Abstract
Foreign Direct Investment (FDI) plays a crucial role in the economy of Indonesia. The new FDI law passed in 2007
serves as a new milestone in the FDI regime in Indonesia. As the country implements the new regulation, the impact of
foreign investment on firm performance becomes an interesting subject. This paper aims to estimate the effect of foreign
investment on the productivity and contribution of firms in relation to the new FDI law in Indonesia. This study employed a
combination of Propensity Score Matching (PSM) and Difference-in-Differences (DiD) methods to eliminate endogeneity
problems and to examine causality. We discover that foreign investment increases the contribution of firms in terms of
tax and employment yet drives no significant change in firm productivity after the new FDI law came into force. This
result implies that foreign investors might have picked already productive domestic firms; and that other firms need to increase their level of attractiveness while policymakers need to improve the investment climate in order to attract more FDI.
Original language | English |
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Pages (from-to) | 37-50 |
Journal | Economics and Finance in Indonesia (Ekonomi dan Keuangan Indonesia) |
Volume | 68 |
Issue number | 1 |
Publication status | Published - 2022 |