Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/295858 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 16835
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We analyze the effect of rising protectionism towards foreign direct investment (FDI) on domestic employment, exploiting revisions in Indonesia's highly-granular negative investment list, and spatial variation in the exposure of the manufacturing sector to these investment restrictions. Rising FDI restrictions caused employment gains at the local level, explaining about one-tenth of the aggregate employment increases observed between 2006 and 2016 in Indonesia. These employment gains went along with a reorganization of the local production structure, and new firm entries in the manufacturing sector that are concentrated among micro and small enterprises. While our results are consistent with an increase in the labor-to-capital ratio and reduced productivity among regulated firms (which allowed smaller and less productive firms to enter the market), we also document that at least half of the employment gains are driven by spillover-effects along the local value chain and into the service sector.
Subjects: 
FDI regulation
Indonesia
local labor markets
JEL: 
F16
F21
F23
J23
J31
L51
Document Type: 
Working Paper

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