PRODUCTIVITY AND FIRM DYNAMICS: CREATIVE DESTRUCTION IN INDONESIAN MANUFACTURING, 1994–2000

Abstract

This paper examines the entry and exit, and the labour productivity, of Indonesian manufacturing firms with 20 workers or more, using a firm-level panel dataset constructed for the years 1994–2000. Overall change in manufacturing labour productivity reached 27.2%—an average growth of 3.5% per annum—between 1994 and 2000, a period that includes the 1997–98 Asian financial crisis, which hit Indonesia hard. Vibrant firm dynamics characterised this period, in which about 10% of manufacturing enterprises were renewed in any one year. By 2000, one-third of all enterprises in existence in 1994 had closed, but the number of enterprises that closed was lower than the number that entered and survived up to the year 2000. The replacement of exiting firms with newly entering firms contributed significantly to increases in overall labour productivity. Regulatory reform in support of this process should lead to gains in productive employment for Indonesian workers.

The authors gratefully acknowledge the Asian Development Bank and Indonesia's Central Statistics Agency (Badan Pusat Statistik, BPS) for providing access to the data. The paper has benefited from insightful comments by the editor and two anonymous referees. All remaining errors are ours.

Notes

1 All entry indicators reported in the World Bank's Doing Business reports (World Bank 2003, 2004, 2005a, 2006) describe a limited-liability company—not a sole proprietorship, a partnership, a cooperative, a joint stock company or a corporation. Private limited-liability companies are the most prevalent business form around the world.

2 Presidential Instruction 3/2006, dated 27 February 2006.

3 According to Schneider (2002), 19.4% of the economy is considered informal.

4 Rodriguez (2004) presents a perspective on donor support to enterprise development in Southeast Asia after the Asian financial crisis.

5 Presidential Decree 99/1998 on Reservation of Particular Industry Sectors for Small-scale Enterprises.

6 Minister of Finance Decree (SK Menteri Keuangan) 316/KMK.016/1994 on Compulsory Assistance by State-owned Enterprises to Small-scale Enterprises.

7 Recent technical assistance provided by the Asian Development Bank (ADB) to the Indonesian government included a review of registration, licensing and other business legislation related to small businesses. ‘Promoting Deregulation and Competition’ (Technical Assistance No. 3416) and ‘Small and Medium Enterprise Development’ (Technical Assistance No. 3417) ran in parallel with a policy-based loan for Industrial Competitiveness and Small and Medium Enterprise Development (Loan No. 1738 for $200 million) (ADB 2000).

8 At the time of writing, the central statistics agency had not yet made the 2001 and later data available.

9 In relation to the national poverty line, 15% of Indonesians lived in poverty in 1996 and in 2004. If the international poverty line of $2 per day is used, 45% were poor in 2004, somewhat less than the 50% headcount of 1996 (IMF 2005: 13).

10 More recent data indicate a far higher (8%) average annual growth for 2001–04 in 2000 constant prices (table 1).

11 Data tend to be less reliable for very small firms. Survey data show very high productivity growth (16.2%) for this group between 1975 and 1986, but negative growth between 1986 and 1996 (Berry, Rodriguez and Sandee 2001: table 1).

12 Survey years relevant here are 1975, 1986 and 1996. The annual surveys cover manufacturing firms with 20 workers and more, and are de facto censuses for this population of firms.

13 According to the 1996 census of manufacturing establishments, of 2.8 million total establishments, by far the majority (2.5 million) were micro-enterprises with fewer than five workers. There were 28,798 firms with 20 workers or more (Berry, Rodriguez and Sandee 2002: table 1).

14 The number of firms that closed is understated because it does not take into account those that were established between 1995 and 1999 but which had closed by the year 2000. This number is considerable because of the high failure rate of new enterprises.

15 Firm dynamics have also been found to be correlated with increased exports (Rodriguez and Ter Wengel 2006; Sandee and Van Diermen 2004). These studies do not explain whether firms become exporters because they are more productive or whether they are more productive because they export.

16 Empirical work on technical efficiency needs to focus on a specific industry. For instance, Mini and Rodriguez (2000) explore the positive relationship between size and technical efficiency in the Philippines textile industry.

17 The sign of the interactive term is also compatible with the study of Bartelsman, Haltiwanger and Scarpetta (2005).

Additional information

Notes on contributors

Jan ter Wengel

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Edgard R. Rodriguez

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