Fdi And Employment In Indonesian Manufacturing Domestic Firms Economics Essay

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. Asia's population accounts for about 60 per cent of the world's population, so Asian's unemployment problem not only relate to the welfare of more than half of the people in the earth, but also close to the safety and stable of the whole world. Even though Asia Developing Bank (2010) suggests that jobs creation in the economics of developing Asian were faster than in industry economics when recovery from the global economic crisis, unemployment problem is still an outstanding issue in Asian countries. Job recovery is unbalanced between Asian economics, and those new creation-jobs more concentrate on service sector, however, the process in manufacturing sector was lackluster. Among all the open trading economics of Asia, Indonesia suffers the most severe unemployment problem. The statistic figure from Indonesian Central Statistical Office shows that the unemployment rate of Indonesia is up to 11.24 in year 2005, then the rate continuous declines to 7.1 in August 2009 but still over 9 million labors are out of jobs. It is such a herculean task that needs Indonesian government to make some progress in addressing constraints to employment growth. Foreign direct investment (FDI) might be one helpful way used to increase the employment. It appears that the foreign-owned firms usually have the bigger scale of production and more sophisticated organization which request more employees than non foreign-owned firms. It is a well-established fact that the multinational enterprises presence is propitious to "promote diversification of production activities into new areas" (Felipe and Hasan, 2006) and at the meantime, stimulate more employment in the host country (Karlsson et al, 2009; Lipsey et al, 2010). Furthermore, the employment in the linkage industries could be promoted by FDI if the chain mechanism is taken into account. While in the other hand, foreign plants might generate some negative effect on employment in the domestic manufactories by increasing competition.

Previous empirical studies have shown that foreign-owned firms bring higher employment growth through foreign acquisition and open new affiliates in the developing countries (Karlsson et al, 2009). However few academics touch the area about the foreign direct investment effect on employment in the domestic firms, which defined as the plants without any foreign ownership. Thus it is interesting and necessary to do some study on the be-ignored aspect of FDI effect. This paper aims at examining the employment growth in the Indonesian domestically owned plants in the same industry and in the linkage industries deriving from sharing of foreign direct investment, based on the firm-level data from Indonesian Manufacturing sector in the years 1990-1996. By doing this research, it is believed that the study about the impact of foreign direct investment on employment growth will be more complete and it provides a meaningful reference to the policy-makers who are indulgent with the foreign direct investment.

Theoretical Framework

There is little doubt that multinational enterprises (MNEs) usually engage in the modern sectors, abundant capital investment and top-rank researchers enable the multinational enterprises own the advanced technologies within the sector. Mature management and appropriate structure organization are the forceful support to the efficient production and sales. In addition, multinational enterprises have wider contact and knowledge about global market and international trade rules which help them easier access to the international market and expand the worldwide business. All these advantages of MNEs bring considerable profits, pushing them to open subsidiaries or acquisition local firms, which are the two direct consequences from foreign direct investment in the host country. New foreign firms and the joint-venture firms introduce productions in new industries (Lispey, 2004, 2006), and absorb large number of cheap labors working for them which can promote the employment in the host country. In the other hand, the domestically owned firms might learn some superior technologies due to the mobility of employees (Glass and Saggi, 2002) and managers (Fosfuri et al, 2001) from foreign firms. The diffusion of such firm-specific knowledge improves the productivity of domestic firms, which will higher the demand of employees and create more jobs. Moreover, the competition pressure brought by foreign firms force indigenous firms inputting more capital to expend production and employment scales.

In addition to explore new industries and set up new foreign firms in host country, the presence of FDI also generate some employment in domestically owned firms by purchasing local products and services of the other sectors. The arrival of foreign firms accelerates the construction of infrastructure in the host country and impulse the development in various sectors, from the row material supply industry, the transportation industry to the merchandising business etc. It thus appears that foreign firms are considerably more adept at leveraging employment in the linkage industries, which can be defined as the indirect stimulation effect on employment in the host country.

Another possible consequence of foreign direct investment for host country, the one that is sometimes neglected by policy makers, is the negative effect on employment in domestically owned firms. It is reasonable to believe that the multinational enterprises usually produce proper-price but good-quality goods or provide better services. When such products or services flow to the domestic market, it is quite easier to capture the consumer's preferences. Thus the entrance of foreign firms fierce the competition in the host-country market which impels the low-production or less-powerful domestic plants to cut down the number of employees or even end their business, those workers who serviced in the pushover firms will be out of jobs. What's more, the higher wages and better welfare benefit offered by the foreign firms will attract some employees, especially the skilled workers, mobile from the domestic firms to the foreign firms, which also deter the employment growth in domestically owned establishments.

