A Better Match: Do Technology Gaps with Foreign Subsidiaries Affect Domestic Firms’ Productivity? Case Study of Indonesian Manufacturing

Foreign Direct Investment (FDI) continues to be an important aspect for economic growth, as many countries push open-FDI policies intended to growth. Despite this, research shows that FDI inflows have mixed spillover effects. This chapter studies whether horizontal spillovers, taking into account technological gaps of domestic firms with foreign subsidiaries, yield spillover effects to domestic firms. Using firm-level panel data in the Indonesian manufacturing, we find that horizontal spillovers and technology gaps hamper domestic firms’ productivity. This shows that the internal conditions of the firm must be efficient in order for domestic firms to gain benefits from multinationals’ presence.