As a service to readers BIES has decided regularly to publish the abstracts of recently completed doctoral theses on the Indonesian economy. The intention is to bring significant new research in this field, and the authors of such work, to the notice of readers soon after theses have been examined and accepted.
New PhDs are strongly encouraged to submit thesis abstracts of about 500 words for publication in this series. Abstracts must be in English, although the thesis itself may be written in any language.
The subject must be economics in Indonesia, widely interpreted to include fields such as economic history and economic geography; comparative country studies that focus particularly on Indonesia are also acceptable. Theses must have been accepted to be eligible.
Submissions should include the name and contact details of the student's supervisor (not for publication) to allow confirmation of eligibility. They should indicate the year of acceptance of the thesis, the name of the conferring institution and the author's e-mail address, and should be sent to: [email protected].
Readers, especially former advisers of doctoral candidates, are kindly requested to bring this series to the attention of new PhDs, or to advise the editor if they are aware of recently completed theses that may be suitable for inclusion.
Thesis abstracts have been published in the December issue of BIES each year since 2003. From 2009, they may appear in any issue.
ABSTRACTS OF DOCTORAL THESES ON THE INDONESIAN ECONOMY
Essays on the Empirical Modelling of Money Demand in Periods of Financial Liberalisation: The Case of Indonesia
Gregory A. James ([email protected]) Accepted 2007, University of Leicester
Financial liberalisation is widely blamed for the instability of empirical money demand models. A stable money demand function (MDF) is a key element in the formulation of monetary policy. Structural breaks brought about by financial liberalisation can impair the predictability of the impact of changes in money on income, the price level and the interest rate, and render monetary policy less reliable. This in turn can infl uence individuals’ expectations about future policy, and ultimately alter the effects of a given policy measure. Thus, obtaining reliable estimates of the parameters of the MDF—through an appropriate modelling strategy that takes into account the structural change induced by financial liberalisation—is a crucial task.
The thesis contains three essays on the empirical modelling of money demand in periods of financial liberalisation. The empirical analysis uses a quarterly time-series data set on Indonesian money, output, price, and interest and exchange rates from Q1 1983 to Q4 2001. The first essay uses a univariate method to identify endogenous structural breaks in various monetary aggregates as well as in some of the series most commonly used as explanatory variables in the MDF. The second essay extends this approach to the multivariate case to detect endogenous regime shifts in the demand for narrow money (M1). The third essay explicitly controls for financial liberalisation in the MDF for broad money (M2).
The results provide evidence of a break in M1 occurring in the second quarter of 1991 and coinciding with a major government intervention in the money market known as the Sumarlin shock. The results also provide evidence of a break in M1 occurring in the last quarter of 1997 and coinciding with a severe economic crisis and a government intervention in the money market for which the Sumarlin shock of 1991 is the precedent. Finally, the study shows how modelling financial liberalisation as a deterministic drift process constitutes an improvement over the standard specifications in terms of yielding more constant and plausible values for the parameters of the M2 MDF.
These findings support the Mundell-Fleming argument that open capital markets, a pegged exchange rate regime and monetary policy autonomy are mutually incompatible. Before the 1997 crisis, during periods of upswing in the economy, rising aggregate demand was accompanied by both increased foreign borrowing and the liquidation of Bank Indonesia Certificates (SBIs) by sale to the central bank, both of which resulted in increases in base money (given the quasi-fixed exchange rate regime). In such a context, controlling base money growth (and through it aggregate demand) was difficult and required extremely high interest rates and/or dramatic contractions of domestic liquidity of the Sumarlin shock type. Most significantly, monetary policy was immobilised in the period before the decision to float the rupiah in 1997.
More generally, the results support the notion that financial liberalisation might have rendered base money endogenous with respect to output. The Indonesian central bank would have had difficulty in controlling the money supply, because even though it could manage to generate credit constraints in the domestic economy, Indonesian banks could easily borrow on international financial markets, which undermined the effectiveness of monetary policy.
© 2008 Gregory A. James
The Determinants of Regional Poverty in Indonesia 1984–2002
Riyana Miranti ([email protected]) Accepted 2008, Australian National University, Canberra
The objective of this thesis is to examine the determinants of regional poverty and of poverty decline in Indonesia over the 18 years from 1984 to 2002. The thesis uses a consistent provincial data set of selected indicators collected over this period for 26 provinces.
