Trade Propensities and Foreign Ownership Shares in Indonesian Manufacturing

Abstract

This paper examines the relationship between trade propensities and foreign ownership shares in Indonesian manufacturing in 1992 and 1994. Foreign plants had relatively high trade propensities, and plants with high foreign ownership shares had the highest export propensities. Differences in import propensities among foreign ownership groups were relatively small. It might be argued that trade propensities determine foreign ownership shares in Indonesia, which historically waives foreign ownership restrictions for firms that export much of their output. However, this paper argues that causation runs from foreign ownership shares to trade propensities, because multinational firms have strong incentives to restrict access by uncontrolled affiliates to their international marketing networks, and because the relationship persists even when the effects of policy distortions are accounted for. Correspondingly, ownership restrictions that discriminate among foreign ownership groups are likely to reduce the exports of foreign multinational affiliates, but to have a much weaker effect on imports.

Additional information

Notes on contributors

Eric D. Ramstetter

This study was financed by the Trade Implementation and Policy (TIP) Program, which was located in Indonesia's Ministry of Industry and Trade, funded by the US Agency for International Development, and administered by Nathan's Associates, Inc. Previous versions of this paper were circulated by the TIP Program and as part of the Working Paper Series of the International Centre for the Study of East Asian Development (ICSEAD) (Ramstetter 1998c). I would like to thank all the above organisations for financial and logistical support. I would also like to thank an anonymous referee, Robert Aten, Anthony Chan, William E. James, L. Peter Rosner and Mari Pangestu, as well as participants of workshops held in Jakarta in March 1997, in Kyoto in May 1997 and at ICSEAD in September 1998, for their comments on earlier drafts and assistance in understanding the database employed. However, the opinions expressed and all remaining errors are the sole responsibility of the author.