Foreign Direct Investment and Regional Disparity in Productivity Spillover Effects:The Case of Indonesia

Abstract

This study examines the regional disparity in productivity spillover effects from foreign direct investment (FDI) in Indonesia. We employed two distinct foreign presence indicators based on production value and number of establishments to compare Java, the economic center, with the less developed outer islands (regions outside Java). Our findings reveal that spillover effects are consistently larger in the outer islands than in Java, regardless of the indicator used. These results support the Indonesian government’s policy of attracting foreign manufacturing investments to the outer islands not only from the perspective of equity in correcting inter-regional economic disparities but also from the perspective of efficiency in effectively fostering local firms through the maximization of spillover effects.