Firms’ responses to foreign demand shocks: Evidence from Indonesia after the global financial crisis

How do exporting firms respond to foreign shocks? Numerous studies have discussed the responses through input adjustment and market reorientation in developed countries, but evidence from developing countries is rare. We investigate how exporting firms respond to foreign shocks using data of Indonesian firms from 2008 to 2012, a period that followed the global financial crisis. To tackle endogeneity issues, we construct an appropriate instrument by matching manufacturing survey and export destination datasets. We confirm that in response to foreign shocks, firms adjust their input composition, but the adjustments are heterogeneous across input types and firm sizes. We present a novel finding of asymmetric adjustment: while big firms are more responsive to foreign shocks, their labour adjustment is slower and material adjustment faster during a downturn, relative to recovery period. We could not find evidence that foreign demand shocks affect domestic sales except for firms exporting low- and medium-technology products.