Does market characteristic determine foreign direct investment spillovers?

Fawai , Muhammad e al.
A icle
Does ma ke cha ac e is ic de e mine o eign di ec
in es men spillo e s?
Cogen Economics & Finance
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Does ma ke cha ac e is ic de e mine o eign
di ec in es men spillo e s?
Muhammad Fawai , Hau a Azzah a Ta biyah Islamiya, Dyah Wulan Sa i, T i
Ha yan o, Sanju Kuma Singh & Faiz Masnan
To ci e his a icle: Muhammad Fawai , Hau a Azzah a Ta biyah Islamiya, Dyah Wulan Sa i,
T i Ha yan o, Sanju Kuma Singh & Faiz Masnan (2024) Does ma ke cha ac e is ic de e mine
o eign di ec in es men spillo e s?, Cogen Economics & Finance, 12:1, 2392199, DOI:
10.1080/23322039.2024.2392199
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GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE
Does ma ke cha ac e is ic de e mine o eign di ec in es men
spillo e s?
Muhammad Fawai
a,b
, Hau a Azzah a Ta biyah Islamiya
a
, Dyah Wulan Sa i
a
, T i Ha yan o
a
,
Sanju Kuma Singh
a
and Faiz Masnan
c
a
Depa men Economics, Facul y o Economics and Business, Ai langga Uni e si y, Su abaya, Indonesia;
b
Eas Ja a Regional
Rep esen a i e Council, Su abaya, Indonesia;
c
Facul y o Business & Communica ion, Uni e si i Malaysia Pe lis, Pe lis,
Malaysia
ABSTRACT
This s udy examines he signi icance o o eign di ec in es men (FDI) and ma ke cha ac-
e is ics bo h wi hin and ac oss indus ies in de e mining he p oduc i i y and e iciency
o i ms. This s udy also measu es he o al ac o p oduc i i y (TFP) g ow h and i s compo-
nen s o bo h o eign and domes ic i ms. Using Indonesian annual medium and la ge
manu ac u ing es ablishmen s su eys, wholesale p ice index, and inpu -ou pu (I-O)
able, he au ho s calcula e he ho izon al and e ical spillo e s and unde ake s ochas ic
on ie analysis o es ima e he p oduc ion and ine iciency unc ion. The esul s show
ha he less concen a ed ma ke o domes ic i ms wi hin he indus y and supplie s
educes p oduc i i y and e iciency, while domes ic buye s’less concen a ed ma ke s
could ha e he opposi e e ec . Mos domes ic and o eign i ms s ill expe ience de e io -
a ion in TFP g ow h. The policy ecommenda ion is o encou age i ms o imp o e echno-
logical p og ess, such as upg ading machines and in es ing in human esou ces, by
p o iding aining wo ke s aiming a mas e ing be e manage ial expe ise. Policymake s
should also ensu e ha he bene i s o FDI spillo e s ou weigh hei disad an ages.
IMPACT STATEMENT
This s udy con ibu es o ex ending ecen empi ical li e a u e on he possibili y o spill-
o e s in he Indonesian au omo i e indus y no only om o eign i ms wi hin he
indus y, bu also om po en ial ex e nali ies a ising om downs eam and ups eam
ma ke s using s ochas ic on ie analysis (SFA). Gene ally, s udies on FDI spillo e s
examine he ole o FDI in explaining he e iciency di e ences measu ed by he dis-
ance o he on ie ; howe e , ew s udies conside he impac o e iciency imp o e-
men and echnological p og ess on p oduc i i y gains om FDI. This s udy a emp s o
cap u e he sou ces o p oduc i i y gains h ough bo h channels. The o he s udies ha e
ne e discussed, based on au ho knowledge, he impac o spillo e s ega ding domes-
ic i ms’speci ic ma ke concen a ion as compe i o s, buye s, o selle s o o eign i ms
on e iciency and p oduc i i y. This s udy aims o ill his gap and analyze he impo -
ance o ma ke cha ac e is ics in de e mining spillo e s, VTI, ade openness, and
o eign owne ship. P e ious s udies on ma ke concen a ion employ he He indahl-
Hi schman Index (HHI), while his s udy u ilizes he ela i e en opy coe icien (RE)
o p o ide ano he app oach o measu e ma ke concen a ion. In his s udy, he indus-
y-speci ic cha ac e is ic is con olled using he inclusion o i m size and indus ial
dummy a iables. The SFA es ima ion esul s a e calcula ed o measu e ou pu elas ici y
wi h espec o each inpu and o al ac o p oduc i i y (TFP) g ow h. The discussion
p o ides TFP decomposi ions, which a e echnical e iciency change (TEC), echnological
p og ess (TC), and scale e iciency change (SEC).
ARTICLE HISTORY
Recei ed 7 Feb ua y 2024
Re ised 2 July 2024
Accep ed 1 Augus 2024
KEYWORDS
Fo eign di ec in es men ;
spillo e s; ma ke
cha ac e is ic; indus ializa-
ion; p oduc i i y;
sus ainable indus ializa ion
JEL CLASSIFICATION
CODE
L10; L62; L11; F15
SUBJECTS
Economics and
De elopmen ; Economics;
Indus ial Economics;
Indus y & Indus ial S udies
1. In oduc ion
Indonesia has his o ically been a p e e ed place o o eign di ec in es men (FDI) in Sou heas Asia due
o i s weal h o na u al esou ces, la ge labo supply, and expanding domes ic ma ke (Lindblad, 2015).
