Simultaneity and Heterogeneity in Import and Productivity: Case Study of Indonesian Manufacturing

We examine the impact of imported intermediates on plant productivity and the role of plant capability in explaining the heterogeneity of the impact. We use a survey database of medium-sized and large Indonesian manufacturing establishments from 2000 to 2015. Imported intermediates are presented as a proportion of total intermediates, while capability factors are represented by the plant’s age, foreign direct investment (FDI) status, exporting status, and capital intensity. We find that import intensity does not significantly affect productivity. However, the impact of import intensity on productivity is positive and significant for exporters and for plants with higher capital intensity. Meanwhile, older and FDI plants do not seem to differ in terms of productivity gain from higher import intensity compared with either younger or non-FDI plants. The result underlines the importance of plant capability in determining productivity gain from imported intermediates. Our study improves policy makers’ understanding for better outcomes in the industry, such as the purpose of trade negotiation. Our study also recommends that policy makers carefully consider implementing a restriction or ban on imported intermediates, as doing so will penalize capable firms and reduce the competitiveness of exporters in the global market.