Backward and Forward Linkages of Productivity Effect from Foreign Direct Investment

Productivity related to foreign direct investment (FDI) has been examined for the last two decades, but the findings are mixed. This paper contributes to shed the light by analyzing the backward and forward linkages of FDI-related productivity. By estimating manufacturing firms of Indonesia, the results shows that there is a positive backward linkage from FDI in local firms on domestic firms in upstream 3-digit industries. There is also a positive forward linkage from FDI in local firms in downstream industries. The findings implicate the demonstration effect and skill-training effect of foreign firms to local firms in the industrial line. The findings are robust under fixed effect model, general method of moment model, and instrumental variable model.