Foreign direct investment and quality upgrading in Indonesian manufacturing

Product quality is the key to the export success of firms in developing countries. This study examines whether and to what extent inward foreign direct investment (FDI) affects the product quality of local plants, focusing on the role of quality upgrading spillovers and productivity spillovers. Employing plant product-level data from Indonesian manufacturing, we find that backward FDI upgrades the product quality of exporters only, while plant productivity improves the product quality of both exporters and non-exporters. Thus, quality upgrading spillovers are effective in enhancing the competitiveness of incumbent exporters. However, they do not encourage non-exporters to export their products, for which productivity spillovers are effective instead.