CONTACT Dyah Wulan Sa i [email p o ec ed] Depa men Economics, Facul y o Economics and Business, Ai langga
Uni e si y, Su abaya, Indonesia
ß2024 The Au ho (s). Published by In o ma UK Limi ed, ading as Taylo & F ancis G oup
This is an Open Access a icle dis ibu ed unde he e ms o he C ea i e Commons A ibu ion License (h p://c ea i ecommons.o g/licenses/by/4.0/), which
pe mi s un es ic ed use, dis ibu ion, and ep oduc ion in any medium, p o ided he o iginal wo k is p ope ly ci ed. The e ms on which his a icle has been
published allow he pos ing o he Accep ed Manusc ip in a eposi o y by he au ho (s) o wi h hei consen .
COGENT ECONOMICS & FINANCE
2024, VOL. 12, NO. 1, 2392199
h ps://doi.o g/10.1080/23322039.2024.2392199
This has gi en mul ina ional co po a ions (MNCs) nume ous op ions o in e naliza ion when selec ing a
loca ion o hei o e seas ope a ions. As epo ed by Indonesian Bu eau o S a is ics (2024), FDI in low o
Indonesia inc eased s eadily be ween 2010 and 2020. By 2022, i accoun ed o 11% o all FDI in low o
ASEAN, making Indonesia he coun y wi h he second-highes FDI in low a e Singapo e. This igu e
amoun s o USD 24.7 billion (Wo ld Bank, 2024). In addi ion o being he p ima y d i e o economic de el-
opmen , o eign di ec in es men (FDI) has aided Indonesia’s indus ializa ion p ocess (Aswicahyono e al.,
2011; Na joko, 2023). Indus ial de elopmen plays a signi ican ole, especially in de eloping coun ies as
i aid in educing po e y and achie ing sus ainable economic g ow h (Abdul, 2010).
Ex ensi e esea ch has been unde aken on he spillo e s o o eign di ec in es men (FDI). The e a e
con lic ing and inconsis en indings in he empi ical li e a u e ha looks a how mul ina ional co po a-
ions (MNCs) a ec domes ic i ms’p oduc i i y pe o mance. The majo i y o he ea ly e idence is nega-
i e (Ai ken & Ha ison, 1999; Bou nakis e al., 2022; Djanko & Hoekman, 2000; Huynh e al., 2021). On
he con a y, FDI is ega ded as a ca alys o economic g ow h (see, Behe a, 2017; Damijan e al., 2003;
Fa ima, 2016;G
€
o g & G eenaway, 2004; Ha is & Robinson, 2003; He e al., 2019; Kayani e al., 2021; Liu,
2002; Nguyen, 2022). Addi ionally, FDI has admi ed o being one o he p ima y means o dissemina ing
in o ma ion in e na ionally. Gains om FDI spillo e s in domes ic en e p ises a e epo ed empi ically by
Bloms €
om & Sj€
oholm (1999), Li e al. (2001), Haskel e al. (2002), Kelle & Yeaple (2003), and Liu & Wang
(2022). None heless, he majo i y o hese esea ch concen a e on ho izon al spillo e s, which quan i y
how he p esence o o eign companies a ec s na i e companies in a ce ain indus y. The impac o o -
eign i ms on domes ic i ms ac oss indus ies is de e mined as e ical spillo e s. The e ical spillo e s
can occu in wo di e en linkages, namely backwa d and o wa d linkage. The o me is he impac o
o eign i ms on he domes ic i ms in he ups eam ma ke when hose domes ic i ms supply in e -
media e inpu s o o eign i ms. The la e is he impac on he downs eam indus ies in using he o -
eign i m’s ou pu as hei in e media e inpu s.
The e a e ew s udies on ex e nali ies be ween indus ies (Bloms €
om e al., 2000). A no able excep-
ion in he li e a u e on e ical spillo e s ound mixed esul s (see, Blalock & Ge le , 2008; Ja o cik,
2004; Kugle , 2001; Le & Pom e , 2011; Ma cin, 2008; Schoo s & Van De Tol, 2002). The esea ch con-
duc ed by Blalock & Ge le (2008) ound ha he MNC i ms’ex e nali ies a e bene icial o he local
i ms as he supplie s in Indonesian manu ac u ing indus ies. Schoo s & Van De Tol (2002) examine
posi i e backwa d spillo e s, and he opposi e holds o o wa d spillo e s in Hunga ian companies.
Ai ken & Ha ison (1991) disco e he nega i e backwa d spillo e s since o eign i ms demand impo ed
goods, which p e en s domes ic supplie s om gaining economic o scale. Nguyen e al. (2020) ound
ha backwa d spillo e s inc ease local p oduc i i y bu ho izon al and o wa d linkage spillo e s ha e a
de imen al e ec on domes ic i ms’p oduc i i y. Resea ch om Bou nakis e al. (2022) sugges ha
only MNCs ha a e majo i y o ully owned p oduce mone a ily mino ho izon al spillo e s. Rod iguez-
Cla e (1996) sugges s ha he e ec o FDI would be mo e a o able when he MNC i ms demand
in ensi ely he in e media e goods p oduced by he domes ic i ms in he ups eam ma ke , and he
quali y is a leas equal o he home coun y’s p oduc s. When hese equi ed condi ions do no hold,
he hos coun y’s economy could be ha med. The p ima y inding om he li e a u e on FDI spillo e s
o da e is ha MNCs’e ec s on domes ic i ms’pe o mance a e complex, and one should ca e ully
examine he di e en ways ha MNCs a ec he hos na ion’s economic ac i i y (Bou nakis e al., 2018;
C espo & Fon ou a, 2007; Hayakawa e al., 2012).
