Foreign Direct Investment and Technology Transfer: Knowledge Spillover in the Manufacturing Sector in Indonesia

Abstract

Knowledge spillover, as a form of technology transfer from foreign direct investment (FDI), has frequently been investigated in the contexts of various countries. This study aims to examine whether the availability of labour working for foreign companies could trigger improved productivity of the companies’ domestic workers. It also aims to investigate the horizontal and vertical spillovers that might occur, formally or less formally, and to discover whether specialization and industrial competition play a role in facilitating knowledge spillover in Indonesia’s manufacturing industry. What differentiates this study from previous similar studies is our investigation of whether or not the business orientation and intensity factors of domestic companies could be catalysts for knowledge spillover. To examine this, we use firm-level data and econometrics modelling to test our hypotheses. An important finding of this study is that the export orientation of domestic companies is a critical factor in promoting knowledge spillover.