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Service sector reform and manufacturing productivity : evidence from Indonesia

Author

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  • 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.

Suggested Citation

  • Duggan, Victor & Rahardja, Sjamsu & Varela, Gonzalo, 2013. "Service sector reform and manufacturing productivity : evidence from Indonesia," Policy Research Working Paper Series 6349, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6349
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    References listed on IDEAS

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    2. 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.
    3. 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.
    4. Mattoo, Aaditya & Rathindran, Randeep, 2006. "Measuring Services Trade Liberalization and Its Impact on Economic Growth: An Illustration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 21, pages 64-98.
    5. 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.
    6. Jens Matthias Arnold & Aaditya Mattoo & Gaia Narciso, 2008. "Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(4), pages 578-599, August.
    7. 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.
    8. 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.
    9. 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.
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    Citations

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    Cited by:

    1. Fiorini, Matteo; Lebrand, Mathilde, 2016. "The Political Economy of Services Trade Agreements," Economics Working Papers ECO2016/05, European University Institute.
    2. 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.
    3. Roy, Martin, 2017. "The contribution of services trade policies to connectivity in the context of aid for trade," WTO Staff Working Papers ERSD-2017-12, World Trade Organization (WTO), Economic Research and Statistics Division.
    4. Genthner, Robert & Kis-Katos, Krisztina, 2018. "Foreign investment regulation and firm productivity: Granular evidence from Indonesia," Center for European, Governance and Economic Development Research Discussion Papers 345, University of Goettingen, Department of Economics.
    5. Bernard Hoekman, 2017. "Trade in services: Opening markets to create opportunities," WIDER Working Paper Series 031, World Institute for Development Economic Research (UNU-WIDER).
    6. Fiorini, Matteo & Hoekman, Bernard & Malgouyres, Clément, 2016. "Services Policy Reform and Manufacturing Employment: Evidence from Transition Economies," CEPR Discussion Papers 11694, C.E.P.R. Discussion Papers.
    7. Beverelli, Cosimo & Fiorini, Matteo & Hoekman, Bernard, 2017. "Services trade policy and manufacturing productivity: The role of institutions," Journal of International Economics, Elsevier, vol. 104(C), pages 166-182.
    8. repec:bla:worlde:v:40:y:2017:i:3:p:499-516 is not listed on IDEAS
    9. World Bank Group, 2016. "Services and Manufacturing Linkages," World Bank Other Operational Studies 24040, The World Bank.
    10. Fritsch, Michael & Changoluisa, Javier, 2017. "New business formation and the productivity of manufacturing incumbents: Effects and mechanisms," Journal of Business Venturing, Elsevier, vol. 32(3), pages 237-259.
    11. Era Dabla-Norris & Giang Ho & Annette J Kyobe, 2016. "Structural Reforms and Productivity Growth in Emerging Market and Developing Economies," IMF Working Papers 16/15, International Monetary Fund.
    12. Cali,Massimiliano & Hollweg,Claire Honore & Ruppert Bulmer,Elizabeth N., 2015. "Seeking shared prosperity through trade," Policy Research Working Paper Series 7314, The World Bank.
    13. Theodore Ahlers & Hiroshi Kato & Harinder S. Kohli & Callisto Madavo & Anil Sood (ed.), 2014. "Africa 2050: Realizing the Continent's Full Potential," Books, Emerging Markets Forum, edition 1, number africa2050, August.
    14. Bernard Hoekman & Ben Shepherd, 2017. "Services Productivity, Trade Policy and Manufacturing Exports," The World Economy, Wiley Blackwell, vol. 40(3), pages 499-516, March.

    More about this item

    Keywords

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

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