PUBLICATIONS & REPORTS

Contents Introduction

This paper examines the relationship between trade propensities and foreign ownership shares in Indonesian manufacturing in the early 1990s. The empirical findings strongly suggest that foreign plants tended to have relatively high trade propensities, both in terms of exports and imports, in Indonesian manufacturing in 1990, 1992, and 1994. Moreover, the results also suggest that plants with high foreign ownership shares had by far the highest export propensities in all years. However, differences in import propensities among foreign ownership groups were relatively small. In Indonesia, as in other Southeast Asian economies, it is possible to argue that trade propensities determine foreign ownership shares because Indonesia has a history of allowing exceptions to foreign ownership restrictions for firms that export a large portion of their output. However, this paper argues that the causation is likely to run from foreign ownership shares to trade propensities because (1) multinational firms have strong incentives to restrict the access of uncontrolled affiliates to their international marketing networks, (2) part of the above-mentioned policy influence is captured in the statistical analysis, and (3) a similar correlation has been observed in Singapore where there are no foreign ownership restrictions of this nature. One important policy implication of this interpretation is that foreign ownership restrictions can reduce the exports of affiliates of foreign multinationals and thereby be costly for the host economy. On the other hand, although of limited importance in an economy like Indonesia, ownership restrictions that discriminate among foreign ownership groups apparently have a much weaker effect on imports.