The study begins with an analysis of the growth elasticity of poverty across several growth episodes: (1) the first period of liberalisation (1984–90); (2) the second period of liberalisation (1990–96); and (3) the post-crisis recovery period (1999–2002). The findings show that the growth elasticity of poverty is significant. Growth is shown to have been ‘friendly’ to the poorest of the poor, even when other variables and inequality are not controlled for. The results suggest that, in general, the relationship between labour-intensive growth and the growth elasticity of poverty is not as strong as the data on employment seemed to indicate. If inequality is taken into account, the growth elasticity of headcount poverty is shown to have been strongest during the second period of liberalisation, and there is a possible lag in the impact of liberalisation policies on poverty.
The study then examines the growth elasticity of poverty across groups of provinces. It is found that poverty was highly growth-elastic in Java–Bali, confirming that better infrastructure and human capital allow a greater transmission of the growth impact to poverty reduction. In contrast, the growth elasticity of poverty was low both in the isolated provinces of Nusa Tenggara and in the resource-rich provinces. For the latter, this finding is attributed to the fact that growth based on mining, oil and gas has a low impact on poverty because such growth is unlikely to be very labour intensive. In addition, until the 2001 decentralisation most of the revenue from this growth went back to the central government rather than to the producing provinces.
In general, the results support the hypothesis that growth is a substantial determinant of poverty reduction, but that other determinants also matter. The growth elasticity of poverty was around –2.5 over the 18 years from 1984 to 2002. This is comparable to findings in the earlier literature, especially other single-country and Indonesia studies. Growth also was found to be more pro-poor (to have had a higher impact on poverty) when better human capital, infrastructure and openness were controlled for.
Determinants of poverty other than growth are then analysed: (1) natural resources; (2) openness; (3) human capital; (4) inequality; and (5) infrastructure. A special focus is given to the role of two new determinants usually ignored in the literature: recent inter-provincial migration (assisted and non-assisted in-migration and out-migration) and inter-governmental transfers in the form of regional development grants during the study period. The thesis investigates both the direct channel to poverty and the indirect channel to poverty through growth. Through regression analysis, it is found that inter-provincial migration affects regional poverty only indirectly through economic growth. Non-assisted in-migration and out-migration are growth-enhancing strategies, but this is not true for assisted in-migration (transmigration). In contrast, surprisingly, intergovernmental transfers are neither growth enhancing nor poverty reducing. As for the role of other determinants, only growth, low inequality and infrastructure are found to be direct poverty reduction strategies in Indonesia.
© 2008 Riyana Miranti
Family Planning, Community Health Interventions and the Mortality Risk of Children in Indonesia
Ranjan Shrestha ([email protected]) Accepted 2007, Ohio State University, Columbus, Ohio
In the last four decades, Indonesia has experienced rapid declines in infant and child mortality alongside active government interventions. The government instituted a small family norm through an extensive family planning program, and improved access to primary health care through various community-based programs. Using the Indonesian Family Life Survey, my dissertation studies the impact of two major government programs on the decline in mortality rates: (1) the national family planning program introduced in 1970, which is considered to have been very successful in increasing contraceptive prevalence; and (2) the village midwife program initiated in 1989, which trained and placed over 50,000 midwives in villages across the country.
The first two chapters describe the nature of the family planning program in Indonesia and empirically examine the relationship between the program and the risk of infant and child mortality. Access to modern contraceptives gives couples better control over the fertility process, allowing them to avoid unwanted pregnancies and to plan better for a desired number and age composition of children. This affects child survival through improvements in the mother's health and the resources allocated to the upbringing of children. First, using the difference in the timing of the family planning program's introduction in two sets of provinces, I employ a difference-in-difference approach to show that the mortality rates of children fell in provinces where the family planning program was introduced. Second, I examine the relationship between contraceptive acceptance by the woman and the likelihood of survival of subsequent births. A bivariate probit framework is used to overcome the bias that would arise in a single-equation framework owing to correlation between contraceptive use and unobserved individual characteristics of the woman. The results show a 5% reduction in the risk of child mortality after a woman has used contraceptives, but there is no such effect of contraceptive use on infant mortality.
