Is FDI a Panacea? Unveiling Spillover Effects on Efficiency and Risk in Indonesian Manufacturing

This study builds on Javorcik (2004), who argues that countries attract Foreign Direct Investment (FDI) with the expectation that spillovers will benefit local firms. However, empirical evidence on this effect remains inconsistent. This research addresses the gap by examining the impact of horizontal spillovers not only on production efficiency but also on production risk. It also accounts for firm heterogeneity in the manufacturing sector by classifying technological intensity using unsupervised machine learning, specifically K-means clustering, into three categories based on OECD (2011): High Technology (HT), Medium Technology (MT), and Low Technology (LT). The study uses data from Statistik Industri (SI) for 2017, 2018, 2019, and 2021, analyzed with the stochastic frontier model developed by Greene (2005). The results show that the MT cluster achieves the highest production efficiency scores, outperforming HT. Labor elasticity exceeds capital elasticity across all clusters, including HT, when the food industry is included. Horizontal spillovers are found to enhance production efficiency in the MT and LT clusters and to mitigate production risk across all clusters. However, spillovers reduce production efficiency in the HT cluster. These findings highlight that, beyond attracting FDI, governments must ensure that local firms possess sufficient technical and managerial capabilities to absorb and adopt transferred technology and knowledge.