the form of knowledge, managerial practices, know-how and technological sharing. The transmission of knowledge, practices and technology from MNCs is through labor mobility, demonstration and competition (Sugiharti et al , 2022).…”