S udies on FDI spillo e s in Indonesia’s manu ac u ing sec o ha e p e iously been ca ied ou u iliz-
ing he s ochas ic p oduc ion on ie such as Suyan o e al. (2021), Suyan o e al. (2014), and Suyan o &
Salim (2010). These s udies ocus on es ima ing he ex e nali ies o FDI on i ms’e iciency. Howe e , FDI
no only imp o es domes ic i ms’e iciency bu also gene a es p oduc i i y gains o domes ic i ms
h ough echnological p og ess. Only s udies om Sa i e al. (2016) and Sugiha i e al. (2022) use a sim-
ul aneous model o examine how FDI spillo e s a ec p oduc i i y and e iciency. The e o e, his s udy
would enhance he li e a u e ela ed o p oduc i i y and ine iciency.
One o he key ac o s in luencing he bene i s o spillo e FDI is he indus ial ma ke cha ac e is ic
o he hos na ion (Bloms €
om e al., 2000). The e icien -s uc u e (ES) and quie -li e (QL) hypo heses a e
wo compe ing heo ies ha add ess deg ee concen a ion and e iciency. Ad oca es o QL, Hicks (1935)
con ends ha signi ican ma ke concen a ion lessens compe i ion and lessens he abili y o en e p ises
2 M. FAWAIT ET AL.
o ecei e incen i es o e iciency. The ES hypo hesis p oposes ha he excessi e concen a ion may
ha e been caused by e icien en e p ises. S udies on ma ke cha ac e is ic ha e been ocused on he
ole o ma ke cha ac e is ic a ec s i ms’e iciency. The e only a ew s udy explo e he impac o ma ke
cha ac e is ic’s ole on spillo e FDI. The excep ions a e on he s udy om Sugiha i e al. (2022) and
Suyan o e al. (2009). Sugiha i e al. (2022) concludes ha highe ma ke compe i ion boos s indus ial
p oduc i i y wi hin he indus y which ecei es FDI. S udy om Suyan o e al. (2009) has also con i med
ha g ea e concen a ions a e linked o g ea e spillo e s o o eign p esence. Ne e heless, no s udy
has e e examined how spillo e s a ec e iciency and p oduc i i y in ligh o domes ic i ms’dis inc
ma ke concen a ion as o eign i ms’cus ome s o selle s.
Besides con ibu ing o economic ac i i y and p oduc i i y, MNC i ms ind ad an ages om sou cing
inpu s and p oducing ab oad, agmen ing hei p oduc ion p ocess and c ea ing a new ade pa e n
ha is e ical ade o in eg a ion (VTI). VTI p esen s loca ional ad an ages and p oduc i i y bene i s
h ough specializa ion in di e en s ages o he p oduc ion p ocess. This e ical specializa ion exploi s
e iciency a each s age o he p oduc ion by linking sequen ial p oduc s and acili ies a se e al egions
o coun ies (Mi oudo & Ragoussis, 2009). MNC i ms gain bene i om VTI since hey se e o eign ma -
ke s h ough o eign a ilia es. Howe e , ano he issue a ises om VTI, which is addi ional cos such as
dis ance- ela ed cos .
This s udy con ibu es o ex ending ecen empi ical li e a u e on he possibili y o spillo e s in he
Indonesian au omo i e indus y no only om o eign i ms wi hin he indus y, bu also om po en ial
ex e nali ies a ising om downs eam and ups eam ma ke s using s ochas ic oen ie analysis (SFA).
Gene ally, s udies on FDI spillo e s examine he ole o FDI in explaining he e iciency di e ences meas-
u ed by he dis ance o he on ie ; howe e , ew s udies conside he impac o e iciency imp o emen
and echnological p og ess on p oduc i i y gains om FDI (see, Knelle and Pisu, 2007; Ayyaga i &
Koso 
a, 2010; Sa i, 2019; and Nguyen e al., 2021). This s udy a emp s o cap u e he sou ces o p od-
uc i i y gains h ough bo h channels. The o he s udies ha e ne e discussed, based on au ho know-
ledge, he impac o spillo e s ega ding domes ic i ms’speci ic ma ke concen a ion as compe i o s,
buye s, o selle s o o eign i ms on e iciency and p oduc i i y (see, Sa i e al., 2016; Schoo s & Van De
Tol, 2002; Suyan o & Salim, 2013). This s udy aims o ill his gap and analyze he impo ance o ma ke
cha ac e is ics in de e mining spillo e s, VTI, ade openness, and o eign owne ship. P e ious s udies on
ma ke concen a ion employ he He indahl-Hi schman Index (HHI), while his s udy u ilizes he ela i e
en opy coe icien (RE) o p o ide ano he app oach o measu e ma ke concen a ion. I is no ewo hy
ha RE sha es cha ac e is ics wi h HHI and is an easy index o comp ehend (Yi e al., 2018). In his s udy,
he indus y-speci ic cha ac e is ic is con olled using he inclusion o i m size and indus ial dummy
a iables. The SFA es ima ion esul s a e calcula ed o measu e ou pu elas ici y wi h espec o each
inpu and o al ac o p oduc i i y (TFP) g ow h. The discussion p o ides TFP decomposi ions, which a e
echnical e iciency change (TEC), echnological p og ess (TC), and scale e iciency change (SEC).
