This article was downloaded by: [KU Leuven University Library]

On: 02 August 2015, At: 09:17

Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered
office: 5 Howick Place, London, SW1P 1WG

The Journal of Development Studies

Publication details, including instructions for authors and
subscription information:
http://www.tandfonline.com/loi/fjds20

Foreign Ownership and Employment

Growth in a Developing Country
Robert E. Lipsey

c a

, Fredrik Sjholm & Jing Sun

NBER and City University of NY

Lund University and Research Institute of Industrial Economics

University of Idaho
Published online: 04 Jun 2013.

To cite this article: Robert E. Lipsey , Fredrik Sjholm & Jing Sun (2013) Foreign Ownership
and Employment Growth in a Developing Country, The Journal of Development Studies, 49:8,
1133-1147, DOI: 10.1080/00220388.2013.794264
To link to this article: http://dx.doi.org/10.1080/00220388.2013.794264

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the
Content) contained in the publications on our platform. However, Taylor & Francis,
our agents, and our licensors make no representations or warranties whatsoever as to
the accuracy, completeness, or suitability for any purpose of the Content. Any opinions
and views expressed in this publication are the opinions and views of the authors,
and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content
should not be relied upon and should be independently verified with primary sources
of information. Taylor and Francis shall not be liable for any losses, actions, claims,
proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or
howsoever caused arising directly or indirectly in connection with, in relation to or arising
out of the use of the Content.
This article may be used for research, teaching, and private study purposes. Any
substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,
systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &
Conditions of access and use can be found at http://www.tandfonline.com/page/termsand-conditions

The Journal of Development Studies, 2013

Vol. 49, No. 8, 11331147, http://dx.doi.org/10.1080/00220388.2013.794264

Foreign Ownership and Employment Growth in a

Developing Country
ROBERT E. LIPSEY,*, FREDRIK SJHOLM** & JING SUN

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

*NBER and City University of NY, **Lund University and Research Institute of Industrial Economics, University of Idaho

Final version received February 2013

ABSTRACT Many developing countries would like to increase employment in the formal sectors. One way to
accomplish this goal may be to encourage the entrance of foreign firms. We examine employment growth in
Indonesian plants taken over by foreign owners from domestic ones. We also examine the effect of FDI during
different trade regimes and the timing of employment effects following an acquisition. For plants that change the
nationality of ownership, we find a strong effect of shifts from domestic to foreign ownership in raising the growth
rate of employment, but no significant effects of shifts from foreign to domestic ownership.

1. Introduction
One of the possible consequences of inward foreign direct investments (FDI) for developing countries,
and one that is of particular interest to their governments, is the extent to which the investment creates
new jobs in the industrial, or modern sector, to help in the transformation of the economies. The
Lewis (1954) notion of a need to move people out of agriculture and into the modern sector is still a
goal for many developing countries (Asian Development Bank, 2005). There are several ways in
which inward FDI might play this role.
For instance, there is considerable evidence that foreign-owned firms are relatively efficient, and
may for that reason have access to foreign markets that would not be within the reach of domestically
owned firms. They may also have wider contacts and knowledge of world markets and better access to
financing, all advantages that should provide a positive effect on their employment.1 On the other side,
the foreign-owned firms may compete with domestically owned firms for some markets, so that the
losses of employment by domestically owned firms may offset, to some extent, the gains in the
foreign-owned firms. In addition, the foreign-owned firms may tend to be more capital-intensive than
domestically owned firms, and more intensive in the use of imported intermediate products, so that an
increase in their sales adds less to employment than would a corresponding increase by domestically
owned firms.
Considering the potential importance of FDI for formal sector employment growth in developing
countries, there is an unfortunate lack of existing studies. One exception is Karlsson, Lundin, Sjholm,
& He (2009) which finds higher growth in employment in foreign than in domestically owned Chinese
firms. However, from such comparisons it is not possible to disentangle a selection effect that
Correspondence Address: Dr Jing Sun, College of Business and Economics, University of Idaho, 875 Campus Drive, PO Box
443161, Moscow 83844, USA. Email: sun@uidaho.edu
*Robert E. Lipsey was a Research Fellow, NBER, and Professor of Economics at City University of New York when he sadly
passed away on 11 August 2011.
An Online Appendix is available for this article which can be accessed via the online version of this journal available at http://dx.
doi.org/10.1080/00220388.2013.794264.
2013 Taylor & Francis

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

1134 R.E. Lipsey et al.

foreign owners acquire relatively good firms from a pure growth effect of foreign ownership (Arnold
& Javorcik, 2009).
We contribute to the existing literature in several aspects. First, we examine employment growth
after foreign acquisitions of domestically owned establishments and domestic acquisitions of foreignowned establishments. If foreign ownership provides superior technology or better access to world
markets, establishments should tend to raise their employment after foreign takeovers. If these
advantages require continued foreign ownership, there may be employment losses when a foreignowned establishment is acquired by a domestic firm. On the other hand, if the technological or other
gains from foreign ownership are retained in the establishment, its level and growth of employment
may continue after a domestic acquisition.
Second, given a possible relationship between trade regimes and development in a developing
economy like Indonesia, we test whether a countrys trade regime might affect the employment effect
of FDI. FDI flows attracted to a country by cheap production costs will presumably respond to an
export-oriented policy by expansion (Balasubramanyam, Salisu, & Sapsford, 1996). A nice feature of
our long time series is that it enables us to examine the employment effect of FDI during different
Indonesian trade regimes.
Last, our panel data allow us to track the pattern of employment changes following a foreign
acquisition. Our results show that the employment growth is concentrated in the year of acquisition.
This suggests that acquisitions can be associated with very substantial additions to resources, contesting the conventional wisdom that green-field investment adds resources to the recipient country, but
acquisitions only change ownership.

