The effects of agglomeration economies on technical efficiency of manufacturing firms: evidence from Indonesia

Abstract

This article examines the effects of agglomeration economies and industrial structure upon firm-level technical efficiency in the Indonesian manufacturing industry over the period 2004–2009. A stochastic production frontier and three channels of agglomeration economies consisting of specialization, diversity and competition are used. The empirical results show that the effects of specialization and diversity upon firm-level technical efficiency are positive and negative, respectively, indicating that specialization is more favourable than diversity for stimulating firms’ technical efficiency. Competition has a positive sign, showing that region with high levels of competition tend to be more conducive in accelerating firm-level technical efficiency. In terms of firm location, both dummy for urban region and industrial complex turn out to be positive, indicating that firms located in both areas are experienced higher technical efficiency. Both firm size and age also have positive effect upon technical efficiency.

Keywords:

• agglomeration economies
• industrial structure
• firm-level technical efficiency
• stochastic frontier

JEL Classification:

• L25
• L12
• L60

Acknowledgements

We are grateful to the anonymous referees for helpful comments and suggestions which improve the quality and presentation of this article. However, we solely remain responsible for any omission or error.

Notes

¹ The procedure of data cleaning is conducted by following Takii (2004) and Suyanto et al. (2009). We do not repeat the procedures here to conserve space.

² The 2-digit ISIC level for measuring industrial concentration (CR4) includes 22 industry sub-sectors, which exist in the Indonesian manufacturing structure.

³ Test results are not reported here to conserve space, however, can be obtained from authors upon request.

⁴ Higher value of competition index means higher level of concentration. Therefore, a positive sign of competition in inefficiency function means that inefficiency increase with higher level of concentration.