Publication: Early Impacts of Indonesia’s Investment Reforms: A Preliminary Analysis
Loading...
Date
2023-07-10
ISSN
Published
2023-07-10
Editor(s)
Abstract
The Indonesian government implemented comprehensive investment reforms in 2021 to encourage investment inflows and related positive impacts. Compared to the previous investment regulation in 2016, the new decree removed foreign direct investment restrictions in over 500 business activities. By estimating the difference in difference in difference event study model, this paper empirically assesses the response in (realized and planned) foreign direct investment and realized domestic direct investment to the reforms. The paper also assesses whether there was growth in investments in fully liberalized sectors linked to Sustainable Development Goals as a proxy for the quality of investment. The results suggest that the investment reforms were associated with increases in realized foreign direct investment, realized direct domestic investment, and planned foreign direct investment, especially in fully liberalized sectors, while there was a decline in all three types of investments in the non-liberalized sectors. The results for planned foreign direct investment suggest that the increase in fully liberalized sectors is likely to continue. The results on direct domestic investment suggest a possible crowding-in effect. Among the fully liberalized sectors, the base metal industry was a key driver of growth, and sectors linked to Sustainable Development Goals sectors had mixed results. The findings provide suggestive evidence of the complementary effect of trade reforms, although the analysis does not specify which of the several reforms may have led to the increase. These results are robust when the possible effects of Covid-19 recovery and other macroeconomic factors are controlled for. These results are also robust to alternative event study models. Further analysis would be needed to observe the trajectory in both the quality and quantity of investment going forward, the distributional effects and the needed complementary reforms to ensure sustainable gains beyond the short run.
Link to Data Set
Citation
“Montfaucon, Angella Faith; Senelwa, Victor Kidake; Doarest, Aufa. 2023. Early Impacts of Indonesia’s Investment Reforms: A Preliminary Analysis. Policy Research Working Papers; 10478. © World Bank. http://hdl.handle.net/10986/39962 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Service Sector Reform and Manufacturing Productivity : Evidence from Indonesia(World Bank, Washington, DC, 2013-01)This paper examines the extent to which policy restrictions on foreign direct investment in the Indonesian service sector affected the performance of manufacturers over the period 1997-2009. It uses firm-level data on manufacturers' total factor productivity and the OECD's foreign direct investment Regulatory Restrictiveness Index, combined with data from Indonesia s input-output tables regarding the intensity with which manufacturing sectors use services inputs. Controlling for firm-level fixed effects and other relevant policy indicators, it finds, first, that relaxing policies toward foreign direct investment in the service sector was associated with improvements in perceived performance of the service sector. Second, it finds that this relaxation in service sector foreign direct investment policies accounted for 8 percent of the observed increase in manufacturers' total factor productivity over the period. The total factor productivity gains accrue disproportionately to those firms that are relatively more productive, and that gains are related to the relaxation of restrictions in both the transport and electricity, gas, and water sectors. Total factor productivity gains are associated, in particular, with the relaxation of foreign equity limits, screening, and prior approval requirements, but less so with discriminatory regulations that prevent multinationals from hiring key personnel abroad.Publication Revisiting the Gains from Trade in EMDEs(Washington, DC: World Bank, 2025-02-24)Following the gains from variety literature, this paper estimates the welfare impact of growth of the variety of imported goods in 28 countries in East Africa and East Asia and compares the results. While estimating the gains from variety, the elasticities of substitution are estimated for each country at the Harmonized System six-digit level of