2. Previous Literature
There have been relatively few studies of the effects of takeovers of domestic firms or plants by
foreign firms on levels of employment in the target plants. Moreover, almost all of the existing studies
examine the issue in developed economies. Bandick & Karpaty (2007) found some evidence of a
positive effect on numbers of employees of acquisitions by foreign firms of Swedish firms: the
increase in the number of skilled employees was larger than the decline in the number of unskilled
workers. In another study on Swedish data, Bandick & Grg (2010) found that the positive effect on
employment was restricted to acquisitions of exporting firms. In a paper on mergers and acquisitions
in Finland comparing cross-border with other types, going beyond manufacturing to include service
industries and using matching methods to assure the comparability of acquired firms to those not
changing ownership, Lehto & Bckerman (2008) found that cross-border acquisitions in Finland led to
reductions in employment in manufacturing, but effects in non-manufacturing were much weaker. An
examination of foreign acquisitions in UK manufacturing between 1989 and 1996 by Girma (2005, p.
165), using propensity score matching, concluded that foreign acquisition did not result in any clear
employment effects, but there were some signs of a negative effect in the case of larger take-over
targets, and beneficial impacts amongst smaller ones.
Among developing host countries, there have been some studies for China. A paper on China by
Gong, Grg, & Maioli (2007) compared the employment effects of domestic privatisation with those
of foreign acquisition of state-owned enterprises, using propensity score matching and differences in
differences. However, their study controlled for firm output growth, and therefore was an examination
of productivity effects rather than employment effects. They found that given firm output growth,
domestic privatisation led to reductions in employment growth, and therefore increases in productivity,
compared with firms that did not change ownership, while foreign acquisitions were associated with
higher employment growth. The authors suspected that foreign acquirers, in particular, were constrained by promises made with respect to employment in securing permission for acquisitions.
Other studies that focused on productivity rather than employment levels, or on effects of ownership
rather than acquisition, included, for China, Karlsson, Lundin, Sjholm, & He (2009, p. 198) finding
higher employment growth in foreign-owned firms, Takii (2005), which found higher productivity

Foreign Ownership and Employment Growth in a Developing Country 1135

levels in foreign-owned plants in Indonesian manufacturing, and Arnold & Javorcik (2009), which
found positive productivity effects from foreign acquisition in Indonesian manufacturing between
1983 and 1996.
There is also a literature that examines how FDI affects productivity in local firms through
spillovers. The extent of spillovers seems to differ across countries (Grg & Greenaway, 2004;
Harrison & Rodrguez-Clare, 2010; Lipsey & Sjholm, 2005), but a number of studies find positive
spillovers in Indonesia (Blalock & Gertler, 2008, 2009; Javorcik, 2004).

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

3. Foreign Plants in Indonesian Manufacturing

We analyse Indonesian manufacturing data supplied by the Indonesian Statistical Office for the period
1975 to 2005 for all manufacturing plants with more than 20 employees. A plant identification code
enables us to construct a panel and follow individual plants over time.
Employment in manufacturing plants with more than 20 employees increased from fewer than
700,000 in 1975 to about 4 million in 1997 and later years (Figure 1). That growth was driven mainly
by a strong increase in employment in domestically owned private plants, which remained close to
three-quarters of all plants during the entire period. Foreign establishments have played an increasing
role in Indonesian manufacturing employment. Plants with some foreign ownership, accounting for
less than 10 per cent of manufacturing employment in 1975, employed around 20 per cent in 1997, at
the time of the Asian crisis. After that the share declined slightly, but then recovered to 20 per cent
again in 2005. The share of government-owned plants, much larger than that of foreign plants in 1975,
shrank steadily after the late 1980s, and was only 5 per cent of manufacturing employment in 2005.
The industry sectors and the ownership groups differed in some important aspects. One extreme
difference was in size: government-owned plants were far larger than domestically owned private plants,
five times as large, on average, in 1975 and still over three times as large in 2005. They were much
larger also within the industry groups, with a few exceptions (Table 1). Foreign-owned plants were also
much larger than domestically owned private plants, about three times as large in both beginning and end
years. In 2005, the foreign-owned plants were larger than domestically owned private plants in every
group. The size disparity may be an element in the frequency and success of takeovers.

Figure 1. Employment in Indonesian manufacturing, by ownership.

1136 R.E. Lipsey et al.

Table 1. Average number of employees per establishment and the share of blue-collar workers, 1975 and 2005
Private-domestic

Govt-domestic

Foreign

Average
Average
Average
employees per Share of blue- employees per Share of blue- employees per Share of blueSector ISIC
plant
collar workers
plant
collar workers
plant
collar workers

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

1975
Total
31
32
33
34
35
36
37
38
39

75
91
72
58
52
74
41
174
87
47

0.88
0.88
0.93
0.82
0.84
0.83
0.88
0.82
0.86
0.90

365
537
507
90
228
243
385
72*
210
191*

0.75
0.75
0.81
0.86
0.71
0.68
0.71
0.65*
0.72
0.82*

219
179
431
146
157
167
325
96*
223
167*

0.77
0.81
0.90
0.81
0.78
0.64
0.85
0.75*
0.73
0.92*

31
32
33
34
35
36
37
38
39

157
135
206
168
145
178
89
205
142
120

0.85
0.85
0.89
0.87
0.78
0.79
0.87
0.78
0.82
0.87

481
507
204
116
519
530
725
1822*
619
287*

0.74
0.74
0.85
0.83
0.75
0.68
0.67
0.75*
0.66
0.90*

563
517
1060
280
647
389
398
215
536
664

0.79
0.75
0.89
0.83
0.78
0.70
0.80
0.76
0.80
0.87

2005
Total

Note: *Fewer than five observations.