The third chapter estimates the impact of the village midwife program on infant mortality. Trained midwives placed in villages through the program provided ante-natal, intra-partum and post-partum assistance to village women who would otherwise have relied on traditional birth attendants for help during the birth process. Prior studies on the village midwife program have shown general improvements in women's health and the birth-weights of newborns. However, they have not directly examined the impact of the program on the safety of the birth process, improvement of which was its primary objective. I estimate the program effect by aggregating mortality outcomes at the district level and taking a district fixed-effects approach to overcome the bias due to non-random placement of these midwives. The results suggest that the program is associated with a reduction in infant mortality primarily through reductions in neo-natal mortality, but not through reductions in post-neonatal mortality. However, the inclusion of time-specific effects into the analysis removes the effect of the program on infant mortality.© 2008 Ranjan Shrestha
Shocks, Coping Strategies and Their Consequences: An Application to Indonesian Data
Francesca Modena ([email protected]) Accepted 2008, University of Trento, Italy
Analysis of the way risk or uncertainty affects household economic choices is a key issue in developing countries, where the economic environment is riskier, households may be more vulnerable to risk, and shocks may have dramatic consequences for household living conditions. This dissertation investigates the way in which potential and actual shocks influence economic conditions and the choices of rural Indonesian households. The analysis focuses on three main issues. First, I explore which strategies are chosen for different types of shocks. Second, I investigate the specific mechanisms adopted in the face of the most common shock (crop loss), and the consequences for consumption. Finally, I examine the consequences of risk and shocks for a particularly important household decision: how much to invest in children's education.
The source of data used in this dissertation is the Indonesian Family Life Survey. The survey collected a large amount of information on household economic conditions and household and individual characteristics, and the questionnaire has a detailed section on shocks experienced by the household during the five years prior to the interview.
Three main sets of conclusions emerge from this dissertation. First, I found that household responses to shocks depend on the nature of the shock (for example, whether demographic or economic, idiosyncratic or common), and on household characteristics. In particular, data suggest that informal arrangements (for example, family assistance) are important means to overcome demographic and idiosyncratic shocks, while they are marginal as a response to economic hardships. On the other hand, households are more likely to use labour supply responses to cope with economic and common shocks. A characteristic that has important consequences for the way households respond to shocks is clearly household wealth (and the presence of liquidity constraints that may be related to this). Indonesian data show that poor and non-poor households differ in their choice of coping strategies: the former are more likely to use a labour supply response, while rich households are more likely to sell assets (for demographic shocks) and to use savings.
The second main conclusion is that poor and non-poor households behave in very different ways in the face of shocks. In general, rich households smooth consumption relative to income, whereas the need to accumulate savings both to build a buffer stock of assets and to self-finance profitable investments leads poor people to rely more on ex post income smoothing strategies (taking an extra job) and to use part of this extra labour income to preserve their level of assets, even reducing consumption if necessary.
Finally, it is necessary to deepen our knowledge of the long-run consequences of shocks, particularly with respect to human capital formation through the education of children. Given the irreversibility of withdrawal from school—that is, children cannot re-enrol once they stop going to school—temporary interruptions to schooling have long-term impacts on a child's ‘human capital’. Under the assumption of irreversibility, the impact of uncertainty on schooling decisions is subtler than is suggested by much of the development literature. Our results suggest a new channel through which uncertainty may affect education: in the face of household income variability parents are more likely to send their children to school than to withdraw them, in order to give them the option to continue to higher levels of schooling in the future (and hence achieve higher earnings as adults).© 2008 Francesca Modena
Environmental Change in a Frontier Region of Java: Besuki, 1870–1970
Nawiyanto ([email protected]) Accepted October 2007, Australian National University, Canberra
This thesis examines the relationship between humans and the environment in the Besuki region of Java from 1870 to 1970. In this period Besuki experienced rapid environmental change. In a century the region's environment was radically altered, while in many other parts of Java this degree of change took centuries to materialise. It is argued that the fast-changing environmental realities in Besuki resulted from demographic and socio-economic processes that took place more or less simultaneously. Drawing upon diverse historical materials, the thesis discusses the role of human agency in changing the environment of Besuki, and the responses to the changing environment. In elaborating the argument, the study looks specifically at population and major forms of natural resource use, including agriculture, forest extraction, fishing and conservation, and their role in altering the environmental realities of Besuki.
