Revitalising Indonesia’s Manufacturing: The Productivity Conundrum

TLDR: In this paper, the authors investigated trends in productivity at the firm level and found that real wage is the most important variable that influences firm level productivity, followed by capital intensity and foreign ownership and export orientation.

Abstract: 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.

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Table 4 shows that the manufacturing sector has not transformed much in recent years. For example, the share of labour-intensive food, textile, wood and paper in manufacturing value added (mva) remained almost unchanged during 2010–2014, after significantly declining between 2000 and 2010 (from around 60 per cent to 47 per cent). Their share in mva was around 46 per cent in 2014. On the other side of the transformation picture, the share of capitalintensive activities (chemical, non-metallic mineral, basic metal, fabricated metal) inmva increased dramatically from39.6 per cent in 2000 to 52.1 per cent in 2010, buthas remainedvirtually unchanged (53.2 per cent in 2014) since then.

Full text

󰅺   󰂶 󰂶 󰆽󰆻󰆼󰇂 󰃊 󰂹 󰆼󰆻󰂺󰆼󰆼󰇁󰆾󰃈󰆼󰇀󰇂󰆻󰆻󰇁󰆼󰇀󰄀󰆻󰆼󰇁󰆻󰆼󰆻󰆻󰆾
  
   󰆼󰇁 󰃍󰆽󰆻󰆼󰇂󰃎 󰆼󰆽󰆿󰄍󰆼󰇀󰆾
 

  
󰂺󰃈
 󰄘 
  
  󰃻
    󰂶
  󰂶 
 󰂏 󰂐󰅎󰂐󰂐
 
    󰂶  󰂶 
 
󰄀   󰂶
  󰂶 

     󰂶   󰂶   
󰂶         󰂺    
        󰄀 󰂺 
   󰄀        
    󰂺         
     󰂶    󰂺 
   󰂶        
        󰂺   
     󰄎󰂶 󰂶   󰂺   
    󰂶       󰆔󰆜󰆚󰆓  󰄀󰆔󰆜󰆛󰆓󰂶
      󰄀 󰂺
󰃻           
󰃍󰃎󰂺            󰄀
   󰃍󰃎      󰃍  󰃎󰂶
       󰂺       
            󰄀
      󰂺 󰂶    󰂺 
              󰃍󰄀
  󰃎󰂺

 󰄘  󰆼󰆽󰇀
      󰆼󰇁 󰃍󰆽󰆻󰆼󰇂󰃎 󰆼󰆽󰆿󰄍󰆼󰇀󰆾

 󰄍  󰄍   󰄍   󰄍 

         󰄘 󰄀
   󰆔󰆜󰆜󰆚   󰂶     
  󰆜    󰆔󰆜󰆚󰆓󰄍󰆔󰆜󰆜󰆚󰂶    󰄀 󰄀
    󰆙󰂺󰆘  󰂺 󰂶    
     󰄀 󰂺     
  󰆗󰂺󰆜    󰆕󰆓󰆓󰆖󰄍󰆕󰆓󰆔󰆘       󰄀
    󰆘󰂺󰆙  󰂺       
              󰄀
 󰄀  󰄀 󰂺󰇟  󰂶   󰄀
         
        󰂺󰇠  󰄀 
           
   󰄀󰄀     
󰂺󰇡
󰆞   󰂶     󰂶 󰄖 󰂹  󰄀
   󰄘󰂶   󰂶      󰃍󰃎󰂶 󰃖
     󰃖 󰂏     
󰃍󰂹   󰂶 󰆕󰆓󰆔󰆖󰃎󰂶 󰂺 󰆔󰆜󰆖󰄍󰆕󰆕󰆕󰂷  󰂶 󰄖   
   󰄘󰂶    󰂌󰂶
󰂺 󰆔󰂶 󰂺 󰆔 󰃍󰆕󰆓󰆔󰆖󰃎󰂶 󰂺 󰆗󰆛󰄍󰆙󰆘󰂷   󰂶 󰄖       󰄀
󰄘󰂶   󰃍󰆔󰆖  󰆕󰆓󰆔󰆖󰃎󰂷  󰂶   󰂏 
  󰃍󰂹  󰂶  󰆕󰆓󰆔󰆙󰃎󰂺    󰄀
       󰂹  󰂶  󰄖 
  󰂌  󰂕󰄘 󰃍       󰄀
 󰂶   󰂿󰃎󰂶   󰃍󰆗  󰆕󰆓󰆔󰆘󰃎󰂷 󰄖󰃖
   󰄘 󰃍  󰃎󰂶  
󰃍󰆚  󰆕󰆓󰆔󰆗󰃎󰂷 󰄖󰂏   󰄘 󰃍    󰄀
󰃎󰂶   󰃍󰆚  󰆕󰆓󰆔󰆖󰃎󰂷 󰄖󰂏   󰄘 󰃍󰂹
    󰃎󰂶  󰃍󰆕󰆕  󰆕󰆓󰆔󰆓󰃎󰂺
󰆟  󰂶 󰂏     󰃍󰂹 󰂶
󰆕󰆓󰆓󰆓󰃎󰂺
󰆠  󰂶     󰂶 󰄖 󰂹 
󰂿󰄘       󰃍󰃎󰂶 󰂌   

