Total Factor Productivity Growth in Indonesian Manufacturing: A Stochastic Frontier Approach

Abstract

This paper examines the patterns of total factor productivity (TFP) growth and technical efficiency changes in Indonesia's manufacturing industries over the period 1988–2000. A stochastic frontier production has been employed to decompose the sources of TFP growth into technical progress, technical efficiency change and the effects of scale economies. The analysis takes into consideration the impact of the economic crisis in 1997.

Keywords:

• Indonesian manufacturing
• total factor productivity
• stochastic frontier analysis
• technical efficiency

Acknowledgements

An earlier version of the paper was presented at the Asia Pacific Productivity Conference (APPC) 2006, at Seoul National University, Seoul, 18 Augus. The author wishes to thank his PhD supervisors Dr Mita Bhattacharya and Associate Professor Robert Rice for their insightful comments and inspirations while pursuing this research. The author also wishes to thank Professor Young Hoon Lee for providing GAUSS code for the implementation of the model, as well as two anonymous referees for very valuable comments. Helpful suggestions by Dr George Battese and Professor Jakob B. Madsen as well as constructive comments from the APPC 2006 participants are also greatly appreciated. The usual disclaimer applies.

Notes

1. For further details on data constructions see Ikhsan (2007).

2. ISIC 37 (Basic metals) is merged with ISIC 38 (Fabricated metals) due to small sample size (13 establishments) and lack of sufficient degree of freedom.

3. Indonesian manufacturing products are mostly either natural resource based or simple assembly processed (Aswicahyono, 1998).

4. Edwards (1998) shows an overwhelming support of positive relationship between trade and TFP from a cross-country study. Aswicahyono (1998) provides similar evidence for the case of Indonesian manufacturing.