Technology Gap, Competition and Spillovers from Direct Foreign Investment: Evidence from Establishment Data

Using detailed micro data from the Indonesian manufacturing sector, we examine the effect on productivity of direct foreign investment. The results suggest that direct foreign investment benefits locally owned establishments. The effect differs between groups of industries. Spillovers from DFI are found in sectors with a high degree of competition. The result suggests that the degree of competition affects the choice of technology transferred to the multinationals' affiliates and, hence, the potential for spillovers. Moreover, it seems to be domestic competition rather than competition from imports that affects spillovers from DFI. Our result concerning the effect from technology gap is unclear.