The Double-Edge Sword: Does FDI Exacerbate Inefficiency Traps? Evidence of Indonesian Manufacturing Firms

Employing a firm-level panel dataset from Statistik Industri for 2008-2015, this study investigates the effect of incoming Foreign Direct Investment (FDI) on inefficiency traps in Indonesia. Firms often face transient and persistent inefficiencies in production and resource utilization, impeding optimal efficiency and productivity. Stochastic Frontier Analysis and Tobit estimates quantify the positive impact of FDI spillovers on inefficiency traps, with FDI spillovers reducing both inefficiencies, particularly transient inefficiencies. Foreign investment externalities diminish inefficiencies through spatial and sectoral spillovers, with spatial spillovers exerting a larger influence. Improved human capital and increased access to foreign inputs also contribute to the mitigation of inefficiency traps.