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Vertical Ownership and FDI: The Example in Indonesia
Abstracts
This paper examines the relationship between Foreign Direct Investment (FDI) and ownership structures in Indonesia, using a game-theoretic approach to analyze strategic market entry decisions. The study focuses on how FDI and ownership types, such as passive forward and backward ownership, influence firms' profits and market equilibrium. Using game theory, it models scenarios with and without ownership influence, following a three-stage process: market entry mode selection, upstream input pricing, and firm competition through Cournot competition.Key findings reveal that ownership structures significantly alter strategic and economic outcomes. Passive forward ownership enables upstream firms to control downstream operations, optimizing supply chains and improving profitability. Conversely, passive backward ownership by downstream firms secures raw materials, enhancing supply chain stability but sometimes increasing market dominance risks. By theoretical models, the paper contributes to understanding how FDI and ownership can foster economic development in Indonesia.