Resource information
This paper examines the extent to which
policy restrictions on foreign direct investment in the
Indonesian service sector affected the performance of
manufacturers over the period 1997-2009. It uses firm-level
data on manufacturers' total factor productivity and
the OECD's foreign direct investment Regulatory
Restrictiveness Index, combined with data from Indonesia s
input-output tables regarding the intensity with which
manufacturing sectors use services inputs. Controlling for
firm-level fixed effects and other relevant policy
indicators, it finds, first, that relaxing policies toward
foreign direct investment in the service sector was
associated with improvements in perceived performance of the
service sector. Second, it finds that this relaxation in
service sector foreign direct investment policies accounted
for 8 percent of the observed increase in
manufacturers' total factor productivity over the
period. The total factor productivity gains accrue
disproportionately to those firms that are relatively more
productive, and that gains are related to the relaxation of
restrictions in both the transport and electricity, gas, and
water sectors. Total factor productivity gains are
associated, in particular, with the relaxation of foreign
equity limits, screening, and prior approval requirements,
but less so with discriminatory regulations that prevent
multinationals from hiring key personnel abroad.