󰆼󰆽󰇁 󰂶   
      󰆼󰇁 󰃍󰆽󰆻󰆼󰇂󰃎 󰆼󰆽󰆿󰄍󰆼󰇀󰆾
   󰄘        󰄀
 󰄘   󰂺  󰆕󰆓󰆓󰆜󰂶   󰄀
  󰆙󰆖            󰆘󰆜
   󰆕󰆓󰆔󰆕  󰆕󰆓󰆔󰆖󰂺 󰂶    󰄀 
  󰆖󰆚    󰆕󰆓󰆓󰆜   󰆗󰆕    󰆕󰆓󰆔󰆕󰂺
          
      󰂹
󰄘       󰄀
  󰆔󰆜󰆜󰆚󰃈󰆜󰆛   󰂺    󰄀
  󰆔󰆔    󰆔󰆜󰆜󰆓  󰆔󰆜󰆜󰆙  󰆗󰂺󰆛  
   󰆕󰆓󰆓󰆔  󰆕󰆓󰆔󰆗 󰂻      󰄖󰄀
 󰄘󰂺       󰆔󰆜󰆜󰆓󰂶   
        󰆕󰆓󰆓󰆘󰂶  
     󰄀     
  󰂻 󰃕󰃖         
      󰂶  
 󰄖󰄀󰄘󰂺󰇢
󰂶    󰂶     
       󰂺 󰂶   
          󰄀
󰂺󰇣         󰄖 
     󰃍     󰃎󰂶 󰄀
    󰃍󰂹     󰂶 󰆕󰆓󰆔󰆔󰃎󰂶
󰂺 󰆔󰆔󰆖󰄍󰆔󰆖󰆖󰂷   󰂺󰂶 󰄖 󰂹  󰄘󰂷  󰄀
    󰂶 󰄖   󰂹  
    󰄘󰂶    󰂶 󰂺 󰆗󰆙󰂶 󰂺 󰆔 󰃍󰆕󰆓󰆔󰆕󰃎󰂶 󰂺 󰆕󰆙󰆘󰄍󰆕󰆛󰆘󰂷
     󰂶 󰄖󰂶    
  󰄘󰂶      󰂶 󰂺 󰆕󰆓󰂶 󰂺 󰆔 󰃍󰆕󰆓󰆔󰆘󰃎󰂶 󰂺 󰆘󰆚󰄍󰆚󰆙󰂷 
󰂶  󰂶  󰂺    󰂶 󰂌
󰂌    󰂏  󰂶 
      󰃍󰃎 󰂺 󰆕󰆓󰆔󰆖󰆓󰆗 󰃍󰂹 
󰂶 󰆕󰆓󰆔󰆖󰃎󰂺
󰆡  󰂶   󰂏   󰂶 󰂺 󰆕󰆚󰂺
󰆢  󰂺󰂺  󰂶    󰂏    󰃮  󰃖
 󰃍󰂹  󰂶 󰆕󰆓󰆔󰆕󰃎󰂷  󰂶   󰅪󰂏     
      󰃍󰂹  󰂶 󰆕󰆓󰆔󰆕󰃎󰂷  󰄀
 󰂶 󰃮  󰂏  󰂌 󰂌   󰂕󰃤 
     󰅫󰅩󰅪󰅬󰂌   󰃍󰂹   󰂶 󰆕󰆓󰆔󰆖󰃎󰂺

 󰄘  󰆼󰆽󰇂
      󰆼󰇁 󰃍󰆽󰆻󰆼󰇂󰃎 󰆼󰆽󰆿󰄍󰆼󰇀󰆾
   󰂶    
  󰂶         󰄀
      󰂺󰄘󰇤    
          
   󰂶      󰂶  󰂶
          󰄀 󰂺󰇥
    󰂶        
    󰄘  󰂺  󰂶   
           
 󰂶    󰂶  󰃍󰃎   󰄀
󰂺          
            
        󰂹  󰄀 
    󰃍    󰃎 
        󰃍 
  󰃎󰂺      󰂹     
 󰄖󰄀󰄘 󰂷      󰄀
      󰂷    󰄀
    󰂷    
          󰂺
     󰂶   󰄀
󰂺
    󰃬󰃖󰃮  
 
