Foreign investment regulation and firm productivity: Granular evidence from Indonesia

Robert Genthner and Krisztina Kis-Katos

Journal of Comparative Economics, 2022, vol. 50, issue 3, 668-687

Abstract: When regulating foreign direct investment (FDI), countries often face a trade-off between pursuing national policy interests and suffering efficiency losses due to FDI restrictions. We demonstrate the presence of this trade-off in the case of a protectionist FDI policy in Indonesia. Using a yearly census of Indonesian manufacturing firms from 2000 to 2015, we link product-level changes in binding FDI regulation due to major regulatory tightening to changes in firm-level productivity. Controlling for an extensive set of fixed effects as well as potential political economy drivers of regulation, we show that a tightening of the regulatory environment was successful in reducing foreign capital reliance among regulated firms, and led to increases in FDI among non-regulated firms producing the same product. Despite compensating increases in domestic capital, regulated firms experienced relative productivity losses. This points towards either a less efficient allocation of domestic capital or a general inferiority of domestic capital as compared to foreign investments.

Keywords: FDI regulation; Foreign capital; Domestic capital; Indonesia; Productivity (search for similar items in EconPapers)
JEL-codes: D24 F21 F23 L51 L6 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jcecon:v:50:y:2022:i:3:p:668-687

DOI: 10.1016/j.jce.2022.02.003

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