The theoretical framework that informs the argument of the thesis comes primarily from frontier theories. These theories deal mainly with how the resource frontiers were created, expanded and eventually closed, sometimes through the exhaustion of available resources, sometimes through the achievement of a stable economic system. The frontier analysis is sharpened by the use of environmental adaptation and conservation politics approaches. The environmental adaptation approach elaborates the ways in which humans responded to the environmental problems and new environmental realities. The conservation politics approach looks at the emergence of conservation interest and its transformation into public and policy issues, conservation measures, and the execution of these measures.
The thesis concludes that the advance of the frontiers of Besuki was driven by a combination of population growth, market demand and technological innovation. These forces generated the rapidly expanding frontiers of settlement, agriculture, forest exploitation and fishing that led to Besuki's emergence as the region with the largest proportion of migrants in Java, as a leading centre of agricultural production and as the second largest fishing complex in Indonesia. On the environment, these big transformations brought about a stronger presence of human-made environmental landscapes and attendant problems, thus pushing back the boundaries of natural forests. However, the closure of the Besuki frontiers was not due exclusively to the reality that there were no longer any new areas to move into, but also in part to the interest in nature conservation, which led to human efforts to limit the impact of economic change on the environment.
The fact that the advance of the Besuki frontiers occurred not long before the emergence of the conservation movement gave the region an opportunity to avoid becoming one of the frontier societies that destroyed their all-important environmental base. The conservation movement and the establishment of conservation areas prevented the closure of Besuki's frontiers from happening simply because all natural resources had gone. It must be acknowledged, however, that part of the region's natural values could no longer escape damage or extinction because concern about their protection came too late. Further, effective protection of the conservation areas was difficult to implement because of a lack of funds and personnel, and because of unresolved contests over resources among different parties, which remained a serious problem until the late 1960s. Despite these facts, post-1970 Besuki retains remnants of its natural heritage, which deserve protection and are too valuable to be allowed to disappear from the region's environment.© 2008 Nawiyanto
Environmental Disclosures and Earnings Management by Environmentally Visible Indonesian Corporations
Susi Sarumpaet ([email protected]) Accepted 2008, Australian National University, Canberra
This thesis examines: (1) the association between environmental visibility and environmental disclosure; and (2) whether firms with poor environmental ratings will manage earnings downward to avoid political costs associated with environmental externalities. A conceptual framework that explains the above propositions is developed under two theoretical perspectives of environmental disclosure that are used widely in the literature—the social and economic perspectives. Using this framework I argue that environmentally visible firms have the incentive to disclose environmental information and to engage in earnings management related to environmental performance.
Using a sample of Indonesian companies listed on the Jakarta Stock Exchange from 2001 to 2005, the study measured environmental disclosures and earnings management. Proxies used for a firm's environmental visibility are its size, industry type, environmental performance ratings, cross-listing status, profitability and performance. Environmental ratings are those issued by the Indonesian government's environmental ratings program, PROPER (Pollution Control and Performance Evaluation and Rating). The program uses five colour ratings to grade the environmental performance of facilities, and releases the results to the public.
The study finds that the level of environmental disclosure by Indonesian corporations remains very low and that environmental reporting by companies is still dominated by soft (not easily verifiable) rather than hard disclosure items. However, the trends show increasing levels of environmental disclosure, both in the number of items disclosed and in the number of companies reporting the items. A pre- and post- evaluation of the effectiveness of the PROPER program reveals that environmental disclosures increased significantly one year after the implementation of the program in 2002.
Using a series of ordinary least squares regressions, the study regresses environmental disclosure levels on the various proxies for environmental visibility, while controlling for auditor choice, firm age and leverage. Environmental disclosure levels are found to be positively associated with multiple proxies for environmental visibility: firm size and the environmental sensitivity of the firm's industry; inclusion in the environmental ratings program; and cross-listing on foreign stock markets. It also appears that environmental disclosures are associated with the choice of auditor. However, there is no evidence to show that environmental disclosure is affected by a firm's age or its leverage.
Using the subset of PROPER-rated firms, the study regresses the discretionary accruals estimates against receipt of a negative rating, while controlling for firm size, ownership structure and auditor choice. Consistent with the political cost hypothesis, the firms receiving poor environmental ratings appear to use income-reducing discretionary accruals. Earnings management is also associated with firm size and inside ownership.
Overall, the results of this study are consistent with predictions made on the basis of political cost and legitimacy theories in relation to environmental visibility. Both conceptually and empirically, the research identifies a clear link between environmental visibility and environmental disclosure, and between environmental performance and earnings management.
