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Entry, Exit, and Productivity of Indonesian Electronics Manufacturing Plants

Author

Listed:
  • Alfons Palangkaraya

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Jongsay Yong

    () (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

We study the link between plant turnover and productivity using Indonesian plant-level data for the period of 1990-95. First, we compare productivity differentials among incumbents, entrants, and exiting plants by constructing the Farrell technical efficiency index using data envelopment analysis. We test the significance of these differentials using Simar and Wilson (1998) bootstrap algorithm and Li’s (1996) nonparametric test of closeness between unknown distributions. We find that the incumbent plants are on average the most productive group in every year of the estimation period. Also, the new plants are relatively less productive than the exiting plants in the early years. However, they are more productive than the exiting plants in the later years. Second, and more importantly, we estimate the productivity change during the study period using the Malmquist productivity change index and decompose the change to see if the differences in measured productivity change among the three groups of plants come from differences in the efficiency change or the technical change. Since the existing literature rarely distinguishes between these two different components, little is known whether exiting plants are less productive because of their inability to catch up to the current frontier or to adopt a better technology. Similarly, not much known whether entrants’ ability to survive come from their being equipped with a ’better’ technology or being able to catch up to the current frontier. Our findings indicate that although new plants enter with relatively lower productivity levels, they exhibit the highest productivity change during the early years. In addition, we find entrants’ high productivity growth in the early period is due to a movement toward the frontier, while in the later period is due to an upward shift of the technology frontier. Exiting plants, on the other hand, exhibit the lowest productivity change during the early years when entrants experience high productivity change.

Suggested Citation

  • Alfons Palangkaraya & Jongsay Yong, 2006. "Entry, Exit, and Productivity of Indonesian Electronics Manufacturing Plants," Melbourne Institute Working Paper Series wp2006n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2006n08
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    References listed on IDEAS

    as
    1. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    2. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    3. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    4. Fare, Rolf & Shawna Grosskopf & Mary Norris & Zhongyang Zhang, 1994. "Productivity Growth, Technical Progress, and Efficiency Change in Industrialized Countries," American Economic Review, American Economic Association, vol. 84(1), pages 66-83, March.
    5. Simar, Leopold & Wilson, Paul W., 1999. "Estimating and bootstrapping Malmquist indices," European Journal of Operational Research, Elsevier, vol. 115(3), pages 459-471, June.
    6. Léopold Simar & Paul W. Wilson, 1998. "Sensitivity Analysis of Efficiency Scores: How to Bootstrap in Nonparametric Frontier Models," Management Science, INFORMS, vol. 44(1), pages 49-61, January.
    7. Bee Yan Aw & Sukkyun Chung & Mark J. Roberts, 1998. "Productivity and the Decision to Export: Micro Evidence from Taiwan and South Korea," NBER Working Papers 6558, National Bureau of Economic Research, Inc.
    8. Good, D. & Nadiri, M.I. & Sickles, R., 1996. "Index Number and Factor Demand Approaches to the Estimarion of Productivity," Working Papers 96-34, C.V. Starr Center for Applied Economics, New York University.
    9. Oulton,Nicholas & O'Mahony,Mary, 1994. "Productivity and Growth," Cambridge Books, Cambridge University Press, number 9780521453455, March.
    10. Lambson, V.E., 1989. "Industry Evolution With Sunk Costs And Uncertian Market Conditions," Working papers 8904, Wisconsin Madison - Social Systems.
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment

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