Previous research

In contrast to the scarce literature on FDI and employment effect in domestic firms, the studies on foreign acquisition and employment effect in MNEs are relatively plentiful. Bandick and Karpaty (2007) use the Swedish manufacturing data to analyze the effects on labor demand in Swedish plants acquired by foreign capital during the 1990s after Sweden being one of EU members. Bandick and Karpaty combine the propensity score matching approach and the difference-in-difference (DiD) estimate technique in their research. The empirical study shows that the level of employment in the foreign taken firms is much higher than non-target firms. However, the employment changes is smaller when the ownership from Swedish MNE to foreign MNE than the ownership from non-MNE to foreign MNE. Bandick and Karpaty also find that the skilled labor demand increases right after the ownership changed and the positive effect maintains up to five year post-acquisition, whereas, the demand of unskilled labor is not noticeable.

Bandick and Karpaty's research talk about the foreign takeover effect on employment growth in developed country, how about the acquisition effect in developing countries? Lipsey, Sjöholm and Sun (2010) examine the foreign ownership and employment growth in Indonesia by applying a large firm penal data during the period 1975- 2005. They indicate that employment growth in foreign firms is 6 per cent higher than that in domestic firms, and foreign plants create more position for blue-collar workers than white-collar workers. Their study also finds that foreign acquisition produces employment growth at a rate 9 per cent faster than domestic firms in the OLS estimate, the positive effect increases to 11 per cent if take the time-constant unobserved plant characteristics into account. Besides, Lipsey et al compare the effect on growth in employment between foreign takeovers of a domestic firm and domestic takeovers of a foreign firm then point out a fact that ownership changes from domestic to foreign can increase the employment growth rate by 10 per cent during acquisition and post-acquisition, however, the domestic takeovers do not show any clear impact on employment growth. Most of the stimulation on employment of foreign takeovers happens in the first year of acquisition and the effect shrinks a lot in the post-acquisition years.

There is also a literature that concerns the employment growth and foreign firms, however, Karlsson et al (2009) pick Chinese employment situation as their research object. The authors confirm that employment growth in foreign firms is about 7 per cent higher than the non-private domestic firms. What's more, Karlsson et al apply FDI intensive and Herfindahl index considered as a measure of competition to examine the FDI effect on the domestically owned firms. Their results suggest that FDI lays positive effect on the employment in domestic private firms in both national and regional levels under OLS estimate, but this effect becomes smaller and only significant at national four-digit level under fixed effect approach. The authors once believe that the negative impact from FDI on domestic employment growth might be captured by the Herfindahl index, but when they remove the Herfindahl index, the regression results still positive and robust. Moreover, the researchers did not find positive effect from FDI on non-private domestic employment growth.

Even though the research concerning FDI and employment in domestic firms is limited, there are, however, plenty of studies on how FDI affect the production and wages in domestically owned firms, which provide some theories to explain the FDI effect on employment growth. Lipsey and Sjöholm (2004) prove that foreign plants offer higher wages and better welfare that can attract some workers and specialists from local firms, and the positive effect on productivity from FDI has been confirmed in large previous studies (Blomström and Sjöholm, 1999; Djankov and Hoekman, 1999); in the other hand, the existence of spillover effect in wages and spillover effect in production in Indonesian manufacturing enhance the domestically establishment plants' competition power which help them prevent the brain drain. Thus, the total effect of FDI in employment of domestic firms is ambiguous.

Data sources and Description

My analysis is based on Indonesian manufacturing data supplied by Indonesian Central Statistical Office. The data includes all manufacturing plants with more than 20 employees during the years 1990-1996 in which total employment, employment in white and blue collar respectively, output, value added, the ownership status of every firms etc are provided. The number of the domestically owned plants surveyed ranged from a low of 21431 in 1990 to a high 24567 in 1996. The analysis concentrates on the employment growth of domestically owned plants, which defined as plants without any foreign ownership, caused by the foreign direct investment presence.

