Firms' responses to foreign demand shock: The case of Indonesia and the GFC

Export-oriented manufacturing generally create jobs. But a few recent studies on Indonesian manufacturing based on input-output tables reported a declining power of this sector in creating jobs. Using firm-level data to examine manufacturing employment during the global financial crisis (GFC), we find that a 10% increase in the degree of export orientation rises the manufacturing employment by about 1% on average, depending on the firm’s capital intensity. The low sensitivity to foreign demand shock and the economy’s low exposure to the global market explain the mild effect of the Global Financial Crises (GFC) on the Indonesian economy. An examination of the inter-related adjustments of labour, capital, and intermediate input confirms that the changes in employment are not independent of the adjustments of other factor inputs such as capital and material inputs. The results are robust when external and internal instruments are used in instrumental variable (IV) and GMM estimations, respectively.