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.

In this paper, we examine the contribution of openness variables such as import, export, absorptive capacity and foreign-shared capital to Indonesian firms’ technical efficiency and total factor productivity (TFP) growth. We use the most recent firm-level panel data of 23 subsectors in the manufacturing industry over the period from 2008 to 2015. We employ time-varying stochastic production frontier to examine factors affecting technical efficiency and to decompose the components of TFP growth. The results reveal that export and absorptive capacity alone contribute to the efficiency improvement of the firms under study. To speak specifically of foreign firms, they contribute to improving efficiency if they interact with absorptive capacity and imported raw material intensity. We identify that, on an average, the manufacturing industry in Indonesia experienced positive TFP growth. However, among 23 subsectors, there are only few subsectors that benefitted from the openness variables. In 2014, 15 out of 23 subsectors experienced negative TFP growth. This implies that, in 2014, there were some macroeconomic issues regarding the contracted policy, for example, the subsidy removal and the basic electricity tariff. JEL Classifications: C23, D24, F23, O14

We examine whether foreign direct investment (FDI) influences wage spillover in the manufacturing sector in Indonesia from the perspective of three recipients (dimensions): industry, province, and technology intensity. Annual data of Indonesian manufacturing firms from 2011 to 2015 is employed. Using the Fixed Effect Model, we found the spatial (province) dimension to matter the most as it consistently indicates that inward FDI depresses wages in the recipient province. When we split the observation based on firm size, FDI inflows within the same technological intensive subsectors were found to discourage wages. Only FDI inflows within the host industries support higher salaries for smaller domestic firms. The coordination between central and local governments remains essential to ensure that local companies are sufficiently competitive with foreign companies.

This paper investigates the inflation convergence of 82 Indonesian cities and discusses the remarkable regional inflation programmes in Indonesia. By employing a dynamic panel regression, the paper shows that Indonesia experienced an inflation convergence from 2013 to 2018. An intriguing finding is that the cities in Java-Bali, the largest density area, experienced a slower speed of convergence than that in cities outside the Java-Bali. This paper alleges that the development of logistic transportation and the formulation of an inflation control programme, such as the Tim Pengendalian Inflasi Daerah (TPID) or Regional Inflation Controlling Team (RICT) that has just been stationed and has commenced their duties in East Indonesia, might play an essential role in the convergence. Moreover, the coordination between the central and regional governments, represented by TPID/RICT, in implementing the effective policy (i.e. prioritising development outside Java-Bali and fostering inter-region cooperation in the commodity supply chain) is effective in stabilising and reducing the inflation rate.

Crude palm oil (CPO) is a valuable commodity for Indonesia’s economy as the country has become the world’s biggest producer and exporter. Therefore, maintaining productivity in the CPO industry is crucial to ensure that the global demand is met. This study aims to examine Indonesian CPO productivity and its components using total factor productivity growth (TFPg) with stochastic frontier analysis. This study analyzes the variation in the TFPg across years, locations, and firm sizes. The first two analyses imply that, on average, the CPO industry’s productivity declines annually, with firms in 20 provinces experiencing negative TFPg. Regarding size, the analysis demonstrates that the technical efficiency change (TEC) and technical change (TC) have regressed the TFPg in all scale firms. However, medium firms saw a smaller decline in comparison to large firms. Conversely, large firms possess slightly better scale efficiency change (SEC) than medium firms, although both types attain a negative SEC. The findings also show that the main factor contributing to the gain or decline in productivity is TC, which suggests the urgency of innovative technology in the CPO industry.