Revitalising Indonesia’s Manufacturing

The Productivity Conundrum

in European Journal of East Asian Studies
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In light of the continuing importance, but declining dynamism, of the manufacturing sector, this paper investigates trends in productivity at firm levels. It finds that labour productivity has been either stagnant or falling in labour-intensive manufacturing. The paper uses firm level cross-sectional and time series data and employs GMM techniques to estimate determinants of productivity. It finds that real wage is the most important variable that influences firm level productivity, followed by capital intensity. Contrary to the common perception, foreign ownership and export orientation are not found to have statistically significant influence on firm level productivity. This finding is consistent for firms of all sizes—large, medium, small and micro. This implies that Indonesia can use wages policy, as Singapore did during the late 1970s to mid-1980s, to upgrade its manufacturing to higher value-added activities.

Revitalising Indonesia’s Manufacturing

The Productivity Conundrum

in European Journal of East Asian Studies




World BankIndonesia Economic Quarterly: Resilience through Reforms p. 27.


See e.g. World BankPicking up the Pace: Reviving Growth in Indonesia’s Manufacturing Sector (Jakarta: World Bank2012); World Bank Policy Note 1: Why the Manufacturing Sector Still Matters for Growth and Development in Indonesia (Jakarta: World Bank 2012); Asian Development Bank Asia’s Economic Transformation: Where To How and How Fast?—Key Indicators for Asia and the Pacific 2013 Special Chapter (Manila: Asian Development Bank 2013).


World BankPicking up the Pace p. 3.


Robert Rowthorn and John R. WellsDe-industrialization and Foreign Trade (Cambridge: Cambridge University Press1987) p. 5.


Rowthorn and WellsDe-industrialization and Foreign Trade p. 5.


H.B. Chenery‘Patterns of industrial growth’American Economic ReviewVol. 50 No. 4 (1960) pp. 624–654; Simon Kuznets Economic Growth of Nations: Total Output and Production Structure (Cambridge MA: Belknap Press of Harvard University Press 1971).


Manuel Arellano and Stephen Bond‘Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations’Review of Economic StudiesVol. 58 No. 2 (1991) pp. 277–297; Manuel Arellano and Olympia Bover ‘Another look at the instrumental variables estimation of error components models’ Journal of Econometrics Vol. 68 No. 1 (1995) pp. 29–51; Richard Blundell and Stephen Bond ‘Initial conditions and moment restrictions in dynamic panel data models’ Journal of Econometrics Vol. 87 No. 1 (1998) pp. 115–143.


Eric D. Ramstetter and Sadayuki Takii‘Exporting and foreign ownership in Indonesian manufacturing 1990–2000’Economics and Finance in IndonesiaVol. 54 No. 3 (2006) pp. 317–345; Dahai Fu Yanrui Wu and Yihong Tang The Effects of Ownership Structure and Industry Characteristics on Export Performance: Evidence from Chinese Manufacturing Firms Discussion Paper 10.09 (Perth: University of Western Australia Business School 2010).


Angus Deaton‘Panel data from time series of cross sections’Journal of EconometricsVol. 30 (1985) pp. 109–126.


W.E.G. SalterProductivity and Technical Change (Cambridge: Cambridge University Press1960).


E.A. Russell‘Wages policy in Australia’Australian Economic PapersVol. 4 (1965) pp. 1–26.


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Simon Deakin and Frank WilkinsonLabour Law Social Security and Economic Inequality (London: Institute of Employment Rights1989) p. 44.


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    Figure 1

    Structural transformation, 1971 and 1997. Note: Statistics Indonesia (BPS) has regularly published the National Income Account yearly and quarterly since the mid-1970s. In addition, BPS also publishes a regional income account at provincial and district levels. The Sakernas was initiated in 1976 to cover national labour market characteristics of all working-age individuals within sampled households. However, it has been conducted on a regular basis only since 1986. It was conducted quarterly from 1986 to 1993, annually from 1994 to 2004, biannually from 2005 to 2010, and again quarterly from 2011 onwards. The August Sakernas has the largest sample size, of around 200,000 households. Furthermore the survey quality has been constantly improved.Source: Calculated from Statistics Indonesia (BPS) data: National Income Account and National Labour Force Survey/(Sakernas)

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    Figure 2

    De-industrialisation, 2001 and 2014Source: Calculated from BPS data

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    Figure 3

    Distribution of manufacturing firms by size, 2008Source: World Bank, Enterprise Survey 2008, quoted in World Bank, Picking up the Pace: Reviving Growth in Indonesia’s Manufacturing Sector (Jakarta, Indonesia; World Bank, 2012), p. 8

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    Figure 4

    Labour productivity (IDR million, 2000 constant price, GDP deflator)Source: Calculated from BPS data (the Sakernas and National Account)

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    Figure 5

    Productivity in large–medium firms (manufacturing, IDR million, 2000 constant price, GDP deflator)Source: Calculated from BPS data

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    Figure 6a

    Labour productivity (sub-sector: food, beverages and tobacco industries; IDR million/year/worker, 2000 constant prices)

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    Figure 6b

    Labour productivity (sub-sector: textile, leather products and footwear industries; IDR million/year/worker, 2000 constant prices)

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