1528 http://dx.doi.org/10.36418/syntax-literate.v5i12.1840
Syntax Literate : Jurnal Ilmiah Indonesia p–ISSN: 2541-0849
e-ISSN : 2548-1398
Vol. 5, No. 12, Desember 2020
FOREIGN DIRECT INVESTMENT ON IMPROVING THE QUALITY OF
EXPORTED COMMODITIES IN INDONESIA MANUFACTURE SECTOR
Dolly Poncho Siregar
Universitas Indonesia Depok Jawa Barat, Indonesia
Email: [email protected]
Abstract
Foreign Direct Investment (FDI) has been examined internationally has an effect on
improvement of export quality. To examine the effect of FDI on Indonesia’s export
quality, this paper uses the theoretical framework of Melitz type where the model
explains the heterogeneity within the firms and the significance of the inwards
Foreign Direct Investment on the improvement of export quality. Proxy that is used
as quality measurement is export unit value where FDI will affect optimal prices and
quality. The theoretical model then transformed into panel data with the industry level
data in Indonesia’s manufacturing sector from 2011 to 2015. The finding estimated
is there is a significant impact of Foreign Direct Investment on the quality of
commodities exported which is increasing in Foreign Direct Investment increase the
export unit value.
Keywords: export unit value; foreign direct investment; indonesia; quality
Abstrak
Penelitian atas pengaruh Foreign Direct Investment (FDI) terhadap peningkatan
kualitas export telah dilakukan di banyak literature internasional. Untuk menunjukkan
pengaruh FDI terhadap kualitas ekspor Indonesia, Penelitian ini menggunakan
kerangka Teoretikal Melitz di mana model ini menjelaskan heterogenitas perusahaan
dan signifikansi dari FDI pada peningkatan kualitas eskpor. Proxi yang digunakan
adalah nilai unit eskpor di mana FDI akan mempengaruhi harga optimal dan kualitas.
Model teoretikal akan diubah menjadi data panel dengan menggunakan data sektor
manufaktur Indonesia dari tahun 2011 hingga tahun 2015. Hasil dari penelitian ini
menemukan bahwa ada pengaruh signifikan dari FDI terhadap peningkatan kualitas
ekspor yang ditunjukkan melalui peningkatan nilai unit ekspor.
Kata kunci: nilai unit ekspor; fdi; indonesia; kualitas
Introduction
Previous study shows that quality linked to the price. Higher quality products
usually are sold in a higher price. A product that is high in terms of quality is signaled by
a higher price (Utaka, 2015). This increasing of price will increase the income of a
country.
However, not every country could produce a high-quality product, since to
improving the quality means that the production process of the products will be more
complicated and sophisticated. Therefore, a country needs to have access to technology.
Dolly Poncho Siregar
Syntax Literate, Vol. 5, No. 12, Desember 2020 1529
Advanced technology is not cheap, and not every country could afford to have this
technology. One of the ways accessing the technology indirectly is the Foreign Direct
Investment (FDI). One of the advantages of FDI can be viewed as the one that can
increase the level of technical by bringing the advanced technology to the country that
receive the investment through the learning by doing process (Blalock & Gertler, 2008).
FDI could also a way to provide the channel of distribution, but their research also shows
that the foreign firms presence within the industries is not statistically significant
contribute on spillover effect (Barbosa & Eiriz, 2009).
Also, the FDI could have effect in productivity Athat theoretically could boost the
performance of production especially on improving quality. The importance of improving
quality is because of high quality product is usually sold with a higher price. Higher price
could boost the performance of a country’s economic especially related to international
trade. However, only few previous researches show that the improvement of the quality
of the commodities exported are related to Foreign Direct Investment.
A research by (Harding & Javorcik, 2012) concludes that there is a possibility that
FDI are linked to the export quality upgrading but does not officially confirm the link. In
the other hand, Research by (Wang & Wei, 2010) shows that there is no linkage between
FDI and China’s increasing export sophistication. In addition, export sophistication will
be measurement bias since product quality has not been taken into account (Xu, 2010).
In the other hand, research by (Zhu & Fu, 2013) shows that FDI make a contribution in
export sophistication.
Based on previous studies, there is debate whether the presence foreign will
increase the performance of the export of a country. Study by (Alvarez & López, 2008)
concluded that the spill over effect of FDI could only positively impact the performance
of the export if the effects can compensate the sunk entry cost. Therefore, there is
variation of effect of FDI on export performance and would make sense that results of
one country is not applicable on other countries.