2. Li e a u e e iew
Compa ed o local i ms, mul ina ional co po a ions (MNC) ecei e FDI using sophis ica ed echnology and
in es mo e in esea ch and de elopmen (R&D). By exe ing echnological supe io i y, be e manage ial
p ac ice, and he abili y o exploi economies o scale, MNC i ms can es ablish subsidia y i ms e en in
unexplo ed coun ies and compe e agains domes ic i ms (Bloms €
om, & Sj€
oholm, 1999; Belde bos e al.,
2021). Possessing knowledge-based in angible asse s such as echnological supe io i y, which may no be
a ailable in he hos coun y, could c ea e spillo e s o domes ic i ms (Suyan o & Sugia i, 2019).
Spillo e s occu ed in h ee channels. The i s is he demons a ion e ec , de ined as he p ocess o
domes ic i ms upg ading echnology by imi a ing o eign i ms’p oduc ion p ocesses, p oduc s, manage -
ial skills, and o ganiza ional inno a ions. The second ac o is labo u no e . Fo eign i m wo ke s a e
mos ly ained o gi en access o in angible asse s. As a esul , p oduc i i y spillo e s occu when ained
labo e en ually esigns and wo ks in domes ic i ms o es ablishes hei own business (De Mello, 1997;
Fos u i e al., 2001; Kelle , 2021). The hi d ac o was compe i ion. Domes ic i ms a e willing o p o ec
hei ma ke sha e; he e o e, hey a e o ced o ope a e mo e e icien ly, leading o p oduc i i y gains
(Glass & Saggi, 2002; Li & Tanna, 2019). On con a y, because FDI-in es ed companies ypically o e high
COGENT ECONOMICS & FINANCE 3

pay and incen i es o d aw and keep highly ained indi iduals, he wage dispa i y be ween o eign and
domes ic businesses also a ec s labo mobili y (Huang & Zhang, 2017). Thus, labo chu n and he ans e
o labo om FDI i ms o domes ic i ms a e a oided (Demena, 2015; Go odnichenko e al., 2014).
Addi ionally, he p esence o o eign companies may ha e a g ea e compe i ion e ec han he demon-
s a ion e ec and e ical linking e ec , which would be de imen al o domes ic companies in he hos
ma ke (Ascani & Gaglia di, 2020; Le & Pom e , 2011). Fu he mo e, MNCs equen ly boos compe i i e-
ness bu “s eal”ma ke sha es om domes ic i ms, which e en ually esul s in p oduc i i y and e iciency
losses. Domes ic i ms may su e om he heigh ened le el o compe i ion in he sho e m by seeing a
decline in ou pu and ma ke sha e (Lin e al., 2009). Domes ic en e p ises may expe ience c owding-ou
e ec h ough dec easing p oduc i i y when hese local i ms dis ibu e hei ixed expenses o e a lowe
sales olume, as demons a ed by Ai ken & Ha ison (1999). The en y o MNCs may esul in highe labo
cos s o na i e companies. This is due o o eign-in es ed businesses equen ly p o iding highe wages.
This s a emen is s eng hened by Ai ken e al. (1996) who a gue ha in labo ma ke s whe e he e is com-
pe i ion, o eign i ms may imp o e wages o all businesses. Bou nakis e al. (2022) also explain ha he
domes ic i ms cha ge lowe ma kups due o he g ea e p esence o MNEs in he domes ic ma ke indica -
ing ha he p esence o o eign i ms push he domes ic ones o compe e. The e o e, he ne ho izon al
e ec o FDI on domes ic en e p ises is heo e ically unce ain and depends on he ela i e s eng hs o
he posi i e echnical spillo e s and he nega i e c owding-ou e ec .
Spillo e s migh no only ake place in a-indus y bu also ac oss he indus y, which is e ealed as
e ical spillo e s ha occu h ough he supply chain channel and a e di ided in o backwa d and o -
wa d spillo e s. Backwa d spillo e s exhibi a nega i e impac when o eign i ms impo in e media e
inpu s ins ead o buying in ensi ely om he local ups eam ma ke s. Ba ios e al. (2011) de ines back-
wa d spillo e as how he ac ions o o eign i ms a ec local supplie s’o p o ide s’p oac i e adap a-
ion o gua an ee he s anda diza ion and quali y o he local inpu s supplied. This migh be due o
quali y conside a ions, as he quali y o in e media e inpu s p oduced locally is lowe han hose pu -
chased om ab oad. Highe in e na ional equi emen s o p oduc quali y and consis en deli e y
mo i a e local supplie s o enhance hei o e ings and wo k lows in o de o d aw consis en business
om FDI i ms (Huynh e al., 2021). In con as , posi i e backwa d spillo e s a ise when o eign i ms
ans e echnology o domes ic supplie s o inc ease he quali y o in e media e inpu s bough locally.
