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.
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).
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).