To the extent that we can associate the share of blue-collar workers in total employment with the
average skill level in an establishment, it appears that foreign firms tended to use a slightly higher-skill
labour force than private domestic firms in the same industry. Government-owned plants operated with
the lowest proportions of blue-collar workers consistently across almost all industries. Only government-owned plants employed work forces with 30 per cent or more of white-collar workers, almost 40
per cent in a few cases, while private domestic plants employed more than 20 per cent white-collar
workers in only one industry group in one year.
The changes in the share of Indonesian manufacturing employment in foreign-owned plants,
discussed above, came about in several different ways. One was takeovers of domestically owned
plants by foreign firms, offset by takeovers of foreign-owned plants by Indonesian owners. Another
was the establishment of new plants by foreign owners and the demise of existing plants. A third
source of change was any differences in average rates of growth in employment between locally
owned and foreign-owned plants.
These different sources of growth of employment in foreign-owned plants are shown in Table 2. Up
through 1989, foreign takeovers accounted for a large part of total growth in employment in foreignowned manufacturing establishments, but they were offset by declines in such employment from local
takeovers of foreign-owned plants. After 1989, the foreign takeovers added more to the foreign-owned
share than the domestic takeovers took away.
The path of takeover activity between foreign and domestic owners, in terms of numbers of
takeovers, is described in Figure 2. The numbers of takeovers had been fairly similar in the two
directions until the 1990s, but since then foreign takeovers have been more numerous, except in 1997
during the Asian crisis. However, the net effect of foreign and domestic takeovers was less important
as a source of employment growth in foreign-owned establishments than the combination of the
establishment of new foreign-owned plants and their more rapid growth.

Foreign Ownership and Employment Growth in a Developing Country 1137

Table 2. Employment growth in foreign-owned manufacturing establishments in Indonesia, by source of growth,
19752005
Year

Foreign

Foreign takeover

Domestic takeover

Othera

1975~1979
1980~1984
1985~1989
1990~1994
1995~1999
2000~2005

49,379
9,197
30,615
384,856
135,759
108,500

21,190
18,463
47,488
182,561
216,927
300,782

10,765
27,435
47,997
87,909
181,210
110,081

38,954
18,169
31,124
290,204
100,042
82,201

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Note: a New establishments minus disappearances, firm growth after takeover, and miscellaneous changes.

Figure 2. The number of takeovers in Indonesian manufacturing, 19762005.

4. Econometric Approach
We begin the econometric analysis by treating growth in employment as a function of various plant
characteristics:
X
X
ln Lit ln Lit  ln Lit1 Plantit1
w Ownershipit
t Year dummy
X
X
ind Ind dummyj
R Reg dummy "it

(1)

where i indexes firms, and t indexes year.

The variables included in the model are: L: employment; Plant: a vector of lagged plant
characteristics, that is plant size measured by employment, energy intensity (quantity of energy
per employee), which is a proxy for physical capital intensity, and inputs of intermediate goods,
defined as raw materials, fuel, and lubricants, per employee; Ownershipi : ownership dummy
variables indicating three ownership categories, private domestically owned, private foreignowned, and government-owned; and dummy variables for year, industry (two-digit ISIC), and region
(provinces aggregated into five regions).
The plant control variables might be endogenously determined and we try to control for this possibility
by lagging them one period. Hence, we assume that growth in employment between period t and t + 1 is

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

1138 R.E. Lipsey et al.

caused by, for instance, the size in period t. Labour productivity, as measured by value-added per
employee, was included in some specifications, but it added nothing to the equation and was dropped.
Ownership is in the data divided into shares of foreign, government-domestic and private-domestic.
Foreign establishments are defined as plants with any foreign ownership, and the dummy variable has
the value one for all periods with foreign ownership.2 Government-owned establishments are defined as
plants without foreign ownership but with any government (central or local) ownership. The remaining
plants are defined as private-domestically owned. In some later estimations ownership is instead a
dummy on foreign acquisitions of domestically owned plants and a dummy on domestic acquisitions of
foreign-owned plants. The foreign acquisition dummy variable is one for all the years after foreign
takeover, and the domestic acquisition dummy variable is one for all the years after domestic takeover.
The universe we examine in the estimations on takeovers includes all firms except those that experience
multiple ownership changes. Firm-specific effects and time dummies are included in the regressions.
One problem with estimating the causal effect of an acquisition on employment is the possible
endogeneity of firms being acquired. Acquisitions may not be random with respect to factors that
determine future growth. This means that estimates on employment growth may be biased if nonrandomness is not taken into account. More specifically, firms that become foreign owned might be
such that they would in any case develop differently than firms that remain domestically owned. This
means that estimates on outcome variables (such as employment) become biased.
One often-used approach to control for selection bias is to use an instrumental variable (IV)
approach. However, instrumental variables are arguably difficult in the context of FDI and employment, since most variables that affect foreign acquisitions also could have an effect on most outcome
variables including employment.
We therefore use propensity score matching (PSM) combined with the more general difference-indifferences technique, as suggested by, for example, Blundell & Costa Dias (2000), Heyman, Sjholm,
& Gustavsson Tingvall (2007), and Arnold & Javorcik (2009). The matching procedure aims to find a
group of non-acquired plants that display the same characteristics as the group of acquired plants prior
to the acquisition. The matched non-acquired plants are the counterfactuals to approximate the
employment growth that the acquired plants would have had if they were not acquired. Specifically,
the identifying assumption for the matching technique is that, conditional on all relevant covariates,
the employment growth rates are independent of the acquisition status (conditional independence), so
acquisition status is random.3 The conditional independence assumption is not directly testable
(Wooldridge, 2010, p. 910), but our dataset provides us with rich control variables to help this
assumption to hold. Moreover, the combination of propensity score matching and difference-indifferences estimator removes the time-invariant bias. In other words, this estimation strategy allows
us to control for observable and unobservable but constant differences between acquired and nonacquired plants. However, it should be noted that the methodology does not solve possible endogeneity problems caused by time-varying unobservable variables.
To obtain the matched control group, we estimate the propensity score by fitting a probit model. We
then apply the difference-in-differences estimator on the matched samples to estimate the impact of
acquisitions on employment growth. The difference in employment growth trends after acquisition can
be attributed to the effects of acquisition. Below is our DD estimator:
 


  



control
treated
control
DD E Ltreated
X
X
X
X

E
L

E
L

E
L
j
j
j
j
post
post
pre
pre

(2)

L is employment growth rates (difference in log employment) or, in some estimations, employment itself.
Post refers to the post-acquisition period, which could be in the year of acquisition, or one year after, or
the average of the whole post-acquisition periods. Pre refers to the period before acquisition. Similarly it
could be one year before the acquisition, or the average of the all the years before acquisition. The
difference in the second parenthesis corrects the selection bias in the pre-acquisition period. In our
matched samples, the control group for foreign takeovers is taken from the plants that are always
domestic, while the control group for domestic takeovers is taken from the plants that are always foreign.