Fo eign i ms demand high-quali y in e media e inpu s, o cing domes ic supplie s o lessen ine iciency
and imp o e p oduc i i y. Fo eign i ms a e eage o ans e echnology and p o ide echnical assis -
ance o se e al supplie s o a oid monopolies when hey ans e only o one supplie (Abegaz & Lahi i,
2021; Blalock & Ge le , 2008). Howe e , he inabili y o abso b some so s o spillo e e ec s is caused
by poo p oduc ion le els and a lack o wo ke aining (Sa ke & Se ieux 2022). This is suppo ed by he
a gumen o K asniqi e al. (2022) who s a e ha domes ic i ms a e unable o ake ad an age o he
oppo uni y o in eg a e in o global alue chains whe e MNCs ope a e because hey lack he quali y
s anda ds, scale o p oduc ion, and connec i e ne wo ks. In addi ion, one po en ial obs acle o backwa d
spillo e s is he weak abso p i e abili y o domes ic businesses (Go odnichenko e al., 2014). Newman
e al. (2015) and Behe a (2017) a gued ha o wa d spillo e s can c ea e wo opposi e e ec s. Nega i e
o wa d spillo e s occu when o eign i ms in he (ups eam ma ke s eal domes ic i ms’ma ke sha e
in he same indus y, esul ing in domes ic compe i o s no compe ing. Fo eign i ms ha e he powe o
inc ease p ices, while domes ic i ms in he downs eam ma ke su e highe cos s because o he
inc easing p ices o in e media e inpu s. In con as , posi i e o wa d spillo e s occu h ough o eign
p oduc s usually accompanied by se ices o assis ance o use he p oduc e icien ly, imp o ing he
p oduc i i y o domes ic buye s (Ja o cik, 2004; Yuliani e al., 2019). Ano he possibili y is ha domes ic
i ms as buye s gain bene i om pu chasing less-cos ly and high-quali y in e media e inpu s supplied
by o eign i ms in he ups eam ma ke . In con as , esea ch om Sa ke & Se ieux (2022) ha e ound
ha o wa d spillo e s a e only expe ienced by he high- ech domes ic i ms possessing low-impo ing
and low-expo ing o eign in es men i ms.
Unlike p e ious esea ches, his s udy u ilizes ano he measu emen as a p oxy o deg ee o concen-
a ion, which is he ela i e en opy coe icien (RE). I is no ewo hy ha RE is an easy index o be
in e p e ed and ha ing he same ai s as HHI (Yi e al., 2018). Theo e ically, he e a e wo opposing
hypo heses ega ding deg ee concen a ion and e iciency, which a e he quie -li e (QL) and e icien -
4 M. FAWAIT ET AL.
s uc u e (ES) hypo hesis. Hicks (1935) p omo es QL and a gues ha he high ma ke concen a ion
educes he compe i ion and less likely o p o ide incen i es i ms o be e icien . On he con a y, he
ES hypo hesis sugges s e icien i ms migh c ea e he high concen a ion. Basically, e icien i ms could
p oduce a lowe cos leading o highe p o i s and la ge ma ke sha e, hus esul ing in e icien i ms
g owing apidly compa ed o ine icien i ms (Demse z, 1973). Ano he explana ion is ha MNC p es-
ence migh in ensi y compe i i eness in he ma ke , pushing domes ic companies o be e le e age
hei esou ces o hold on o ma ke sha e (Esqui ias & Ha ian o, 2020). A highe ou pu sha e om
MNCs sugges s a mo e concen a ed ma ke and educed compe i ion.
A ew among many ha ha e acknowledged he impo ance o ma ke size in d awing in o eign di -
ec in es men (FDI) a e Wheele & Mody (1992), Schmi z & Bie i (1972), and Pis o esi (2000). Recen
s udies by Asiedu (2006), Mlambo (2006), and Zhang (2008) examined he c i ical ole ha ma ke size
plays in d awing in o eign di ec in es men . Acco ding o hese au ho s, one hing ha a ac s o eign
in es o s is a la ge ma ke . Ma ke sha e is a c ucial ac o in de e mining o eign di ec in es men
in lows, acco ding o s udy by Mughal & Ak am (2011). The impac o ma ke concen a ion on e iciency
has been ho oughly s udied (see, Esqui ias & Ha ian o, 2020; Sa i e al., 2016; Se iawan e al., 2012;
Sugia i, 2019), bu li le s udy has been done on how ma ke concen a ion in e ac s wi h he spillo e s
a iable. The wo s udies by Suyan o e al. (2009). and Sugiha i e al. (2022) ha examined he e ec s
o ma ke concen a ion on e iciency, and bo h e iciency and p oduc i i y espec i ely, s and ou as
no ewo hy excep ions. Howe e , hese esea ches ha e ne e discussed, based on au ho s knowledge,
he impac o spillo e s based on domes ic i ms’speci ic ma ke concen a ion as buye s o selle s o
o eign i ms on e iciency and p oduc i i y.
3. Me hodological app oach
3.1. Da a and cons uc ion o a iables
The da a employed we e annual medium and la ge manu ac u ing es ablishmen s, which we e aken
om he Indonesian Cen al Boa d o S a is ics. The medium es ablishmen su ey includes he manu ac-
u ing i ms employing om 20 o 99 wo ke s while he la ge es ablishmen s employ mo e han 99
wo ke s a a gi en yea . The complemen a y da a a e he wholesale p ice index (WPI) a a cons an p ice
in 2010 and an inpu -ou pu (I-O) able. The o me is implemen ed o de la e he a iables in he p o-
duc ion unc ion consis ing o mone a y da a. The la e is u ilized o gene a e e ical spillo e s a ia-
bles ha measu e he ex e nali ies in he ups eam and downs eam ma ke . The I-O able cap u es he
ansac ion o goods and se ices be ween 175 economic sec o s.
