Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197290 
Year of Publication: 
2019
Series/Report no.: 
cege Discussion Papers No. 345
Version Description: 
Revised Version June 2019
Publisher: 
University of Göttingen, Center for European, Governance and Economic Development Research (cege), Göttingen
Abstract: 
Countries that control foreign direct investment (FDI) often face the trade-off between following national policy interests and suffering efficiency losses arising from FDI restrictions. We demonstrate the presence of this trade-off in the case of a protectionist FDI policy in Indonesia that restricts FDI at the product level. Using a yearly census of Indonesian manufacturing firms for 2000 to 2015, we link productlevel changes in FDI regulation to changes in firm-level productivity. Controlling for an extensive set of fixed effects as well as potential political-economy drivers of regulation, we find that newly introduced limitations on FDI were successful at reducing foreign capital use within the regulated firms. Although the drop in foreign capital has been more than compensated by increases in domestic capital, regulated firms have experienced a substantial loss in productivity that was concentrated in the sectors most dependent on external finance and technological innovation.
Subjects: 
FDI regulation
Indonesia
productivity
JEL: 
F23
L51
D24
F21
L6
Document Type: 
Working Paper

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