Foreign direct investment and labor demand by skill in Indonesian manufacturing firms

Toshiyuki Matsuura () and Hisamitsu Saito
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Toshiyuki Matsuura: Keio University

Review of World Economics (Weltwirtschaftliches Archiv), 2023, vol. 159, issue 4, No 4, 941 pages

Abstract: Abstract A recent debate on globalization addresses the importance of skills for firms’ performance in developing countries. Employing microdata from Indonesian manufacturing, we examine the externality effects of inward foreign direct investment (FDI) on labor demand by skill in local firms and identify the relative contribution of each effect to their skill structure. The results show that local firms replace unskilled workers with skilled ones to enable transactions with foreign firms in downstream industries. However, severe labor market competition for skilled workers with foreign firms hinders them from upgrading the skill structure. Moreover, severe product market competition decreases demand for unskilled workers in local firms. Thus, an adequate supply of skilled workers is crucial for the better performance of local firms. The results also highlight the necessity of policies to mitigate the negative impact of inward FDI on unskilled employment in the host economy.

Keywords: Foreign direct investment; Labor market competition; Skill intensity (search for similar items in EconPapers)
JEL-codes: F23 J24 R11 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10290-022-00485-y

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