DP5065 Gifted Kids or Pushy Parents? Foreign Acquisitions and Plant Performance in Indonesia

Author(s): Jens Arnold , Beata Smarzynska-Javorcik

Publication Date: May 2005

Keyword(s): foreign direct investment , productivity , acquisition

JEL(s): D24 , F23 , O33

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5065.asp

This paper uses micro data from the Indonesian Census of Manufacturing to analyse 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.