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Foreign Ownership and Employment Growth in a Developing Country 1139

The model specification for the propensity score includes age, employment, the share of white-collar
workers, inputs, energy use, and productivity. All variables (except age) are lagged one year and the
square of all variables are also included. Moreover, industry and year specific effects are included.
Table 3 shows that large domestically owned plants with low productivity and a high share of whitecollar workers are relatively likely to be acquired by foreign owners. By contrast, foreign-owned plants
that are small, with low productivity and energy intensity, are relatively likely to be taken over by
domestic owners. Hence, foreigners and domestic actors tend to acquire different types of plants. By
constructing a matched sample based on the probability of takeover, the selection problem is reduced.
We employ a nearest neighbour matching technique with replacement to construct our matched
sample of plants. In the case of foreign takeover, each domestic plant that would be acquired later by
foreign owners is matched to an always domestic plant that has the closest propensity score. The same
approach is used for domestic takeovers. Moreover, the matched treated and control units are from the
same year and same industry.
Of the 1,036 foreign takeovers, 377 are in the treatment group. The loss in the number of foreign
takeovers from the treatment group is mainly because there are 442 foreign takeovers reported to have
taken place in the second year after the plant starts operation, and another 108 foreign takeovers are
matched to domestic plants that do not report employment growth before the matched year, and thus
there is no employment growth in the pre-acquisition period with which to compare. Another 109
takeovers are dropped because there are some missing values in the observed characteristics used to
estimate propensity scores. Of 652 domestic takeovers, 291 are included in the treatment group; 233
domestic takeovers are dropped because they are reported to have taken place in the second year of
operation, and another 128 domestic takeovers are dropped because of missing values. It is a cause for
Table 3. Probit results for foreign and domestic takeovers

Age
Age squared
Employment
Employment squared
Ratio of white-collar workers
Ratio of white-collar workers squared
Inputs
Inputs squared
Energy
Energy squared
Productivity
Productivity squared
Year fixed effects
Industry fixed effects
No. of observations
Chi-squared
Pseudo R2

Foreign takeover

Domestic takeover

0.145
[0.007]
0.003***
[0.000]
0.549***
[0.076]
0.029***
[0.007]
0.678***
[0.232]
0.288
[0.329]
0.008
[0.037]
0.001
[0.002]
0.013
[0.037]
0.000
[0.003]
0.217**
[0.086]
0.015***
[0.004]
Yes
Yes
221,068
1,414
0.1897

0.062***
[0.013]
0.002***
[0.000]
0.450***
[0.154]
0.021
[0.014]
0.872*
[0.447]
0.935*
[0.566]
0.004
[0.076]
0.003
[0.004]
0.094*
[0.054]
0.006
[0.004]
0.097
[0.085]
0.010**
[0.005]
Yes
Yes
9,417
420
0.1345

Notes: *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level.

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

1140 R.E. Lipsey et al.

concern that so many takeovers are dropped because they are reported to take place in the second year of
existence. However, the regression analyses were carried out on samples with and without takeovers in
the second year, and the results were robust.
To identify the treatment effect, the so called balancing property of the propensity score must be
fulfilled. This means that observations with the same propensity score must have the same distribution
of characteristics, independently of treatment status. Observations with the same propensity score are
on average observationally identical, implying that exposure to treatment is random. In other words,
the balancing property ensures that sufficiently good matches are found for all treated observations.
Tests are conducted to make sure that our matched sample is balanced in the sense that the treated
and control units have similar pre-takeover values on the control variables (Online Appendix Tables
A1 and A2). There are large differences in the unmatched sample between characteristics between the
treated and control groups. The differences in means of the control variables are in general not
significant between treated and control units in the matched sample. The one exception is that treated
plants tend to have a larger share of white-collar workers even in the matched sample.
Moreover, the difference-in-differences approach assumes that the acquired and non-acquired plants
should follow a similar employment growth trend without the acquisition, given that they have similar
plant characteristics before acquisition. Figures A1 and A2 in the Online Appendix show growth in
employment before and after foreign acquisitions of domestic plants and before and after domestic
acquisitions of foreign plants. There are no obvious differences in the employment trend in treated and
control groups before acquisitions. Hence, it seems that the assumption of a common growth trend
before treatment is reasonably fulfilled. However, the development after acquisitions is strikingly
different between foreign and domestic acquisitions, with a sharp increase in employment growth the
year of acquisition in the former group and with no clear effect in the latter group.

5. Econometric Results
5.1 Determinants of the Rate of Plant Employment Growth
We start in Table 4 with simple OLS analyses on the whole universe of manufacturing plants. The
equations include the ownership variables, Foreign and Government, and the reference group is
therefore domestic-private firms. The coefficient for Foreign is positive and statistically significant,
Table 4. Ownership and growth in employment, OLS estimations
Total employment
Foreign (t)
Government (t)
Size (t1)
Energy (t1)
Inputs (t1)
Time dummy
Ind. dummy
Region dummy
R-square
No. of obserations

0.060
(20.74)***
0.023
(6.28)***
0.038
(47.47)***
0.011
(31.86)***
0.012
(27.53)***
Estimated
Estimated
Estimated
0.028
324,387

Blue-collar workers
0.060
(19.93)***
0.021
(5.31)***
0.036
(46.27)***
0.011
(29.51)***
0.012
(25.17)***
Estimated
Estimated
Estimated
0.021
324,268

White-collar workers
0.036
(10.27)***
0.011
(2.01)**
0.026
(27.38)***
0.005
(9.45)***
0.009
(13.76)***
Estimated
Estimated
Estimated
0.006
277,653

Notes: A constant is included in all estimations. Energy, and Inputs are in log form. T- values based on robust
(cluster at plant level), standard deviations are in parentheses. *significant at the 10 per cent level; **significant at
the 5 per cent level; ***significant at the 1 per cent level.