Table 1 shows the employment situation of Indonesian manufacturing sectora. Food (ISIC 31) and Textiles (ISIC 32) are the biggest industries in recruiting employees during the period 1990-1996. Most of the manufacturing sectors constantly expand their employment scale with time except the Other Manufacturing (ISIC 39) cut down the total number of employee from 74,482 in 1995 to 68,907 in 1996 (Not shown). Despite the total employment of each sector increased a lot from 1990 to 1996, some of them such as Textiles (ISIC 32) and Paper, Printing (ISIC 34) even doubled their size of workers, the employment shares of domestic establishments in all manufacturing sectors suffered downward trend in the whole research period 1990-1996, even though the employments shares in Paper, Printing (ISIC 34), Non-Metallic Minerals (ISIC 36) and Basic Metal Industries (ISIC 37) experienced fluctuation during 1991-1993 (Not shown) but then continuously decreased till year 1996. Total employment of each manufacturing sector increases continuously while the domestic employment share shrinks over time.

Table 1: Total Employment and employment share of domestic plants in Indonesian manufacturing sector

ISIC

Sector

Content

1990

1996

31

Food Products, Beverage, Tobacco

Total employment

604277

797406

Domestic emp. share

96.16%

92.71%

32

Textiles, Closing, Leather, Footwear

Total employment

721253

1337717

Domestic emp. share

88.13%

76.00%

33

Wood Products, Furniture

Total employment

403368

556743

Domestic emp. share

92.75%

90.66%

34

Paper Products,

Printing

Total employment

86549

164902

Domestic emp. share

90.91%

83.21%

35

Industrial Chemicals

Total employment

377620

478625

Domestic emp. share

85.04%

84.72%

36

Pottery, Glass,

Cement Products

Total employment

111113

184231

Domestic emp. share

92.84%

90.51%

37

Iron and Steel,

Non-Ferrous Metals

Total employment

32717

49802

Domestic emp. share

75.61%

77.89%

38

Fabricated Metals, Machinery

Total employment

255358

511981

Domestic emp. share

82.35%

64.66%

39

Other Manufacturing

Total employment

29460

68907

Domestic emp. share

84.03%

61.44%

Total

Total employment

2621715

4150314

Domestic emp. share

89.77%

81.50%

The foreign shares of production and employment of each sector are described in Table 2. These statistic numbers show that the multinational plants have more production power in Paper, Printing (ISIC 34), Chemicals (ISIC 35) and those Heavy industries(ISIC 36-38), meanwhile they offer relatively more jobs in Basic Metal Industries (ISIC 37), Fabricated Metals (ISIC 38) and Other Manufacturing (ISIC 39). If combine the two kinds of share together, we can see that the foreign shares of production and employment present a strong positive relationship in the labor-intensive sectors (ISIC 31-34), while the positive relationship is not stable in the Minerals and Metals sectors (ISIC 36-39) sometimes. The foreign share of production can be seen as an index that reflects the level of foreign direct investment which is reasonable because more investment usually brings higher production. Thus, under the sector level, in most cases, the more FDI in one sector, the more employees working for foreign bosses, which also means the less workers are served in domestically owned plants. FDI might affect the employment in local firms in a negative way.

Table 2: The foreign shares of production and employment (%) in Indonesian manufacturing sector

ISIC

Sector

1990

1996

31

Food Products,

Beverage, Tobacco

Prod.

8.37

14.17

Emp.

3.84

7.29

32

Textiles, Closing,

Leather, Footwear

Prod.

18.18

29.84

Emp.

11.87

24.00

33

Wood Products,

Furniture

Prod.

10.24

23.87

Emp.

7.25

9.37

34

Paper Products, Printing

Prod.

30.63

32.98

Emp.

9.09

16.79

35

Industrial Chemicals

Prod.

33.69

37.96

Emp.

14.96

15.28

36

Pottery, Glass,

Cement Products

Prod.

21.29

27.56

Emp.

7.16

9.49

37

Iron and Steel,

Non-Ferrous Metals

Prod.

23.99

13.49

Emp.

24.39

22.19

38

Fabricated Metals, Machinery

Prod.

46.41

56.67

Emp.

17.65

35.34

39

Other Manufacturing

Prod.

19.92

55.67

Emp.

15.97

38.56

Total

Prod.

33.61

32.16

Emp.

