FDI Spillovers and Wage Gaps in Indonesia

Our objective is to evaluate the competitiveness of local firms by determining whether the dynamic wage spillover model devised by Tomohara and Takii (2011) consistently captures subsectoral dynamics. We identify two subsectors that are witnessing positive spillovers using the Indonesian firm-level dataset. Nevertheless, our quantitative analysis demonstrates inconsistencies, with competitive subsectors contributing to wage disparities at a higher rate than uncompetitive firms. In other words, wage inequalities between foreign and local firms are not effectively reduced by competitive firms. In order to improve the performance of local firms and enable them to more effectively compete with foreign firms in labor markets, international trade policies should incorporate social and labor support, such as advanced skills training and education.