Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia
نویسندگان
چکیده
Just as Cinderella was the ignored sister with great potential, so service sector FDI may be the neglected sibling of trade policy. As trade and FDI regimes have become more liberalized in recent decades, tariff reductions and FDI in manufacturing have hogged the limelight, while FDI in services has often remained a wallflower. In fact, most restrictions on FDI flows today are in the service sectors (UNCTAD 2004), reflecting the fact that governments—particularly in developing countries—are not willing to allow unrestricted foreign entry into sectors they consider sensitive or strategic. Openness in the service sectors is part and parcel of a comprehensive trade policy reform package. The benefits of Drawing on the findings of recent research, this note examines the extent to which changes to policy restrictions on foreign direct investment (FDI) in the Indonesian service sector affected the performance of downstream manufacturers during 1997–2009. The analysis uncovers two important findings: first, that relaxing restrictions toward FDI in service sectors was associated with improvements in the perceived performance of those sectors, and second, more importantly, that this relaxation accounted for 8 percent of the total observed increase in manufacturers’ total factor productivity (TFP) during this period. The results show that these TFP gains accrue disproportionately to those firms that are relatively more productive and that gains are related to the relaxation of restrictions in the transport as well as the electricity, gas, and water sectors. TFP 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 from abroad.
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