10.23

18.50

Table 3 displays the geographic distribution of the total employment and FDI in Indonesian manufacturing sector which clearly reveals the fact that the aggregate employment and investment from foreign countries are unevenly distributed over the 27 provinces. Over 73 per cent of the labor force in Indonesian manufacturing industry concentrates in four Provinces: Jakarta, West Java, Central Java and East Java in the year 1990 and the total share in these four provinces even raises up to over 78 per cent in 1996, however, 17 out of the rest 23 provinces in Indonesia poorly recruit less than 1 per cent employment respectively. West Java is absolutely the biggest contributor in absorbing labors, approximate 30 per cent of workers are employed in this province in 1990 and increase to 36 per cent in 1996, which is tremendously larger than any other 26 provinces. The last two columns in Table 3 indicate that foreign direct investment not spread all over the country, the FDI level defers a lot among the 27 provinces. In some comparatively developed regions, such as Aceh, Riau, Jakarta and Central Kalimantan, about half of the value added is produced by foreign owned plants, whereas in Bengkulu, Yogyakarta and other 6 less developed provinces, FDI even do not exist in 1990. Even though the FDI share increases in a majority of the provinces, the difference between the provinces is still significant in 1996. From the figures shown in the table it is hardly to judge whether higher FDI level in a province generate higher employment, but we can maintain that the economic development is unbalance in Indonesia and overwhelming workforce and foreign investment flow to a few provinces.

Table 3: Geographic distribution of total employment and FDI in Indonesian manufacturing sector

Province Code

Province name

Total employment share (%)

FDI share (%)

1990

1996

1990

11

Aceh

0.550

0.356

45.25

12

North Sumatera

6.432

4.370

30.73

13

West Sumatera

0.564

0.396

14.42

14

Riau

1.706

2.915

53.07

15

Jambi

0.757

0.692

13.56

16

South Sumatera

1.873

1.214

4.91

17

Bengkulu

0.038

0.062

-a

18

Lampung

1.211

0.942

3.92

31

Jakarta

13.585

10.382

45.76

32

West Java

29.497

36.449

24.38

33

Central Java

13.599

12.925

7.54

34

Yogyakarta

0.883

0.877

-

35

East Java

20.497

20.968

8.23

51

Bali

1.108

0.715

1.45

52

West Nusa Tenggara

0.183

0.198

-

53

East Nusa Tenggara

0.053

0.045

0.37

54

East Timor

0.017

0.022

-

61

West Kalimantan

1.383

1.047

3.99

62

Central Kalimantan

0.672

0.419

43.76

63

South Kalimantan

1.441

1.245

13.36

64

East Kalimantan

1.851

1.381

8.19

71

North Sulawesi

0.297

0.342

5.18

72

Central Sulawesi

0.255

0.108

-

73

South Sulawesi

0.907

0.813

12.43

74

Southeast Sulawesi

0.055

0.10

0.62

81

Maluku

0.659

0.598

-

82

Papua

0.195

0.413

4.77

Note: a) "-" means no foreign owned plants located in the province.

Econometric Estimations

In order to shed some light on the effect of FDI on employment in local firms, we use the data only for domestically owned plants and the basic model we estimate is given by:

Where is index for firms, is index for years, are index for sectors and is index for provinces.

The variables included in the model are:

Eit:

Employment in domestically owned plants (Including total employment, white-collar and blue-collar employment).

Firmit:

A vector of log of lagged plant specific characteristics, i.e. plant size measured by employment, inputs of intermediate goods including rents, fuel and raw materials per employee, labor productivity, average wages.

FDI:

Includes four forms: FDI_sectorjt, FDI_provincjmt, Linkage_sectorjt and Linkage_provincejmt to analyze different problems.

Secshare jt:

The lagged value added share of each sector in every year.

Prosharemt:

The lagged value added share of each province in every year.

Yeart:

Year dummy variables.

Sectorj:

Sector dummy variables.

Provincem:

Province dummy variables.

