Spillover effects of foreign direct investment on manufacturing exports and imports in Indonesia

Abstract

Purpose This study aims to identify extensive and intensive margins in exports and imports and examine whether incoming foreign direct investments (FDI) benefit local firms in Indonesia through the export and import channels. Design/methodology/approach Using Heckman’s two-step selection model to consider the potential of bias of self-selection in export–import participation, this study uses the firm-level data from 2008 to 2015 collected from Statistik Industri and proximate both export and import spillovers. Findings The authors found that internal factors are critical for a firm to be an exporter, signaling self-selection in exports and imports. Spillover effects from FDI (spatial properties) support export but lower import propensity and intensity. Research limitations/implications This study implies that improving human capital (absorptive capacity) is needed to accelerate export intensity and policies supporting FDI inflows in complementary sectors (noncompeting industries) can increase export propensity and intensity and reduce imports. Originality/value This study contributes to the literature in several ways. First, the proposed export spillovers model that accounts for impacts through a demonstration channel is applied to the import channel. Moreover, this study extends the model developed by Franco and Sasidharan (2010) and Yasin et al. (2022) by incorporating spatial spillover effects at the provincial level. Subsequently, the authors test whether a firm’s technological intensity determines export–import propensity and intensity. This can indicate whether specific sectors are more likely to participate in international activities based on their use of technology.