Another studies in contrast shows that FDI has zero correlation in the performance
of industry in relation to the export of commodities in the host country (Greenaway, D &
Kneller, 2004). Therefore, the impact varies across countries since there is a variation in
characters of a country in relations to capacity to absorb technology and also the human
capital stock that is available in the host country.
Based On (Anwar & Sun (2017) shows that an increase in Foreign Direct
Investment on Manufacture Sector in China contribute to a substantial rise on quality of
export by formally introduce the export unit value as measurement of export quality in
China Manufacture sector.
The importance of exports in economic growth is recently taken into account since
for the developing countries it could enhance the economic growth. However, the
importance is not about the amount exported to other countries, but what the commodities
that are exported (Minondo 2010). The recent studies also show that there is benefit that
can be received from trading, such as expansion the quality or the new product (Amiti &
Freund 2010. Based on (Broda & Weinstein 2006) than only increasing the quantities of
exported. Consequently, it would be beneficial to understand the significance of the
improvement of quality drivers.
Host country could receive a positive impact of FDI not only directly but also
indirectly. The impact of FDI on the export especially the performance of the export might
be diverse based on the availability of the initial endowment of the human capital and
additionally the technology endowment of the producers available within the country that
Foreign Direct Investment on Improving The Quality of Exported Commodities in
Indonesia Manufacture Sector
1530 Syntax Literate, Vol. 5, No. 12, Desember 2020
receive the investment (Girma et al. 2007). In addition, the government could also take
part as one of the important roles by creating policies that regulating the competition in
host country’s market for the domestic and the foreign firms in host country (Barry and
Bradley, 1997).
A multinational Enterprise manages to be a higher productivity firms since they
have a competitive asset, and high skill human capital employees, products that are
innovative and superior technology (Girma et al. 2007). Therefore, when there is a
transfer the assets to the host country through spillover of knowledge, the host country
will be benefited since the productivity will increase, the increase of the capacity of the
workers and also the competitiveness of commodities that are exported. This will lead to
the improvement of export performance. Macis and Schivardi in 2016 shows that firms
that export will pay higher wage since they might need to employ a higher skilled worker.
Another benefit that can be acquired through FDI is the externalities of
information from the foreign presence that can be used by the host country industry to
learn the export performance (Aitken et al. 1997). One of the information that could give
benefit to the host country is the experience and knowledge about regulations, the
structure of the market, competitors, infrastructure of transportation, networks or research
(Krugman 1989). All of these involves the fixed cost. FDI could also be the source of
indirect aspects such as management techniques, imitation, training of labor or even new
technologies.
Based on (Schott (2004)) shows that the amount of capital and skill in a country are
positively correlated to the value of unit exports. The inflow FDI is a significant part in
the globalization, however, the FDI has two dimensional effect to the host country, first
putting the pressure since there is a difference productivity with the foreign affiliates, or
second the FDI would eventually lead to the improvement of the techniques especially in
producing or marketing the commodities and this would lead to increase of price of
commodities in world market (Harding & Javorcik 2012). Furthermore, there is tendency
that industry with foreign affiliates would export products with unit value is higher than
the one without foreign affiliates (Waang & Wei, 2008; Harding & Javorcik, 2008)
In conclusion, limited research has studied impact on the improvement of the
quality of export commodities by the Foreign Direct Investment and no research have
studied the Indonesia export quality. Therefore, this paper is written to provide the
information whether there is connection between the FDI and export unit value which has
so far focused on China Manufacture sector. This paper will follow the following
structure: the literature review, analytical framework, the data that is used in this paper,
the result and discussion, and the conclusion.
Few previous reports examined numerous aspects of the quality of export. Research
by (Schott (2004)) confirms the quality of export is affected by the characteristics of
countries. (Brambilia and Porto (2016)) shows that to produce high quality goods, a firm
need a high production cost and also to produce high quality goods means that firm will
have to pay greater wages and also including higher production cost such as fixed cost.
(Anwar & Sun (2017) present a model of theoretical which this paper will use to
observe the correlation of Foreign Direct Investment and the Industries’ quality of
commodities that are exported within industries in the host country.
Using Melitz-type of theoretical framework in (Anwar & Sun (2017), the
analytical framework begins to derive the utility function of consumer to observe the
consumer’s behavior in export market.
(1)
Dolly Poncho Siregar
Syntax Literate, Vol. 5, No. 12, Desember 2020 1531
where q is the quality demanded and a is the amount of product demanded.
The utility maximization will yield the demand function as follows:
(2)
where E is the price of the export.
