Indonesia Industrial Productivity Growth: Evidence of Re-industrialization or De-industrialization?

Abstract

This study employs a Stochastic Frontier Analysis to decompose Total Factor Productivity for the manufacturing corridor of Indonesia. Technological progress, technical efficiency change, and scale effects are captured at a firm level covering all Java provinces from 2007 to 2013. The period is of particular interest as it covers the efforts of re-industrialization under the Master Plan for Acceleration of Indonesian Economy (MP3EI) and the sharp increase-decrease in global demand and global prices. The study captures sources of productivity growth supporting/deterring output growth, differentiating across firm characteristics based on size (large and medium), technology intensity, skill intensity, location (province), and capital-output ratio employed in production. As firms differ in the five elements, productivity and efficiency performance also differ. This paper questions whether productivity growth is limited to conventional sources -input growth and technological progress-, or if manufacturing is managing some gains through non-conventional channels -technical efficiency and scale effects. The paper also questions the presence of patterns in productivity among group firms (characteristics), finding that firms which combine a low-tech level, a higher skill ratio, and are medium in scale reported TFP at least 70 % higher than the average firm. Combinations of firm size, technology, skills, and ratio output affect the performance. Cost analysis of factors of production is also carried out, finding that energy is canceling out possible gains in scale effects by rising disproportionately both in consumption and prices. TFP growth was found to be negative and falling, raising the possibility of a path towards de-industrialization.