Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia

33 Pages Posted: 28 Apr 2005

See all articles by Jens Matthias Arnold

Jens Matthias Arnold

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Beata Smarzynska Javorcik

University of Oxford - Department of Economics; World Bank - Development Research Group (DECRG); Centre for Economic Policy Research (CEPR)

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Date Written: April 2005

Abstract

This paper uses micro data from the Indonesian Census of Manufacturing to analyze the causal relationship between foreign ownership and plant productivity. To control for the possible endogeneity of the FDI decision, a difference-in-differences approach is combined with propensity score matching. An advantage of this method, which has not been previously applied in this context, is the ability to follow the timing of observed changes in productivity and other aspects of plant performance. The results suggest that foreign ownership leads to significant productivity improvements in the acquired plants. The improvements become visible in the acquisition year and continue in subsequent periods. After three years, the acquired plants outperform the control group in terms of productivity by 34 percentage points. The data also suggest that the rise in productivity is a result of restructuring, as acquired plants increase investment outlays, employment and wages. Foreign ownership also appears to enhance the integration of plants into the global economy through increased exports and imports.

Keywords: foreign direct investment, productivity

JEL Classification: F23, O33, D24

Suggested Citation

Arnold, Jens Matthias and Javorcik, Beata Smarzynska, Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia (April 2005). Available at SSRN: https://ssrn.com/abstract=708221

Jens Matthias Arnold (Contact Author)

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

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Beata Smarzynska Javorcik

University of Oxford - Department of Economics ( email )

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World Bank - Development Research Group (DECRG) ( email )

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HOME PAGE: http://econ.worldbank.org/staff/bjavorcik

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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