The possible effect of FDI on employment growth in local firms might be different for workers with different skills, thus the dependent variables include growth in total employment, blue-collar and white-collar employment. We add firm-specific variables in the model to analyze how the firm characteristics affect the employment growth. Many of the firm-specific variables are endogenous determined in the model so we use lagged explanatory variables by one period to control for the endogenous bias. Secsharejt and Prosharemt, what reflect the productivity level in each sector and province, are related to the employment growth of domestic plants within the sector and province. If a domestic plant belongs to a higher productivity sector or located in a more developed province, we would expect to observe positive coefficients of Secsharejt and Prosharemt. Sector and Province dummy capture the time-invariant sector- and province-specific factors and Year dummy proxy for time-varying characteristics. FDI, the most important variables in the model, is an index of FDI degree in the national or province level. FDI_sectorjt , calculated by , measures the FDI productivity of each sector at different years in the national level. is used to examine the FDI effect on employment growth within the same sector and province. To the extent that foreign firms will increase the competition in the host-country domestic market, the coefficients of FDI_sectorjt and FDI_provincejmt should be positive. Then, we employ two alternative explanatory variables and to focus on the might-existed positive influence from FDI on the growth in employment of domestically owned firms. For construction and descriptive statistics of the variables, see Table A1 in the Appendix. We would use OLS estimate to regress the model, however, the assumption that the unobservable parameters are independent with the explanatory variables will cause the bias when we try to measure the FDI effect on employment. Some unobservable factors like technology, organization level, working efficiency are closely related to the investment degree and these factors are consistent over time. After taking these problems into account, we will use Fixed Effect approach to correct such bias. Thus, the whole research will be done by both using OLS and Fixed Effect estimates.

Econometric Results

The coefficient of the FDI_sector shows the employment effect of FDI presence on domestically owned plants. We run the basic model without province dummy variables, assuming that the labors can move around the whole country without geographic restriction, within sectors. In the OLS regression, displayed is Table 3, the coefficient for FDI_sector is positive but statistically insignificant. If we divide the employees into white-collar and blue-collar workers, the FDI effect still remains insignificant. It seems that the FDI influence on indigenous firms' employment growth is limited, we cannot find any proof to confirm our expectation in the OLS regression. After controlling the unobserved heterogeneity factors in the firms by including the fixed firm effects, the coefficient for FDI_sector turns to positive and statistically significant at 10 per cent degree in the total employment growth of domestic establishments, positive and insignificant in white-collar employment growth, negative and insignificant in blue-collar employment growth. The foreign direct investment increases 1 per cent in a sector, the domestic plants will expand the scale of recruitment by 6.1 per cent. This estimate, not surprising us, is consistent with the previous research about FDI and Chinese employment made by Karlsson et al (2009). Such positive effect might stem from the productivity and wage spillovers from foreign firms to those domestic firms who enhance the competition power and grow faster. However, there are no evidence shows how the FDI presence impact in the white-collar and blue-collar employment growth in domestic establishments.

The additional variables show expected effects on employment growth: large size plants and the domestic firms in the higher foreign-productive sectors grow slowly, the firms with high input, labor productivity or those which set up in the high foreign-productive province tend to grow fast. It is interesting to note that the high wages stimulate the employment growth of white-collar workers but lower the blue-collar employment grow which runs against the common opinion that higher wages induce to higher employment.

Table 3: FDI (sector) and Employment in Domestic Plants (employment growth as dependent variable)

OLS

Fixed Effect

Regression 1

Regression 2

Regression

Regression 4

Regression 5

Total Emp.

White-collar

Blue-collar

Total Emp.

White-collar

FDI_sector

0.0002

0.019

-0.096

0.061

0.041

(0.01)

(0.47)

(-1.36)

(1.93)*

(1.03)

Size

-0.039

-0.038

-0.026

-0.628

-0.599

(-39.51)***

(-33.67)***

(-13.57)***

(-163.77)***

(-124.03)***

Average Input

0.009

0.009

0.007

0.009

0.007

(11.03)***

(9.28)***

(3.92)***

(5.69)***

(3.29)***

Sector share

-0.227

-0.304

-0.277

-0.098

-0.224

(-3.63)

(-4.24)

(-2.19)**

(-1.46)

(-2.66)***

Province share

0.111

0.104

0.099

0.158

0.147

(10.76)***

(8.81)**

(4.80)***

(2.60)***

(1.92)*

Labor productivity

0.023

0.002

0.017

0.017

0.108

(16.48)***

(12.57)***

(6.14)**

(8.00)***

(4.12)***

Average wage

-0.001

0.002

-0.007

0.008

0.015

(-0.52)

(0.83)

(-1.67)*

(2.70)**

(3.85)***

-cons

-0.048

-0.052

0.045

2.407

2.341

(-2.48)**

(-2.35)**

(1.17)

(75.93)***

(53.52)***

Year dummy

Yes

Yes

Yes

Yes

Yes

Sector dummy

Yes

Yes

Yes

-

-

Plants Fixed effect

-

-

-

Yes

Yes

No. of observation

92169

92140

74122

92169

92140

Adjusted R-square

0.024

0.017

0.004

0.0081

0.0055

*,**,*** significant at the 10, 5, 1 percent level, respectively.