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Foreign Ownership and Employment Growth in a Developing Country 1141

indicating a rate of growth in employment 6 percentage points higher in foreign-owned than in
domestic-private plants. The coefficient for government is also positive and statistically significant.
The equation includes plant characteristics that might affect employment growth. Large firms have
comparatively low growth rates, as has been found in previous studies (for example, Karlsson et al.,
2009). Plants that are more energy intensive and use more raw materials are associated with higher
employment growth rates in general. The last two columns examine growth of the numbers of blueand white-collar workers. The positive effect on the employment growth of blue-collar workers is
substantially larger than the effect on white-collar workers: 6 percentage points compared to 3.7
percentage points. The effect of government ownership is also higher for blue- than for white-collar
workers, but both effects are small compared to the effect of foreign ownership. Finally, the negative
effect of size and the positive effect of input per employee primarily affect blue-collar workers, as is
also the case for the positive effect from energy intensity.
The evidence of Table 4 is that foreign-owned plants tend to increase their employment 6 percentage
points faster than private domestically owned plants over the years of their existence, given the other
characteristics of the plants.
5.2 Foreign Takeovers and Employment Growth
We separate the effects of foreign takeovers from those of foreign ownership in general in Table 5. The
OLS estimate of the effect of foreign ownership aside from foreign acquisition effects is about 5.5
percentage points per year faster growth in employment. The effect of foreign acquisition is subsequent growth in employment at a rate 9 percentage points faster.

Table 5. Acquisitions and growth in employment

Always foreign
Before foreign acquisition
Foreign acquisition
Before domestic acquisition
Domestic acquisition
Government
Size (t1)
Energy (t1)
Inputs (t1)
Time dummy
Ind. dummy
Region dummy
R-square
No. of observations

Total employees

Total employees

Blue-collar workers

White-collar workers

OLS

Fixed effect

Fixed effect

Fixed effect

0.055
(16.50)***
0.078
(10.94)***
0.088
(14.68)***
0.031
(5.83)***
0.004
(0.69)
0.023
(6.37)***
0.038
(48.01)***
0.011
(32.02)***
0.012
(27.50)***
Estimated
Estimated
Estimated
0.028
327,843

0.108
(6.11)***

0.122
(6.61)***

0.063
(2.98)***

0.030
(1.58)

0.027
(1.38)

0.044
(1.79)*

0.426
(27.16)***
0.002
(0.61)
0.007
(1.35)
Estimated

0.264
15,347

0.425
(27.23)***
0.002
(0.58)
0.006
(1.18)
Estimated

0.214
15,333

0.353
(16.47)***
0.004
(0.84)
0.002
(0.18)
Estimated

0.068
14,580

Notes: A constant is included in all estimations. Energy, and Inputs are in log form. T- values based on robust
(cluster at plant level), standard deviations are in parentheses.significant at the 10 per cent level; **significant at
the 5 per cent level; ***significant at the 1 per cent level.

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

1142 R.E. Lipsey et al.

We have also included a dummy variable indicating the period before a domestic plant was taken
over by foreign owners, and a similar dummy variable for foreign plants that were taken over by
domestic owners. These dummy variables capture pre-acquisition growth rates in employment and are
both positive and statistically significant, indicating that all takeovers are of high-growth plants.
Including these dummy variables has no impact on the result for foreign acquisitions.
The fixed-effect approach looks at growth in employment within a firm before and after the
acquisition and removes the time-constant unobserved plant characteristics that could confound the
explanation of acquisition effects. Only firms that change ownership are included. Fixed-effect
estimates raise the foreign acquisition effect to 11 percentage points. The effect on blue-collar workers
is about twice as large as the effect on white-collar workers. Moreover, the results indicate that
domestic acquisition reduces the subsequent rate of employment growth, although only the effect on
white-collar workers is statistically significant.
The effect of FDI on employment might differ between trade regimes (Balasubramanyam et al.,
1996). FDI flows drawn to a developing country to take advantage of cheaper labour costs would
respond to an export-oriented policy by expansion. By contrast, FDI induced by import substitution
policy is limited by the size and income level of the host country market. Moreover, Melitz (2003)
suggests that trade liberalisations will have substantial reallocation effects with expanding employment
in high productivity firms (foreign) and declining employment in low productivity firms (domestic).
To test for the possible impact of differences in trade regimes, suggested above, we divide
Indonesias history since 1975 into three periods, which we think of as an import substitution period,
19751985; a trade liberalisation period, 19861996; and the crisis and post-crisis period, 1997
2005.4 The results, shown in Table 6, support the idea that the effects of FDI on host countries are
affected by trade regimes. During the trade liberalisation period, 19861996, the employment growth
rate effect of foreign acquisition was as high as 17 percentage points. In contrast, foreign takeovers had
no significant effects on employment growth rates during the earlier, import substitution, period 1975
1985. It is interesting to note that the coefficient for foreign acquisitions during the crisis period is
positive. Manufacturing employment has not increased in Indonesia in recent years, which is a source
of concern among policy-makers (Chatani, 2012). Our result suggests that this development in
manufacturing employment is at least not caused by foreign acquisitions, but that such acquisitions
instead seem to increase employment also in times of overall stagnation. One possible explanation is
that foreign-owned firms could have greater access to overseas financing and would expand following
the East Asian financial crisis, while lack of liquidity during the crisis greatly constrained domesticowned firms ability to take advantage of improved terms of trade (Blalock, Gertler, & Levine, 2008).
Table 6. Acquisitions and growth in employment in different time periods, fixed effects (only acquired plants)

