Foreign Direct Investment and Quality‐Upgrading Spillovers in Indonesia

Hisamitsu Saito and Toshiyuki Matsuura

The World Economy, 2025, vol. 48, issue 5, 1127-1138

Abstract: This study investigates whether the agglomeration of multinational enterprises (MNEs) contributes to local firms' quality upgrading in developing countries. Product quality is crucial for firm performance in global markets; recent research highlights its importance even for nonexporting firms, as they are indirectly involved in global competition through production networks. Using firm‐product‐level data from the Indonesian manufacturing census, we find that the agglomeration of MNEs in downstream industries enhances the product quality of nonexporting firms, particularly those that produce intermediate goods. Thus, attracting MNEs is an effective strategy for local firms and economies to enhance their value added within production networks.

Date: 2025
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