Geographic distribution of the employment and FDI (Table 3) mirror the unbalanced development degree in Indonesia, and it is reasonable to believe that province or regional segmentation existed in Indonesian labor market hampers employee's free flow, therefore we need to reduce the selection bias that the foreign plants locate their company in the more developed region. In order to solve the problem we calculate a new variable FDI_province which is the share of an industry's value added produced by foreign firms in a province. We use this alternative measure of the FDI to see if there exists regional difference within the same industry. We can expect that the more foreign-owned firms exist in one province, the more fierce competition will be between foreign firms and the competitors, and the more possible to generate negative spillover effect from foreign firms to domestic firms.

This time we add the province dummies and assume that the labor only mobile within a province not across provinces. The regression result seems a little different with the FDI_sector effect. Table 4 shows that all the coefficients of FDI_province in the OLS and fixed effect approaches are statistically insignificant, which suggest that it does not matter if the foreign firms are in the own province or in other provinces, location-bound is not such a crucial element that influence employment growth. But the coefficient of explanatory variables Sector share and Province share become negative and statistically significant in the OLS regression, which indicate that in the same sector, a province which makes higher production, the slower employment grow will be in non-foreign owned plants. This can be seen an indirect signal proved our expectation.

Table 4: FDI (province) and Employment in Domestic Plants (employment growth as dependent variable)

OLS

Fixed Effect

Regression 1

Regression 2

Regression

Regression 4

Regression 5

Total Emp.

White-collar

Blue-collar

Total Emp.

White-collar

FDI_province

-0.006

0.004

-0.024

-0.009

0.012

(0.64)

(0.36)

(-1.43)

(-0.71)

(0.70)

Size

-0.040

-0.039

-0.026

-0.627

-0.601

(-38.47)***

(-33.14)***

(-12.80)***

(-157.01)***

(-120.14)***

Average Input

0.008

0.008

0.005

0.009

0.007

(9.41)***

(8.01)***

(3.07)**

(5.41)***

(3.25)***

Sector share

-0.191

-0.260

-0.235

-0.062

-0.178

(-2.91)**

(-3.47)***

(-1.78)*

(-0.88)

(-2.02)**

Province share

-0.303

-0.292

-0.392

-0.155

-0.129

(-4.70)***

(-3.96)***

(-3.01)**

(-2.40)**

(-1.60)

Labor productivity

0.025

0.023

0.016

0.015

0.001

(16.48)***

(12.99)***

(5.59)***

(6.91)***

(3.63)***

Average wage

0.001

0.004

-0.003

0.008

0.013

(0.61)

(1.54)

(-0.69)*

(2.57)***

(3.24)***

_cons

-0.169

-0.278

0.167

2.443

2.379

(-1.27)

(-1.83)*

(0.00)

(68.85)***

(53.50)***

Year dummy

Yes

Yes

Yes

Yes

Yes

Sector dummy

Yes

Yes

Yes

-

-

Province dummy

Yes

Yes

Yes

-

-

Plants

Fixed effect

-

-

-

Yes

Yes

No. of observation

84978

84950

68415

84978

84950

Adjusted R-square

0.026

0.019

0.005

0.008

0.0056

*,**,*** significant at the 10, 5, 1 percent level, respectively.

Next we turn our attention to the employment growth in linkage industries. We generate a new variable Linkage_sector to explore how FDI impact the employment growth of the linkage industries. The explanatory variable Linkage_sector is a measure of the value added share produced by foreign plants in all other sectors. From table 5 we can see that all the coefficients for the six regressions are statistically insignificant. We do not find any convincing evidence to prove that the FDI presence produces positive or negative effect on the domestic firms' employment in the linkage industries. It is, perhaps, because the foreign firms tend to use lots of imported inputs instead purchasing local intermediate goods to guarantee the global unified quality of their products.