Foreign Acquisition
Domestic Acquisition
Size (t1)
Energy (t1)
Inputs (t1)
Time dummy
R-square
No. of observations

19751985

19861996

19972005

0.002
(0.118)
0.037
(0.040)
0.505***
(0.061)
0.002
(0.007)
0.032*
(0.018)
Estimated
0.28
1,644

0.174***
(0.048)
0.008
(0.041)
0.551***
(0.030)
0.007
(0.006)
0.004
(0.009)
Estimated
0.35
5,459

0.125***
(0.029)
0.001
(0.035)
0.654***
(0.024)
0.013***
(0.005)
0.000
(0.006)
Estimated
0.36
7,483

Notes: Only plants with one takeover either foreign or domestic, are used. A constant is included in all
estimations. Size, Energy and Inputs are in log form. Standard errors clustered at plant level. *significant at the
10 per cent level; **significant at the 5 per cent level; ***significant at the 1 per cent level.

Foreign Ownership and Employment Growth in a Developing Country 1143

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

5.3 Matched Comparisons of Domestic and Foreign Takeovers

The results above might be biased if acquisitions are not random and if acquired plants differ from
non-acquired plants. We therefore continue with our analysis on the matched sample of acquired and
non-acquired plants which will reduce any selection bias. The results are shown in Table 7. Foreign
takeovers raise the growth rate of employment by 11 percentage points on average during the
acquisition and post-acquisition period, after correcting for the pre-acquisition differences between
acquired and non-acquired plants. This is similar to the fixed-effect estimate. Domestic takeovers,
according to the matched comparison, do not affect employment growth rates in the acquisition year
and the following two years. However, under the current model specification, the domestic takeovers
raise the employment growth rates by 7 percentage points on average during the post-acquisition
period. As a robustness check, we experimented with different model specifications in the probit
model. The positive effects of foreign takeovers on employment growth are robust to various model
specifications, while the effects of domestic takeovers on employment growth are mostly negative or
insignificant.
While the employment growth rates in foreign takeovers do not differ significantly from those of
plants remaining domestically owned in the first and second years after the takeover, the impact of the
foreign takeovers continues, because the acquired plants grow so much in the year of takeover that the
same growth rate after takeover implies a considerably larger absolute growth in employment in the
following years in the acquired plants, relative to domestic plants, as is shown in Table 8, which shows
the increase in levels of employment. There are no similar effects in absolute terms from domestic
acquisitions of foreign plants. The concentration of employment growth rate changes in the year of
acquisition with the consequent carryover of absolute employment growth into the following years.

Table 7. Estimated effects of takeovers on employment growth rates after takeover, propensity score matching
Foreign takeover (control: always
domestic)

Acquisition year
One year after acquisition
Two year after acquisition
Average of post-acquisition

Domestic takeover (control: always

foreign)

DD

Standard error

DD

Standard error

0.314***
0.0305
0.009
0.109***

(0.0564)
(0.0469)
(0.0487)
(0.0368)

0.037
0.014
0.054
0.073*

(0.0466)
(0.0381)
(0.0483)
(0.0377)

Notes: *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level.

Table 8. Estimated effects of takeovers on employment after takeover, propensity score matching
Foreign takeover (control: always
domestic)

Acquisition year
One year after acquisition
Two year after acquisition
Average of post-acquisition

Domestic takeover (control: always

foreign)

DD

Standard error

DD

Standard error

134**
118**
186***
158***

(54.9)
(55.9)
(54.4)
(50.2)

23
12
1
2

(28.3)
(36.8)
(31.8)
(33.4)

Notes: For foreign takeovers, the average number of years after acquisition for both treated and control group is
approximately six years. For domestic takeovers, both treated and control groups have on average six years after
acquisition. The pre-acquisition for this calculation uses information at one year before acquisition. It would not
change the story if the average from all the years before acquisition is used instead.Standard errors are
bootstrapped. *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level.

1144 R.E. Lipsey et al.

Table 9. Estimated effects of foreign acquisitions on growth of domestically owned plants (dependent variable:
industry-level employment growth rate of domestic firms in decimals)

Employment growth rate of foreign takeovers

(in decimals)
Industry fixed effects
Year fixed effects
No of observations
Adjusted R-squared

Regression1

Regression2

Regression3

Regression4

0.094***
(0.001)
N
N
275
0.9916

0.094***
(0.001)
N
Y
275
0.9928

0.032***
(0.007)
Y
N
269
0.0598

0.018***
(0.006)
Y
Y
269
0.3605

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Notes: *Significant at the 10% level; **Significant at the 5% level; ***Significant at the 1% level.

One implication of this concentration in the year of acquisition is that the usual assumption that
Greenfield investment adds resources to the recipient country but acquisitions only change ownership
needs to be put in to perspective (Nocke & Yeaple, 2007, p. 357). Acquisitions can be associated with
very substantial additions to resources, quite apart from any gains that might arise from transfers from
less-skilled to more-skilled management.
One related issue is whether the employment growth in foreign-owned plants is at the expense of the
domestically owned plants in the same industry because of a business stealing effect (Harrison &
Rodrguez-Clare, 2010). In other words, when foreign ownership boosts employment growth in
acquired plants, how has the industry-level employment growth been affected? We examine this
issue by correlating the growth in foreign takeovers with the growth in domestic (private and
government) plant employment at an industry level after controlling for industry and year fixed effects
(Table 9). The results suggest that a rise in employment growth in foreign takeovers is correlated with
employment growth in plants that remain domestic. One reason could be an increased market for
suppliers of intermediate goods.5 We made some simple calculations to examine this issue with the use
of inputs as a dependent variable in fixed effect estimations on foreign acquisitions (not shown).
Foreign acquisitions increased the use of inputs by 42 per cent, which supports the hypothesis of
increased markets for input goods. Another reason could be that domestic firms learn to export due to
the presence of foreign plants in the same industry and thereby increase output and employment.6