disaggregation. More than 100,000 elasticities are estimated, and the paper constructs an exact price index to measure the welfare gains from variety growth. The findings show that from 1995 to 2021, African countries gained on average 5.47 percent of their gross domestic product (0.20 percent annually), and Asian countries excluding Bhutan gained 3.46 percent (0.13 percent annually). Bhutan, Mongolia, Rwanda, and Mozambique are among the countries with the highest gains over the sample period. The evidence indicates that the creation and extension of trade linkages can be a source of welfare, particularly for small and transitioning economies, a point that is occasionally overlooked in discussions about the positive effects of globalization and economic integration. The estimated elasticities may also be useful for other studies.Publication Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia(World Bank, Washington, DC, 2013-02)Drawing on the findings of recent research, this note examines the extent to which changes to policy restrictions on foreign direct investment (FDI) in the Indonesian service sector affected the performance of downstream manufacturers during 1997-2009. The analysis uncovers two important findings: first, that relaxing restrictions toward FDI in service sectors was associated with improvements in the perceived performance of those sectors, and second, more importantly, that this relaxation accounted for 8 percent of the total observed increase in manufacturers' total factor productivity (TFP) during this period. The results show that these TFP gains accrue disproportionately to those firms that are relatively more productive and that gains are related to the relaxation of restrictions in the transport as well as the electricity, gas, and water sectors. TFP gains are associated, in particular, with the relaxation of foreign equity limits, screening and prior approval requirements, but less so with discriminatory regulations that prevent multinationals from hiring key personnel from abroad.Publication Indonesia : Maintaining Stability, Deepening Reforms(Washington, DC, 2003-01)Indonesia experienced another year of modest growth amidst a hesitant global recovery, and a deteriorating investment climate. Significant progress was made in democratization, macroeconomic stability and fiscal sustainability, but growth did not pick up and progress in poverty reduction stalled. Growth remained largely consumption driven, as investors increasingly felt the pinch of a cooling investment climate and a weak legal system. The Bali bombing threatened to sink hopes for higher growth, but that risk has been mitigated thanks to the remarkable resolve the Government has shown in the aftermath of the tragedy. The swift action on security, a fiscal stimulus, and acceleration of structural reforms are likely to limit the damage of the attack. That same resolve should now be used to pursue the reforms that can accelerate growth, create jobs, and further reduce poverty. The Government must move now, before the elections distract politicians, or tempt them into taking popular, but harmful measures such as those recently taken in trade. The Government should stay the course on macroeconomic policies, maintain fiscal sustainability, revamp the investment climate and rebuild the broken institutions in the legal system.Publication Beyond Trade : The Impact of Preferential Trade Agreements on Foreign Direct Investment Inflows(World Bank, Washington, DC, 2006-11)The author investigates the effects of preferential trade agreements (PTAs) on the net foreign direct investment (FDI) inflows of member countries using a comprehensive database of PTAs in a panel setting. He finds that PTA membership is associated with a positive change in net FDI inflows, and the FDI gains are increasing in the market size of the PTA partners and their proximity to the host country. The author identifies several different channels through which preferential trade liberalization may affect FDI, and confirms that both threshold effects (signing the agreement) and market size effects (joining a larger and faster-growing common market) are important determinants of net FDI inflows, although the latter seem to dominate. The estimated relationship is largely driven by North-South PTAs, and is most pronounced in the late 1990s and early 2000s, the period when the majority of "deep integration" PTAs had been advanced.