The unbalanced panel da a consis s o 3,105 i ms in he au omo i e indus y om 2010 o 2014. The
p oduc ion and ine iciency unc ion a e es ima ed using hese da a. To calcula e he To al Fac o
P oduc i i y (TFP) g ow h, i m da a should be a ailable o all pe iods o obse a ion o measu e
g ow h. Fo he pu pose o compu ing TFP, his s udy employs balanced panel da a wi h 469 obse a-
ions pe yea , o 2,345 obse a ions al oge he .
This s udy will es ima e h ough s ochas ic p oduc ion unc ion (SPF) consis ing o ou pu and inpu
a iables. Ou pu is de ined as he o al ou pu p oduced by a i m in a gi en yea , measu ed in Rupiah,
while capi al is he mone a y alue o ixed asse s: lands, buildings, machine y, ehicles, and o he cap-
i al goods. Labo is measu ed h ough he numbe o employees wo ked in each i m, and ma e ial is a
p oxy o o al expendi u e on aw ma e ials. Ene gy is he o al cos o ene gy used in p oduc ion p oc-
esses, such as gasoline, diesel uel, ke osene, public gas, lub ican s, and elec ici y.
The cleaning da a p ocedu e ollows Sa i e al. (2016) who con ol he a io o ma e ial inpu and ou -
pu is con olled. The a io less han 5% and mo e han 95% will be excluded since using small o huge
amoun s o ma e ials o p oduce a ce ain quan i y o ou pu s seems implausible. Howe e , he da a
passes he c i e ia. The e o e, he e is no obse a ion excluded ollowing hese c i e ia. The da a a e
cleaned om mis epo ing and key-punch e o s, such as in o eign sha es. Fo ins ance, he o eign
sha e o a whole selec ed pe iod is 100% excep o one pe iod yped as 0% hen his will be co ec ed
o 100%. Du ing he obse a ion pe iod, i ms co ec ed om domes ic o o eign we e 0.10% while he
i ms changed o domes ic we e 0.16%.
COGENT ECONOMICS & FINANCE 5
The exogenous a iables consis o he key and suppo ing a iables. The key a iables a e ho izon al,
o wa d, and backwa d spillo e s; ela i e en opy (RE); and he in e ac ion be ween each spillo e a i-
able and RE. The suppo ing a iables a e e ical ade in eg a ion, impo and expo in ensi y, i m
owne ship, i m size, and an indus ial dummy. The summa y s a is ics a e p esen ed in Table 1.
Ho izon al spillo e cap u es he impac o o eign i ms’exis ence on domes ic i ms in he same
indus y, and is calcula ed as ollows:
Hspillj ¼Pi2jFShi Qi
Pi2jQi
(1)
Whe e j deno es indus y, PiejFShi is o al o eign sha e in he same indus y. Q
i
measu es he ou -
pu p oduced by i m i in gi en yea , whe eas Pi2jQi cap u es he o al ou pu o all i ms in he
same indus y.
The cons uc ion o e ical spillo e a iables equi es da a ac oss indus y linkages ob ained om
he inpu -ou pu amewo k based on he Leon ie in e se ma ix, ollowing Kohpaiboon (2009) and Sa i
e al. (2016). This s udy cap u es bo h di ec and indi ec (in e -sec o al) linkages. Indi ec linkage is con-
s uc ed based on he Leon ie in e -indus y accoun ing amewo k, conside ing he inpu -ou pu ame-
wo k excluding impo ansac ions:
X¼AdXþYdþE,Ad¼akl
½
,akl ¼Xkl=X (2)
Whe e Xis he column ec o o he o al g oss ou pu , Addeno es he domes ic inpu coe icien
ma ix. Ydde ines he column ec o o domes ic demand o domes ically p oduced goods, whe eas E
ep esen s he column ec o o in e na ional demand o domes ically p oduced goods. The elemen o
domes ic inpu -ou pu coe icien s ma ix is akl
½
:By sol ing Equa ion (2), he Xbecomes.
X¼½I−Ad−1YdþE
½
,½I−Ad−1¼½bkl(3)
Table 1. Summa y s a is ics.
Va iables Uni
Yea
2010 2011 2012 2013 2014
Ou pu and Inpu a iables
Ou pu (Q) Billion Rupiah Mean 416.65 484.20 495.96 398.27 391.45
S d. De . 2613.74 2462.17 2524.58 2043.21 1975.56
Capi al (K) Billion Rupiah Mean 9.98 11.67 9.09 6.96 72.23
S d. De . 72.08 64.29 61.87 40.98 564.91
Labo (L) Pe son Mean 312.68 342.95 349.86 333.74 323.63
S d. De . 905.97 952.49 982.06 904.84 859.91
Ma e ial (M) Billion Rupiah Mean 145.55 211.29 200.82 148.09 132.53
S d. De . 1152.94 1280.18 1215.35 718.03 598.58
Ene gy (E) Billion Rupiah Mean 15.39 26.13 21.50 17.19 15.73
S d. De . 98.92 172.03 149.55 97.21 88.64
Exogenous a iables
Hspill Ra io Mean 0.05 0.39 0.38 0.55 0.39
S d. De . 0.04 0.22 0.22 0.00 0.22
Bspill Ra io Mean 1.12 1.12 1.06 0.11 0.10
S d. De . 0.26 0.27 0.24 0.08 0.07
Fspill Ra io Mean 1.17 1.17 1.01 0.94 0.10
S d. De . 0.32 0.32 0.34 0.46 0.07
VTI In e al [o,2) Mean 0.05 0.05 0.05 0.04 0.05
S d. De . 0.18 0.19 0.17 0.15 0.17
Fo Bina y dummy Mean 0.09 0.23 0.23 0.21 0.23
S d. De . 0.28 0.42 0.42 0.41 0.42
RE Ra io Mean 0.66 0.72 0.72 0.69 0.73
S d. De . 0.11 0.08 0.08 0.07 0.08
XI Ra io Mean 0.09 0.09 0.09 0.08 0.09
S d. De . 0.25 0.24 0.24 0.22 0.24
MI Ra io Mean 0.18 0.19 0.17 0.19 0.19
S d. De . 0.29 0.30 0.29 0.28 0.28
Fsize Ra io Mean 0.02 0.02 0.02 0.02 0.02
S d. De . 0.08 0.08 0.08 0.08 0.08
Numbe o obse a ion 558 567 583 686 711
No e. Ou pu and inpu a iables a e ans o med in o na u al loga i hms. The mean is calcula ed using he a i hme ic mean. The S d. De .