Table 5: FDI (sector) and Employment in Linkage Industry (employment growth as dependent variable)

OLS

Fixed Effect

Regression 1

Regression 2

Regression

Regression 4

Regression 5

Total Emp.

White-collar

Blue-collar

Total Emp.

White-collar

Linkage

_sector

0.007

-0.123

0.416

-0.209

-0.198

(0.04)

(-0.68)

(1.33)

(-1.51)

(-1.15)

Size

-0.039

-0.038

-0.026

-0.665

-0.643

(-39.51)***

(-33.67)***

(-13.57)***

(-198.01)***

(-153.23)***

Average Input

0.009

0.009

0.007

0.009

0.007

(11.03)***

(9.29)***

(3.92)***

(5.93)***

(3.85)***

Sector share

-0.227

-0.312

-0.251

-0.128

-0.237

(-3.65)***

(-4.27)***

(-1.94)*

(-2.07)**

(-3.06)***

Province share

0.111

0.104

0.099

0.133

0.134

(10.76)***

(8.81)***

(4.80)***

(2.38)***

(1.92)*

Labor productivity

0.024

0.021

0.017

0.016

0.013

(16.48)***

(12.58)***

(6.14)***

(8.82)***

(5.45)***

Average wage

-0.001

0.002

-0.007

0.005

0.012

(-0.52)

(0.83)

(-1.67)*

(1.97)**

(3.57)***

-cons

-0.05

-0.0058

-0.120

2.620

2.531

(-0.87)

(-0.07)

(-1.05)

(47.25)***

(36.19)***

Year dummy

Yes

Yes

Yes

Yes

Yes

Sector dummy

Yes

Yes

Yes

-

-

Plants

Fixed effect

-

-

-

Yes

Yes

No. of observation

92169

92140

74122

92169

92140

Adjusted R-square

0.024

0.017

0.004

0.0092

0.0069

*,**,*** significant at the 10, 5, 1 percent level, respectively.

The effect from FDI on the employment growth in the linkage industries is not clear in the national level, as discussed above, might due to the regional-bound in Indonesian domestic market. We therefore introduce an alternative measure of FDI----Linkage_provinve ---- which is weighted the share of all linkage industries' value added in a province that is produced by foreign firms and assume that the labors just flow within a province and foreign plants prefer to purchase local supplies from the linkage industries in the same province to lower the production costs. We would expect a positive coefficient of linkage_province if the flows of FDI generate employment opportunities in the domestic establishments of the linkage industries. However, in contrast, we do not find any positive effect, as is shown in Table 7. Most of the regression results are statistically insignificant except for the blue-collar employment growth in the fixed effect. Regression 6 notes that the negative impact on blue-collar employment growth is significant at 10 per cent level, a 1 per cent higher foreign share in the linkage industries produces a blue-collar domestic firm employment 10.2 per cent lower. The descriptive statistics suggest that the presence of foreign firms promote local industrial upgrade, the indigenous suppliers have to use more technology to improve the quality of their products in order to satisfy the high standard required by foreign firms which implies that the demand for unskilled workers in plants with Indonesian ownership will lower than before.

Table 6: FDI (province) and employment in Linkage Industry (employment growth as the dependent variable)

OLS

Fixed Effect

Regression 1

Regression 2

Regression

Regression 4

Regression 5

Total Emp.

White-collar

Blue-collar

Total Emp.

White-collar

Linkage

_province

-0.009

-0.003

-0.015

-0.031

-0.027

(-0.43)

(-0.13)

(-0.37)

(-1.307)

(-0.91)

Size

-0.040

-0.039

-0.027

-0.664

-0.644

(-39.48)***

(-33.81)***

(-13.55)***

(-195.71)***

(-152.57)***

Average Input

0.009

0.009

0.006

0.009

0.007

(10.44)***

(8.91)***

(3.59)***

(6.07)

(4.03)***

Sector share

-0.200

-0.275

-0.258

-0.137

-0.246

(-3.16)***

(-0.3081)

(-2.02)**

(-2.22)**

(-3.22)***

Province share

-0.300

-0.291

-0.425

0.124

0.111

(-4.80)***

(-4.08)***

(-3.36)***

(2.20)**

(1.57)

Labor productivity

0.025

0.021

0.018

0.159

0.122

(16.72)***

(12.76)***

(6.39)***

(8.64)***

(5.31)***

Average wage

0.001

0.004

-0.005

0.005

0.013

(0.67)