From the firm’s side, to produce a product, a firm will need not only a fixed cost
but also variable cost. The fixed cost involves the fixed export cost and the iceberg trade
cost. The variable cost involves the labor. The productivity of labor depends the capability
of the firm and also the quality of product. When the firms have a high capability, the
labor would be more productive relatively because producing high quality product would
be more difficult. Foreign presence in a firm could increase the capability of a firms
through productivity spillovers. There is a positive productivity of spillovers from the
existence of foreign firms through FDI (Xu & Sheng 2012).
Industry are presumed will be involving in a double stage profit maximization.
During the first phase, firms decide profit that will maximize the quality of a product.
(3)
The Profit maximization will yield the optimal price:
(4)
In the following phase, firms arranged profit that will maximize price. Since
advanced value commodities are comparatively extra challenging to manufacture, the
price of assembly will be greater. Moreover, the fixed cost related to manufacturing
advanced quality commodities is similarly higher. This double-stage profit maximization
will yield optimal quality, and thus given the product quality, will yield optimal market
price (Anwar and Sun, 2017).
(5)
The level of optimal quality will be:
(6)
The firm level quality that is optimal will be:
(7)
Where
If we substitute the optimal level of quality (6) into level optimal price (4), will
yield:
(8)
Therefore, we can assume that change in foreign direct investment will affect change in
the export price that is also change in quality.
(9)
With q is the quality, E is the price of the export of the industry and is the
Foreign Direct Investment. This equation suggests that the effect of FDI upon the quality
of commodities could be recognized through the impact upon the price of the
commodities that are exported.
Foreign Direct Investment on Improving The Quality of Exported Commodities in
Indonesia Manufacture Sector
1532 Syntax Literate, Vol. 5, No. 12, Desember 2020
Method
This paper’s purpose is to provide empirical study to evaluate impact of Foreign
Direct Investment upon the export quality that could be recognized through the export
price that turned into export unit value.
The model for this research is based on (Anwar & Sun, 2018) empirical model,
where this research suggest modification by using panel data to also estimate the fixed
effect of cross section.
Where q
jt
represents export unit value, l is wage rate, f is fixed cost, φ is the Foreign
Direct Investment, represents industry fixed effect, represents time fixed effect,
and ε
jt
: error terms.
The model specified above is a panel data method. We use the STATA Software
version 14 for Statistical estimation to calculate all the statistical outcomes offered in this
essay.
The variables involve in this paper is export unit value as the dependent variable.
The independent variable is wage rate, fixed cost and our interest variable the Foreign
Direct Investment. This paper expects that the wage rate, fixed cost and FDI will be
positively correlated to the the quality of commodities that are exported. The trading cost
such as iceberg is assumed not change over time. Fixed asset is used as a proxy of fixed
cost.
The data that is used in this paper is Industry level data of Manufacture Sectors in
Indonesia from Indonesia Statistic Bureau from 2011 to 2015. Data that is used are wage
(l) and fixed assets (f). The firm level data were categorized into two-number industry
classification method based on Indonesia Industrial Classification. The Foreign Direct
Investment are acquired from Indonesia Investment Coordinating Board. The Foreign
Direct Investment data used is the realization of inward Investment from outside
Indonesia.
Indonesia Statistic Bureau and Ministry of Industry of Indonesia provide export
unit value (q) data. The export unit value is obtained from the division of the total export
to the total amount of quantity exported. The total export obtained by first converting the
total price of commodity exported based on the commodity classification into total price
of two-digit industry to calculate the total export of two digit industry. Since the data is
in nominal terms, the price of the export should be transformed to the real terms using
Consumer Price Index (CPI) from Indonesia Statistic Bureau. The formula used to obtain
the real price is:
(10)
Total data that can be collected is 115 (5 years from 2011 to 2015 and 23 two-
digit industry classifications).
Table 1 denotes the statistical descriptive set of the Indonesia manufacture sector
data that is estimated on this essay. The empirical result of the data would be discussed
within the next section of this essay. Figure 1 shows the industry that attracts the FDI the
most is the vehicle industry and the basic metal industry.
Dolly Poncho Siregar
Syntax Literate, Vol. 5, No. 12, Desember 2020 1533
Table 1
Descriptive of the Statistical Summary
Variables
Number of
Observations
Mean
Standard
Deviation
Minimum
Maximum
ln (q)
115
8.0824
1.4444
3.5734
10.4741
ln (
115
12.2139
1.7954
3.8276
15.0199
ln (f)
115
22.9921
1.8177
17.2809
26.8862
ln (l)
115
22.2618
0.9567
18.9366
23.9773
Figure 1
The Most Invested Industry
Results and Discussion
The analytical of the panel method here in this paper is using approach of the fixed
effects (FE) and random effects (RE). The first thing to do is to test the best model of FE
and RE. Using the Hausman test, the result shows the significant value. Therefore, the
Fixed Effect model is considered more suitable compared to the Random Effect model.