whe e ep esen s he s anda d de ia ion.
Sou ce: Au ho s.
6 M. FAWAIT ET AL.
The ½bkl ep esen s he o al linkages (di ec and indi ec ) cap u ed in he Leon ie domes ic in e se
ma ix. This also elucida es he o al ou pu equi ed o in e -sec o al linkages om all o he sec o s, o
ins ance, indus y k’s ou pu s o be used as an in e media e inpu o indus y l when one p oduc o
indus y l’s demand inc eases.
Fo wa d spillo e s a e measu ed by calcula ing he ou pu s p oduced by o eign i ms in he
ups eam ma ke and used by domes ic i ms as in e media e inpu s in he downs eam ma ke . Fo eign
i ms’expo ed ou pu s we e excluded om he measu emen . The inpu s supplied by i ms wi hin he
indus y a e excluded om he calcula ion, because hey a e al eady cap u ed by ho izon al spillo e s.
The measu emen is de ined as
Fspillj ¼X
n
bkl PiejFShi ðYi −Xi Þ
Pi2jðYi −Xi Þ(4)
whe e bkl measu es indus y k’s ou pu demanded by indus y l as an in e media e inpu o p oduce
one uni o indus y l’s ou pu , Yi is he ou pu p oduced by a o eign i m in he ups eam ma ke . X
i
indica es he ou pu o he o eign i m o be expo ed.
Backwa d spillo e cap u es he impac o o eign i ms in he downs eam ma ke on he indus y
ha supplies he inpu . Inpu s supplied by i ms wi hin he indus y we e excluded om he calcula ions.
The calcula ion is as ollows:
Bspillj ¼X
m
bkl Hspillj (5)
whe e bkl is he numbe o indus y k’s ou pu demanded by an addi ional uni o indus y l’s ou pu .
Ve ical ade in eg a ion (VTI) alues ange be ween 0 and 2. The lowe bound implies ha he i m
uses domes ic inpu s o supplies only o he domes ic ma ke . The uppe bound indica es ha he i m
pu chases impo ed inpu s, whe eas all ou pu s p oduced a e expo ed. The o mula o VTI is as ollows:
VTIi ¼2min ðXi ,Minpi Þ
Qi
(6)
whe e min Xi ,Minpi
ðÞ
deno e he lowes alue be ween Xi and Minpi ,Xi ,desc ibes expo ed ou pu s,
espec i ely. Minpi is he in e media e inpu impo ed by i m i in pe iod ;
The o eign i m is a dummy a iable alued a one when a leas 10% o he capi al is owned by o -
eign i ms. The alue 0 is when o eign in es s capi al wi h a alue less han 10% o no o eign capi al
a all. This baseline is based on he In e na ional Mone a y Fund. The o eign owne ship a iable is o -
mula ed as ollows:
Fo i ¼1i he sha e o o eign capi al i a ime is g ea e han o equal o 10%
0i o he wise
(7)
The ela i e en opy coe icien , measu es he deg ee o ma ke compe i ion. When he alue is ze o,
only a ew i ms ope a e in he ma ke . The e o e, he deg ee o monopoly is high, whe eas he deg ee
o compe i ion is low. The close he alue is o 1, he mo e compe i i e he ma ke is, and comp ises N
equally sized i ms. RE is measu ed as ollows:
REj ¼PN
i¼1si logeð1=si Þ
logeðNÞ(8)
whe e siis he ma ke sha e o i m i in pe iod and e is he na u al numbe . whe e N is he numbe o
i ms in he indus y. The RE a iable in e ac ing wi h each spillo e a iable is included in he model.
REj :Hspillj measu es how ma ke cha ac e is ics a ec he spillo e s o o eign i ms wi hin an indus y.
REj :Bspillj , and REj :Fspillj measu es how he ups eam and downs eam ma ke cha ac e is ics a ec
he spillo e s o o eign i ms.
The ade openness a iables we e expo in ensi y (XI) and impo in ensi y (MI). Each o hese is o -
mula ed as ollows.
XIi ¼Xi
Qi
(9)
COGENT ECONOMICS & FINANCE 7
supply, and he po en ial o cing i ms ou o business (A ian o, 2016; Agus inus & Fi iyani, 2020;
K isnamu hi, 2013, p. 201).