(1.94)*

(-1.13)

(1.78)*

(3.62)***

-cons

-0.034

-0.016

0.116

2.56

2.463

(-0.46)

(0.00)

(0.00)

(86.20)***

(72.57)***

Year dummy

Yes

Yes

Yes

Yes

Yes

Sector dummy

Yes

Yes

Yes

-

-

Province dummy

Yes

Yes

Yes

-

-

plants

Fixed effect

-

-

-

Yes

Yes

No. of observation

90108

90079

72393

90108

90079

Adjusted R-square

0.026

0.183

0.005

0.009

0.0069

*,**,*** significant at the 10, 5, 1 percent level, respectively.

Conclusions

Many developing countries formulate some favorable terms to attract foreign direct investment which is believed as an edge tool in encouraging employment. Plenty of previous researches indeed find some persuasive evidences, to some extent, prove the rationality of the theory, however, how the FDI affect on employment in domestically owned plants is, unfortunately, usually be ignored by academics and government counselors. This paper tries to investigate the effect from the FDI on employment growth in Indonesian domestic plants, based on the detail dataset for the period 1990-1996 in Indonesian manufacturing sector.

From a theoretical point of view, the FDI could cause both positive and negative effect on employment growth in indigenous plants, depending on the strength of the spillover effect and competition, which are simultaneously at work. (Karlsson et al, 2009). Our empirical analysis finds the advantage of foreign direct investment for employment growth in domestic plants within the same sector, under the fixed effect estimate. The gains of employment, through the productivity and wage spillovers to domestically owned plants, may offset the competition losses in employment. Whereas, we cannot conclude which group of employees will get benefit from the employment expansion, the white-collar or the blue-collar employees.

When we examine local employment growth within provinces, expecting that the plants, in the same industry and province, relate closer to each other and easier to affect by their competitors, whereas the positive effect from FDI we got in the national level disappears. Thus this interesting result shows that the location of the foreign firms is not so important involving the stimulation in host-country's employment.

It is generally believed that the flow of FDI tends to increase the employment growth not only in the same sector, but also in the linkage industries. The thriving purchasing power of foreign firms could active the industry chain in the host country. The statistic results in our research, however, do not support the hypothesis. The estimate does not show any significant positive effect on the employment growth in the linkage industries after FDI comes. Nevertheless, if we narrow the FDI effect to the province level, we find significant negative impact on the domestic blue-collar employment growth in the linkage industries. Unskilled workers become the sacrifices in the industrial upgrading.

References

Aitken, B. J. and A. E. Harrion (1999). Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela. American Economic Review 89(3): 605-618.

Asian Development Bank (2010). Asian Development Outlook 2010: Macroeconomics Management beyond the Crisis.

Bandick, R. and P. Karpaty (2007). Foreign Acquisition and Employment Effect in Swedish Manufacturing. Ã-rebro University.

Blomström, M. and F. Sjöholm (1999). Technology Transfer and Spillovers: Does Local Participation with Multinationals Matter? European Economic Review 43(4/6): 915-923.

Baum, C. F. (2006). An Introduction to Modern Econometrics Using Stata. College Station Publisher.

Driffield, N. and S. Girma (2004). Regional Foreign Direct Investment and Wage Spillovers: Plant Level Evidence from the U.K Electronics Industry. Oxford Bulletin of Economics and Statistics 65(4):453-474.

Djankov, S. and B. Hoekman (1999). Foreign Investment and Productivity Growth in Czech Enterprises. World Bank Economic Review 14: 49-64.

Karlsson, S., N. Lundin , F. Sjöholm and P. He (2008). Foreign Firms and Chinese Employment. The World Economy. Vol. 31 No.1 pp.178-201

Lipsey, R. E. and F. Sjöholm (2004). FDI and Wage Spillovers in Indonesian Manufaturing, Review of World Economics, Vol.140(2), pp.321-332.

Lipsey, R. E. and F. Sjöholm (2004). Foreign Direct Investment, Education and Wages in Indonesian Manufacturing. Journal of Development Economics 73(1): 415-422

Lipsey, R. E., F. Sjöholm and J. Sun (2010).Foreign Ownership and Employment Growth in Indonesian Manufacturing. IFN working paper, No 831.

Wooldeideg, J. M. (2006). Introductory Econometrics: a Modern Approach. South Western publisher.

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