Trade Liberalization, Intermediate Inputs and Productivity: Evidence from Indonesia ∗

TLDR: In this article, the productivity gains from reducing tariffs on final goods and from reducing taxes on intermediate inputs are estimated. And they show that a 10 percentage point fall in input tariffs leads to a productivity gain of 12 percent for firms that import their inputs.

Abstract: This paper estimates the productivity gains from reducing tariffs on final goods and from reducing tariffs on intermediate inputs. Lower output tariffs can increase productivity by inducing tougher import competition, whereas cheaper imported inputs can raise productivity via learning, variety, and quality effects. We use Indonesian manufacturing census data from 1991 to 2001, which include plant-level information on imported inputs. The results show that a 10 percentage point fall in input tariffs leads to a productivity gain of 12 percent for firms that import their inputs, at least twice as high as any gains from reducing output tariffs. (JEL F12, F13, L16, O14, O19, O24)

Figures

Figure 2: Average TFP

Table 7: Alternative productivity measures

Table 1: Coefficients of the Production Function

Table 2: Tariffs

Table 3: Summary Statistics

Table 6:Additional Controls