The nex componen is TEC, which, on a e age, makes he g ea es con ibu ion o TFP. The TEC
g ow h o he majo i y o domes ic and o eign i ms’TEC g ow h we e nega i e, indica ing ha he p o-
duc ion p ocesses we e ine icien . The lack o adequa e manage ial skills could a ec he nega i e
g ow h o TEC. Ano he eason is ha i ms may no be e icien in using inpu s o echnology. The las
TFP componen is SEC, which does no seem o ha e high ola ili y. Al hough he g ow h was ela i ely
small, wi h an a e age o 0.18% and 0.39% o o eign and domes ic indus ies, espec i ely, hese posi-
i e SEC alues imply ha mos i ms ope a e on an op imal scale.
5. Conclusion
The exis ence o o eign i ms wi hin indus ies spills o e bo h p oduc i i y and e iciency o domes ic
i ms. The same is ue when domes ic companies a e supplie s in he ups eam ma ke . On he o he
hand, domes ic i ms ha use mul ina ional co po a ions’(MNC’_ p oduc s as in e media e inpu s ha e a
nega i e e ec on p oduc i i y and e iciency. Based on hese esul s, policymake s should ensu e ha
he bene i s o o eign di ec in es men (FDI) spillo e s ou weigh hei disad an ages. The go e nmen
should a ac o eign in es men when MNC i ms p oduce ou pu s used as in e media e inpu s o
expo o inal goods ha a e eady o be used. This is because he empi ical esul s show ha selling
in e media e inpu s o local buye i ms may c ea e nega i e spillo e s.
The empi ical esul s show ha e ical ade in eg a ion may nega i ely a ec p oduc i i y and e i-
ciency. On he con a y, i m size, expo s, and impo in ensi y a e associa ed wi h imp o ed p oduc i -
i y and educed ine iciency. The highe he deg ee o ma ke concen a ion, he mo e e icien he i m
is. The in e ac ion a iable be ween ma ke concen a ion and ho izon al spillo e implies ha he spill-
o e s o FDI wi hin he indus y a e smalle in a less concen a ed ma ke . A less concen a ed ma ke o
domes ic supplie s has a nega i e impac on he i m’s p oduc i i y and less impac on educing ine i-
ciency. By con as , he less concen a ed local buye s’ma ke has a posi i e impac on he i m’s p od-
uc i i y and con ibu es o a lowe deg ee o ine iciency.
Despi e posi i e spillo e s, o al ac o p oduc i i y (TFP) shows nega i e g ow h in bo h domes ic
and o eign i ms. The main conce ns a e echnological change (TC) and echnical e iciency changes
(TEC), as he g ow hs a e mos ly nega i e and ela i ely high. The policy ecommenda ion o his ci -
cums ance is o encou age i ms o imp o e echnological p og ess, such as upg ading hei machines
and in es ing in human esou ces, by p o iding aining wo ke s aiming a mas e ing be e manage ial
expe ise. The go e nmen should suppo esea ch and de elopmen (R&D) by acili a ing i ms, p o id-
ing incen i es o esea ch conduc ed by uni e si ies o na ional labo a o ies, o p o iding ax incen i es.
Au ho s’con ibu ions
HATI: concep ion, analysis, in e p e a ion; MF: in e p e a ion, w i ing d a ; DWS: concep ion, supe ision; TH: supe i-
sion; SKS: clea ing da a; FM: w i ing e ision.
Disclosu e s a emen
No po en ial con lic o in e es was epo ed by he au ho s.
Funding
This esea ch was unded by he Indonesian Minis y o Educa ion, Cul u e, Resea ch and Technology.
No es on con ibu o s
Muhammad Fawai , is a doc o al economics s uden a Uni e si as Ai langga. He wo ked as a poli ician a he Eas
Ja a Regional Rep esen a i e Council.
14 M. FAWAIT ET AL.

Hau a Azzah a Ta biyah Islamiya, wo ks as a lec u e and esea che in he Depa men o Economics, Facul y o
Economics and Business, Uni e si as Ai langga.
Dyah Wulan Sa i, is a p o esso in he Depa men o Economics, Facul y o Economics and Business, Uni e si as
Ai langga. She wo k as a lec u e , esea che , and consul an . Resea ch has ocused on indus ial p oduc ion e i-
ciency, econome ics.
T i Ha yan o, is a senio lec u e and esea che a he Depa men o Economics, Facul y o Economics and
Business, Uni e si as Ai langga.
Sanju Kuma Singh, is an ac i e lec u e and esea che in he Depa men o Managemen a he Facul y o
Economics and Business, Uni e si as Ai langga.
Faiz Masnan, a lec u e a he Uni e si i Malaysia Pe lis, Pe lis, Malaysia.
ORCID
Hau a Azzah a Ta biyah Islamiya h p://o cid.o g/0000-0002-2015-4344
Dyah Wulan Sa i h p://o cid.o g/0000-0003-3567-6513
Da a a ailabili y s a emen
The da a used in his s udy includes annual medium and la ge manu ac u ing es ablishmen s, which a e aken om
he Indonesian Cen al Boa d o S a is ics. The complemen a y da a a e he wholesale p ice index (WPI) a a con-
s an p ice in 2010 and an inpu -ou pu (I-O) able. The da ase s used in his pape will be made a ailable upon a
easonable eques o he co esponding au ho .
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