Technology gap, competition and spillovers from direct foreign investment: Evidence from establishment data

Direct foreign investment (DFI) has been argued to be an important channel for international technology diffusion. This has led to extensive liberalisation of DFI regimes in many developing countries, including in Indonesia. Using detailed micro‐data from the Indonesian manufacturing sector, we examine the effect on productivity from DFI. The results show DFI to benefit locally‐owned establishments, but the effect differs between groups of industries. Spillovers from DFI are found in sectors with a high degree of competition. Moreover, it seems that the larger the technology gap between domestic and foreign establishments, the larger the spillovers.