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Service sector reform and manufacturing productivity : evidence from Indonesia

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Author Info

  • Duggan, Victor
  • Rahardja, Sjamsu
  • Varela, Gonzalo

Abstract

This paper examines the extent to which policy restrictions on foreign direct investment in the Indonesian service sector affected the performance of manufacturers over the period 1997-2009. It uses firm-level data on manufacturers'total factor productivity and the OECD's foreign direct investment Regulatory Restrictiveness Index, combined with data from Indonesia’s input-output tables regarding the intensity with which manufacturing sectors use services inputs. Controlling for firm-level fixed effects and other relevant policy indicators, it finds, first, that relaxing policies toward foreign direct investment in the service sector was associated with improvements in perceived performance of the service sector. Second, it finds that this relaxation in service sector foreign direct investment policies accounted for 8 percent of the observed increase in manufacturers'total factor productivity over the period. The total factor productivity gains accrue disproportionately to those firms that are relatively more productive, and that gains are related to the relaxation of restrictions in both the transport and electricity, gas, and water sectors. Total factor productivity gains are associated, in particular, with the relaxation of foreign equity limits, screening, and prior approval requirements, but less so with discriminatory regulations that prevent multinationals from hiring key personnel abroad.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6349.

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Date of creation: 01 Jan 2013
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Handle: RePEc:wbk:wbrwps:6349

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Keywords: E-Business; Banks&Banking Reform; Transport Economics Policy&Planning; ICT Policy and Strategies; Emerging Markets;

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  1. Sherman Robinson & Zhi Wang & Will Martin, 2002. "Capturing the Implications of Services Trade Liberalization," Economic Systems Research, Taylor & Francis Journals, vol. 14(1), pages 3-33.
  2. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
  3. Arnold, Jens Matthias & Mattoo, Aaditya & Narciso, Gaia, 2006. "Services inputs and firm productivity in Sub-Saharan Africa : evidence from firm-level data," Policy Research Working Paper Series 4048, The World Bank.
  4. Mattoo, Aaditya & Rathindran, Randeep & Subramanian, Arvind, 2001. "Measuring services trade liberalization and its impact on economic growth : an illustration," Policy Research Working Paper Series 2655, The World Bank.
  5. Arnold, Jens M. & Javorcik, Beata S. & Mattoo, Aaditya, 2011. "Does services liberalization benefit manufacturing firms?: Evidence from the Czech Republic," Journal of International Economics, Elsevier, vol. 85(1), pages 136-146, September.
  6. Fink, Carsten & Mattoo, Aaditya & Rathindran, Randeep, 2003. "An assessment of telecommunications reform in developing countries," Information Economics and Policy, Elsevier, vol. 15(4), pages 443-466, December.
  7. Borchert, Ingo & Gootiiz, Batshur & Mattoo, Aaditya, 2012. "Policy barriers to international trade in services : evidence from a new database," Policy Research Working Paper Series 6109, The World Bank.
  8. Aw, Bee Yan & Chen, Xiaomin & Roberts, Mark J., 2001. "Firm-level evidence on productivity differentials and turnover in Taiwanese manufacturing," Journal of Development Economics, Elsevier, vol. 66(1), pages 51-86, October.
  9. Blalock, Garrick & Gertler, Paul J., 2008. "Welfare gains from Foreign Direct Investment through technology transfer to local suppliers," Journal of International Economics, Elsevier, vol. 74(2), pages 402-421, March.
  10. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
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Cited by:
  1. Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Can Open Service Sector FDI Policy Enhance Manufacturing Productivity? Evidence from Indonesia," World Bank - Economic Premise, The World Bank, issue 106, pages 1-7, February.

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