         󰂶  
         
  󰂺  󰆔     󰆔󰆜󰆚󰆔󰄍
󰆔󰆜󰆜󰆚󰂺    󰂶   󰄘    
   󰆘󰆖     󰆔󰆘  󰂶   
󰄘       󰆛    󰆕󰆘    
󰂺    󰂶      
     󰂶   󰄎
 󰆙󰆚    󰆗󰆗           󰆚 
  󰆔󰆖       󰂺
󰆣  󰂶    󰂶 󰂺 󰆖󰂺
󰆤   󰂶 󰃮  󰂺

󰆼󰆽󰇃 󰂶   
      󰆼󰇁 󰃍󰆽󰆻󰆼󰇂󰃎 󰆼󰆽󰆿󰄍󰆼󰇀󰆾
 󰆼  󰂌 󰅪󰅲󰅰󰅪  󰅪󰅲󰅲󰅰󰂐 󰂹   󰂣󰂤 
          
󰃖󰅪󰅲󰅰󰅩󰂐  󰂌         
  󰂐      󰅪󰅲󰅰󰅯    
    󰃖    󰂐
󰂌           󰅪󰅲󰅱󰅯󰂐   
  󰅪󰅲󰅱󰅯  󰅪󰅲󰅲󰅬󰂌   󰅪󰅲󰅲󰅭  󰅫󰅩󰅩󰅭󰂌   󰅫󰅩󰅩󰅮  󰅫󰅩󰅪󰅩󰂌
    󰅫󰅩󰅪󰅪 󰂐       
󰂌   󰅫󰅩󰅩󰂌󰅩󰅩󰅩 󰂐      
 󰂐
󰂹     󰃍󰃎 󰂹 
      󰃈󰃍󰃎
         󰄀
 󰃍󰆕󰆓󰆓󰆔󰄍󰆕󰆓󰆔󰆗󰃎         
   󰂶  󰂶    󰄘 󰄀
     󰆕󰆛    󰆕󰆘  󰂺   󰄘
     󰂶    󰆔󰆖
   󰆔󰆗   󰃍 󰆕󰃎󰂺 󰂶     

Frequently asked questions

Q1. What are the contributions in this paper?

In light of the continuing importance, but declining dynamism, of the manufacturing sector, this paper investigates trends in productivity at firm levels. The paper uses firm level cross-sectional and time series data and employsgmmtechniques to estimate determinants of productivity. It finds that real wage is the most important variable that influences firm level productivity, followed by capital intensity. The authors gratefully acknowledge research funding from the International Labour Office ( Jakarta ). The paper benefited from comments at seminars in the IndonesianNational Development Planning Agency ( bappenas ) and the smeru Research Institute ( both in Jakarta ), and the authors are grateful to the seminar participants. An earlier version of the paper was published inWorking Papers in Trade and Development ( Australian National University ). 

Q2. What is the consistency of gmm estimator?

The consistency of gmm estimator depends on the validity of the assumption that the error terms do not display serial correlation and on the validity of the instruments. 

Q3. How many cohorts are created for micro firms?

For micro firms, for firms established during 1990–1999, with fewer than 100 observations for some years, a two-year band is employed to create the cohort. 

Q4. What did trade union leaders understand about the need for economic restructuring?

Being part of the policy-making process, trade union leaders understood the need for economic restructuring to remain internationally competitive. 

Q5. What is the impact of family ownership on the productivity of firms?

London Economics, in a report studying the performance of cooperativemembers versus non-members across Europe, finds that firms with cooperative memberships generally have higher turnover and labour productivity growth as opposed to the non-member firms. 

Q6. What is the role of capital in the productivity of a firm?

In their model, the inclusion of capital represents a control on the role and contribution of smes’ internal resources towards the firms’ productivity. 

Q7. How many cohorts are created for all firms established after 1990?

For all firms set up, averaging both micro and small, with relatively large observations of firms established every year after 1990, the cohort is created using a one-year band. 

Q8. What is the reason for the stagnating productivity in the manufacturing sector?

The above diagnostic of firm level data indicates that the stagnating productivity in the overall manufacturing sector is due to stagnating and/or falling productivity of labour-intensive large–medium firms. 

Q9. What is the effect of capital intensity on labour productivity in large firms?

A point to note is that the effect of capital intensity on labour productivity in large firms is nearly twice that of medium firms.