Impact of provincial human capital on TFP growth through the FDI channel: The case of Indonesian manufacturing industries

The study analyzes the relationship between provincial characteristics, especially provincial human capital, and Indonesian manufacturing firms' performance, represented by total factor productivity (TFP). The purpose of this study is to find out whether the impact of foreign direct investment (FDI) on the TFP of the manufacturing sector relies on the provincial human capital threshold. Using dynamic and non-dynamic threshold regression models, results show the existence of the threshold level of human capital and its consistency when applying different models based on various levels of educational attainment and human capital measures. The results indicate that, on average, provinces with human capital above the threshold level benefit from FDI through an increase in provincial TFP of the Indonesian manufacturing sector. These results suggest that the Indonesian Government should formulate policies that provide incentives to increase the educational attainment level of provincial human capital and apply strategies for the development of education covering all societies and regions.