6. Conclusions
Modern sector employment growth is in many developing countries as important as it is difficult to
achieve. This article examined whether FDI can play a role in manufacturing employment growth. The
analysis contributes to a relatively scarce existing literature in several respects: by examining the
causality of FDI on employment; by looking at the effect of trade regimes; and by examining the
timing of employment effects.
Foreign-owned Indonesian manufacturing plants grew more rapidly in employment than plants that
remained in Indonesian ownership during 19752005, given the other characteristics of the plants. The
more rapid growth is confirmed by several tests of the data, including a close examination of takeovers
of locally owned plants by foreigners and of foreign-owned plants by local owners. Employment in
plants that were foreign-owned throughout our period grew, on average, about 5.5 percentage points
faster than always domestically owned plants. Plants that were acquired by foreigners grew about 11
percentage points faster than their pre-acquisition level, according to fixed-effect estimates.
Considering that foreign plants are on average considerably larger than domestic plants, the difference
in the number of jobs created was large.
The propensity score matching consistently confirmed the advantages of foreign ownership for
employment growth. There is also some indication that the employment growth effects of foreign
ownership are sensitive to host country trade policy, with liberalisation encouraging the expansion of

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Foreign Ownership and Employment Growth in a Developing Country 1145

employment through foreign takeover. There were indications in several tests that there was a decline
of employment growth in shifts from foreign to domestic ownership, although that result is not
statistically significant.
Most of the employment effects of foreign takeovers took place in the year of takeover. There was
relatively little effect on growth rates in the following years, but the absolute additions to employment
in the years after takeover were larger than they would have been under continued local ownership
because the base was much larger. The negative or insignificant effect of domestic acquisition on
foreign-owned plants, as in the fixed effects estimate and the difference-in-differences estimate from a
matched sample, shows that the advantages of foreign-owned plants that accounted for more rapid
growth required continued foreign ownership. They are apparently lost if the plant returns to domestic
ownership.
One possible implication of the concentration of growth in the year of acquisition is that the
distinction between greenfield investment and acquisitions is not as sharp as is often assumed.
Many of the acquisitions apparently involve major changes in the size and possibly other dimensions
of the target firms.
The results also contribute to the recent discussion on job creation in large versus small businesses.
Much of the existing evidence shows an inverse relationship between firm size and employment
growth rates (Neumark, Wall, & Zhang, 2011), which has in some countries led to various policy
interventions in favour of small businesses. However, our results suggest that bigger firms have higher
chances of being acquired by foreign firms, which boosts their employment growth even after
controlling for the firm size. This has important implications for developing countries like Indonesia
trying to catch up with the developed economies. Foreign-owned firms tend to be bigger and more
productive. Thus, their expansion will help to address the issue of resource misallocation in developing
economies (Hsieh & Klenow, 2009) and improve productivity and growth.7

Acknowledgements
We are grateful for comments and suggestions by a large number of conference and seminar
participants and from two anonymous referees and the editor of the journal. Fredrik Sjholm gratefully
acknowledges financial support from the Ragnar Sderberg Foundation. The data have been provided
by the Indonesian Bureau of Statistics. Programming codes are available upon request.

Notes
1. See Lipsey (2004) for a survey on host country effects of FDI. For studies on FDI in Indonesia, see, for example, Blomstrm
& Sjholm (1999), Lipsey & Sjholm (2004), Takii (2005), Blalock & Gertler (2008), and Arnold & Javorcik (2009). For
studies on multinational firms and labour markets in high income countries, see Bandick and Karpaty (2007), Lehto and
Bckerman (2008), Hakkala, Heyman, & Sjholm (2008), and Bandick & Grg (2010).
2. Using alternative definitions of foreign ownership with different required ownership thresholds has no major impact on the
results.
3. Wooldridge (2010, p. 910) discusses another identifying assumption called the overlap assumption. Following Arnold &
Javorcik (2009), we exclude observations outside the common support in our matching estimation. The common support is
bound by the lowest propensity score of a treatment observation and the highest propensity score of a control observation.
4. See Aswicahyono, Bird, & Hill (1996), Aswicahyono, Dionisius, & Hill (2008) and Aswicahyono & Hill (2002) for
discussions on Indonesias policy regimes, and for similar distinctions in different periods.
5. We need to use an industry classification at a two-digit level of ISIC (nine industries) because of changes in classification
over time at lower levels of aggregation. That means that suppliers of intermediate goods often are in the same industry as
producers of finished goods.
6. Swenson (2008) finds that a growing presence of multinational firms in China enhances the export capabilities of local
domestic firms. We tried to conduct a similar analysis but were unsuccessful because of poor export data.
7. A recent study by Braguinsky, Branstetter, & Regateiro (2011) is interesting in this respect. It explains Portugals anemic
growth and low productivity in recent decades by a leftward shift in the firm size distribution.

