PUBLICATIONS & REPORTS

Contents Introduction

The purpose of this paper is to examine whether foreign direct investment has an effect on regional disparities in a developing country. For this purpose, the paper compares the magnitude of productivity and wage spillovers derived from a foreign presence to local firms in different locations. Using plant-level panel data for Indonesian manufacturing in 1990–95, the study finds supporting evidence for the hypotheses that the effects of a foreign presence on the level and growth of productivity and wages in locally owned plants are greater in regions where multinational corporation affiliates tend to have a higher concentration as compared to other regions in the same province. These findings indicate that the productivity and wage spillovers occur locally and diffuse to neighboring regions in part and thus that the concentration of foreign direct investment in a certain region imparts a greater positive externality on one hand and negatively affects regional disparities on the other.