Users also downloaded
Showing related downloaded files
Publication China Economic Update, June 2024(Washington, DC: World Bank, 2024-06-14)Economic activity picked up in China in early 2024, buoyed by stronger exports. Meanwhile, growth in domestic demand moderated. Manufacturing and infrastructure investment and consumer spending on services remained robust, while the property market correction continued. In the long term, China’s rapidly aging population will have wide-ranging economic impacts, but with the right policies the demographic transition is manageable. The economic challenges from an aging population can be overcome with policies that increase labor force participation and extend productive working lives. Affordable childcare, better work-life balance, elimination of gender bias in hiring, a higher retirement age, skills upgrading, and lifelong learning are measures that could expand China’s workforce and make it more productive.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.Publication Digital Progress and Trends Report 2023(Washington, DC: World Bank, 2024-03-05)Digitalization is the transformational opportunity of our time. The digital sector has become a powerhouse of innovation, economic growth, and job creation. Value added in the IT services sector grew at 8 percent annually during 2000–22, nearly twice as fast as the global economy. Employment growth in IT services reached 7 percent annually, six times higher than total employment growth. The diffusion and adoption of digital technologies are just as critical as their invention. Digital uptake has accelerated since the COVID-19 pandemic, with 1.5 billion new internet users added from 2018 to 2022. The share of firms investing in digital solutions around the world has more than doubled from 2020 to 2022. Low-income countries, vulnerable populations, and small firms, however, have been falling behind, while transformative digital innovations such as artificial intelligence (AI) have been accelerating in higher-income countries. Although more than 90 percent of the population in high-income countries was online in 2022, only one in four people in low-income countries used the internet, and the speed of their connection was typically only a small fraction of that in wealthier countries. As businesses in technologically advanced countries integrate generative AI into their products and services, less than half of the businesses in many low- and middle-income countries have an internet connection. The growing digital divide is exacerbating the poverty and productivity gaps between richer and poorer economies. The Digital Progress and Trends Report series will track global digitalization progress and highlight policy trends, debates, and implications for low- and middle-income countries. The series adds to the global efforts to study the progress and trends of digitalization in two main ways: · By compiling, curating, and analyzing data from diverse sources to present a comprehensive picture of digitalization in low- and middle-income countries, including in-depth analyses on understudied topics. · By developing insights on policy opportunities, challenges, and debates and reflecting the perspectives of various stakeholders and the World Bank’s operational experiences. This report, the first in the series, aims to inform evidence-based policy making and motivate action among internal and external audiences and stakeholders. The report will bring global attention to high-performing countries that have valuable experience to share as well as to areas where efforts will need to be redoubled.Publication Digital Health Assessment Toolkit Guide(World Bank, Washington, DC, 2021-11-01)The advancement of technology and the exponential growth of data are providing the opportunity to Low Income Countries and Lower Middle-Income Countries to leapfrog and improve quality of care, decision making, the efficient use of resources, while reducing costs and burden of diseases. Recognizing the promise and potential of digital systems, technologies, and data to support the redesign of PHC and solve pernicious healthcare challenges in countries, digital health assessments intend to be an input and the first step towards the digital journey and to plan and prioritize what a country's health system of the future would look like. As expressed in the WHO’s Global Digital Health Strategy, approved by WHO member states in 2021, ‘Digital health should be an integral part of health priorities and benefit people in a way that is ethical, safe, secure, reliable, equitable and sustainable. It should be developed with principles of transparency, accessibility, scalability, replicability, interoperability, privacy, security and confidentiality.’Publication The Container Port Performance Index 2023(Washington, DC: World Bank, 2024-07-18)The Container Port Performance Index (CPPI) measures the time container ships spend in port, making it an important point of reference for stakeholders in the global economy. These stakeholders include port authorities and operators, national governments, supranational organizations, development agencies, and other public and private players in trade and logistics. The index highlights where vessel time in container ports could be improved. Streamlining these processes would benefit all parties involved, including shipping lines, national governments, and consumers. This fourth edition of the CPPI relies on data from 405 container ports with at least 24 container ship port calls in the calendar year 2023. As in earlier editions of the CPPI, the ranking employs two different methodological approaches: an administrative (technical) approach and a statistical approach (using matrix factorization). Combining these two approaches ensures that the overall ranking of container ports reflects actual port performance as closely as possible while also being statistically robust. The CPPI methodology assesses the sequential steps of a container ship port call. ‘Total port hours’ refers to the total time elapsed from the moment a ship arrives at the port until the vessel leaves the berth after completing its cargo operations. The CPPI uses time as an indicator because time is very important to shipping lines, ports, and the entire logistics chain. However, time, as captured by the CPPI, is not the only way to measure port efficiency, so it does not tell the entire story of a port’s performance. Factors that can influence the time vessels spend in ports can be location-specific and under the port’s control (endogenous) or external and beyond the control of the port (exogenous). The CPPI measures time spent in container ports, strictly based on quantitative data only, which do not reveal the underlying factors or root causes of extended port times. A detailed port-specific diagnostic would be required to assess the contribution of underlying factors to the time a vessel spends in port. A very low ranking or a significant change in ranking may warrant special attention, for which the World Bank generally recommends a detailed diagnostic.