1146 R.E. Lipsey et al.

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

References
Arnold, Jens Matthias, & Javorcik, Beata s. (2009). gifted kids or pushy parents? foreign acquisitions and Plant Productivity in
Indonesia. Journal of International Economics, 79, 4253.
Asian Development Bank. (2005). Labor markets in Asia: Promoting full, productive, and decent employment. Manila: Asian
Development Bank.
Aswicahyono, H. H., Bird, Kelly, & Hill, Hal. (1996). What happens to industrial structure when countries liberalize? Indonesia
since the mid 1980s. Journal of Development Studies, 32, 340363.
Aswicahyono, Haryo, Dionisius, Narjoko, & Hill, Hal. (2008, November). Industrialization after a deep economic crisis:
Indonesia. Paper presented at the 11th International Convention of the East Asian Economic Association, Manila.
Aswicahyono, Haryo, & Hill, Hal. (2002). Perspiration versus inspiration in Asian industrialisation: Indonesia before the crisis.
Journal of Development Studies, 38, 138163.
Balasubramanyam, V. N., Salisu, M., & Sapsford, David. (1996). Foreign direct investment and growth in EP and IS countries.
The Economic Journal, 106, 92105.
Bandick, Roger, & Grg, Holger. (2010). Foreign acquisition, plant survival, and employment growth. Canadian Journal of
Economics, 43, 547573.
Bandick, Roger, & Karpaty, Patrik. (2007). Foreign acquisition and employment effect in Swedish manufacturing (Working
Paper No. 10). rebro University.
Blalock, Garrick, & Gertler, Paul J. (2008). Welfare gains from foreign direct investment trough technology transfer to local
suppliers. Journal of International Economics, 74, 402421.
Blalock, Garrick, & Gertler, Paul J. (2009). How firm capabilities affect who benefits from foreign technologies. Journal of
Development Economics, 90, 192199.
Blalock, Garrick, Gertler, Paul J., & Levine, David I. (2008). Financial constraints on investment in an emerging market crisis.
Journal of Monetary Economics, 55, 568591.
Blomstrm, Magnus, & Sjholm, Fredrik. (1999). Technology transfer and spillovers: Does local participation with multinationals matter? European Economic Review, 43, 915923.
Blundell, Rrichard, & Costa Dias, Monica. (2000). Evaluation methods for non-experimental data. Fiscal Studies, 21, 427468.
Braguinsky, Serguey, Branstetter, Lee G., & Regateiro, Andre. (2011). The incredible shrinking Portuguese firm (NBER Working
Paper 17265, July). Cambridge MA: NBER.
Chatani, Kazutoshi. (2012). Economic growth, employment creation, and poverty alleviation. In Hall Hill, Muhammad Ehsan
Khan, & Juzhong Zhuang (Eds.), Diagnosing the Indonesian economy: Toward inclusive and green growth (pp. 301340).
London and Manila: Anthem Press and Asian Development Bank.
Girma, Sourafel. (2005). Safeguarding jobs? Acquisition FDI and employment dynamics in UK manufacturing. Review of World
Economics, 141, 165178.
Gong, Yundan, Grg, Holger, & Maioli, Sara. (2007). Employment effects of privatisation and foreign acquisition of Chinese
state-owned enterprises. International Journal of the Economics of Business, 14, 197214.
Grg, Holger, & Greenaway, David. (2004). Much ado about nothing. The World Bank Research Observer, 19, 171197.
Hakkala, Katariina, Heyman, Fredrik, & Sjholm, Fredrik. (2008). Multinational firms and job tasks (Working Paper No. 781).
Stockholm: The Research Institute of Industrial Economics.
Harrison, Ann E., & Rodriguez-Clare, Andres. (2010). Trade, foreign investment, and industrial policy for developing countries.
In Dani Rodrik, and Mark Rosenzweig (Eds.), Handbook of Development Economics. Vol. 5 ( pp. 40394214) Amsterdam:
North-Holland.
Heyman, Fredrik, Sjholm, Fredrik, & Gustavsson Tingvall, Patrik. (2007). Is there really a foreign ownership wage premium?
Evidence from matched employeremployee data. Journal of International Economics, 73, 355376.
Hsieh, Chang-tai, & Klenow, Peter J. (2009). Misallocation and manufacturing TFP in China and India. Quarterly Journal of
Economics, 124, 14031448.
Javorcik, Beata S. (2004). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers
through backward linkages. American Economic Review, 94, 605627.
Karlsson, Sune, Lundin, Nannan, Sjholm, Fredrik, & He, Ping. (2009). Foreign firms and Chinese employment. The World
Economy, 32, 178201.
Lehto, Eero, & Bckerman, Petri. (2008). Analysing the employment effects of mergers and acquisitions. Journal of Economic
Behavior & Organization, 68, 112124.
Lewis, W. Arthur. (1954). Economic development with unlimited supplies of labour. Manchester School of Economic and Social
Studies, 22, 139191.
Lipsey, Robert E. (2004). Home- and host-country effects of foreign direct investment. In Richard E. Baldwin, and Alan Winters
(Eds.), Challenges to globalization ( pp. 333382). Chicago, IL: University of Chicago Press.
Lipsey, Robert E., & Sjholm, Fredrik. (2004). Foreign direct investment, education, and wages in Indonesian manufacturing.
Journal of Development Economics, 73, 415422.
Lipsey, Robert E., & Sjholm, Fredrik. (2005). Host country impacts of inward FDI: Why such different answers? In Theodore
H. Moran, Edward M. Graham, & Magnus Blomstrm. (Eds.), The impact of foreign direct investment on development: New
Measurements, new outcomes, new policy approaches (pp. 2344). Wasshington, DC: Institute for International Economics.

Foreign Ownership and Employment Growth in a Developing Country 1147

Downloaded by [KU Leuven University Library] at 09:17 02 August 2015

Melitz, Marc. (2003). The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica, 71,
16951725.
Neumark, David, Wall, Brandon, & Zhang, Junfu. (2011). Do small businesses create more jobs? New evidence for the United
States from the national establishment time series. Review of Economics and Statistics, 93, 1629.
Nocke, Volker, & Yeaple, Stephen. (2007). Cross-border mergers and acquisitions vs. greenfield foreign direct investment: The
role of firm heterogeneity. Journal of International Economics, 72, 336365.
Swenson, Deborah L. (2008). Multinationals and the creation of Chinese trade linkages. Canadian Journal of Economics, 41,
596618.
Takii, Sadayuki. (2005). Productivity spillovers and characteristics of foreign multinational plants in Indonesian manufacturing
19901995. Journal of Development Economics, 76, 521542.
Wooldridge, Jeffrey. 2010. Econometric analysis of cross section and panel data. 2nd ed. Cambridhe MA: MIT Press.