Table 2
Fixed Effect Estimation Results
Number of Observations: 115
: 0.3051
Dependent Variable:
Export Unit Value
Ln q
Estimated
Coefficient
t
P > |t|
Ln (FDI)
0.1035
2.80
0.006***
Ln l (Wage)
0.3515
2.12
0.037**
Ln f (Fixed assets)
0.0587
1.83
0.071*
Constant
-2.3561
-0.73
0.466
Table 2 shows that there is positive correlation between the level of wage rate (l)
on average and the export unit value of the industry. Increasing in wage rate will lead to
increasing of export unit value on average. The result show that the relationship is
statistically significant in 5 percent. This result shows that wage rate is one of the essential
0
2
4
6
8
10
12
14
16
(10-2015)…
(10-2015)…
(11-2015)…
(12-2015)…
(13-2015)…
(14-2015)…
(14-2015)…
(15-2015)…
(16-2015)…
(17-2015)…
(18-2015)…
(18-2015)…
(19-2015)…
(20-2015)…
(21-2015)…
(22-2015)…
(22-2015)…
(23-2015)…
(24-2015)…
(25-2015)…
(26-2015)…
(26-2015)…
(27-2015)…
(28-2015)…
(29-2015)…
(30-2015)…
(30-2015)…
(31-2015)…
(32-2015)…
ln𝜑
Foreign Direct Investment on Improving The Quality of Exported Commodities in
Indonesia Manufacture Sector
1534 Syntax Literate, Vol. 5, No. 12, Desember 2020
elements in the marginal cost in relation to production. Therefore, the increasing in the
one percent of wage rate will lead to the increasing the export unit value by 0.35 percent,
and hence increasing the export price. In Indonesia case, the importance of wage as a part
of the determinants of the price since the Indonesia is one of labor intensive countries
(Setyari et al. 2015).
Industry fixed assets (f) that is proxy of fixed cost are also significant in 10 per
cent. Unlike previous study by Anwar and Sun in 2017, this research finds that increase
in fixed assets will increase the export unit value on average. Therefore, the increasing in
the one percent of fixed assets will lead to the increasing the export unit value by 0.06
percent. Study by (Setyari et al. 2015) shows that there is an increasing trend showing
that Indonesia will be Capital Intensive, although it is not a comparative advantage for
labor intensive country like Indonesia.
The main interest variable of this paper is the FDI within the industry. The result
displays that the foreign presence within the industry has significant effect on export price
on 1 percent significance. Increase on foreign presence one percent on average will
increase the export price of the industry by 0.1 percent, hence will increase the quality of
the exported commodities. This result holds the assumption made before and similar to
the result of the research by (Anwar & Sun (2017) that the foreign presence represents by
the Foreign Direct Investment has a positively and statistically significant impact on the
value of export unit of host country hence the impact also affecting the quality of the
export.
This leads to importance of FDI to Indonesia export quality upgrading. However,
there is slightly decreasing trend in 2015. Therefore, Indonesia needs to improve the
business environment to attract more FDI to Indonesia.
Conclusion
This paper uses the theoretical framework of Melitz type where the model explains
the heterogeneity of the firms. The result shows that the foreign presence represents by
the Foreign Direct Investment has affected the quality of exported commodities by
industries. The quality is straightforwardly linked to the value of export unit or the price
of the export of the industry. The model includes the wage rate and fixed assets. This
paper used the data from the period of 2011 to 2015 of the Indonesia’s Manufacturing
Sector. The proxy for the quality is the export unit value of the industry.
The empirical results presented in this essay suggests that rise in wage rate, fixed
assets and the foreign presence will increase the export unit value of the industry,
therefore would increase the quality of the exported commodities since the wage rate,
fixed assets and foreign presence are statistically positive and significant. This finding is
similar with the previous theories used in this paper and the result is expected to be the
same as previous studies.
Since in the present, the Indonesia commodities exported are not widely recognized
as a high quality and only known by the inexpensive price, the policy maker could take
into account the importance of the FDI and would eventually lead to increase the product
quality.
However, in this paper, the result was unable to report any government’s policies
especially in relation with the agreement of trade and price, and also the bargaining of the
country. It would be beneficial if the next paper could examine the study using the more
rigid data set such as the firm level data to see how the decision made by firms especially
in Investment decisions.
Dolly Poncho Siregar
Syntax Literate, Vol. 5, No. 12, Desember 2020 1535
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