© 2008 Susi Sarumpaet
Technological Progress, Efficiency and Environmentally Adjusted Productivity Growth of Indonesian Rice Agriculture
Joko Mariyono ([email protected]) Accepted 2008, Australian National University, Canberra
Rice production in Indonesia is important because it contributes more than 50% of the total value of the agricultural sector. Rice represents the largest source of caloric intake for more than 200 million people. Chapter 2 of this thesis indicates that rice has been a priority in Indonesian agricultural development. Various programs and investments in infrastructure have been undertaken to modernise rice production. Current policy still gives some priority to rice production through an agricultural revitalisation program. The thesis investigates agricultural modernisation in the form of technological change and improvements in technical and allocative efficiency, and the impact of this on productivity and the environment.
In chapter 3, the environmental consequences of agricultural modernisation are analysed using the concept of biased technological change. Analysis of a data set from the central statistics agency demonstrates that between 1979 and 1995 agriculture underwent regressive and environmentally biased technological change. Technological changes during the Green Revolution were more agro-chemical intensive. The subsequent change to a more environmentally sound policy reduced the intensity of agrochemical use.
Analysis of technical efficiency is provided in chapter 4. Technical efficiency estimates are obtained using a data set from the Indonesian Centre for Agricultural Socio-economic and Policy Studies. The results show that there is variation in rice production due to technical inefficiency. The sources of variation in technical efficiency are household characteristics, composition of labour and tractor use. Javanese rice agriculture is the most technically efficient in the country, and the technical efficiency of rice agriculture in all regions has increased. Overall, technical efficiency is low. Therefore there is still considerable room for improvement in rice production, given state-of-the-art agricultural technology.
Chapter 5 provides further analyses of efficiency related to the use of environmentally detrimental inputs and to social efficiency. The results show that there is evidence of low environmental efficiency, leading to significant agrochemical waste. Large-scale farms generate more waste because of the large amounts of agrochemicals used. Rice production also fails to allocate all inputs at the correct level. Land is still under-utilised and other inputs are over-used.
Chapter 6 decomposes productivity growth into technological change, efficiency and scale effects. Productivity growth is also adjusted for the environmental costs associated with the use of agrochemicals. The results show that total factor productivity growth is driven by technological change and allocative efficiency effects. If environmental costs are taken into account, this lowers the measure of productivity growth. Nevertheless, environmentally adjusted productivity growth is a fair measure. Both productivity growth and environmentally adjusted productivity growth have increased over time.
The policy implications of the study should contribute to sustainable increases in rice production and conservation of the agricultural environment. The results suggest that environmentally friendly technology should be continually developed and applied to reduce agrochemical intensity, and that the rate of efficiency improvement should be enhanced. Special attention should be paid to dealing with the problem of agrochemical pollution caused by the inefficient use of agrochemical inputs. It is expected that implementation of these policies will bring about a sustainable increase in productivity growth.
© 2008 Joko Mariyono
Has Indonesia's Decentralisation Led to Improved Forestry Governance? A Case Study of Bulungan and Kutai Barat Districts, East Kalimantan
Ida Aju N. Pradnja Resosudarmo ([email protected]) Accepted 2008, Australian National University, Canberra
This study investigates the devolution of forestry authority to local governments under Indonesia's 2001 decentralisation. It focuses on the relationship dynamics of district governments and other actors through case studies of the forest-rich Bulungan and Kutai Barat districts, East Kalimantan. Many studies have examined devolution of forestry governance to community levels, but few their transfer to local government level.
Using qualitative case studies for the period 1999–2004, the research framework integrates and extends three approaches to the analysis of decentralisation of natural resource governance. The first emphasises actors, power and accountability. The second focuses on institutional aspects of democratic, administrative and fiscal decentralisation. The third, a model for decentralised forest management, highlights power relations among actors.
Decentralisation profoundly affected the dynamics of forest governance in Indonesia—most dramatically in control of access to timber resources, which moved from the centre to the districts, and then largely back again. Districts enjoyed significantly augmented fiscal powers and shares of forestry revenue. During the period of substantial formal devolution to district level, the two case study governments exploited the space created by their decentralised mandates quite effectively, increasing local actors’ importance in district decisions and the benefits accruing to the local level. However, many accountability outcomes expected from decentralisation did not eventuate. Few downward accountability mechanisms, considered critical for improved natural resource management, proved effective. Thus, increased control of access to forest resources and shares of forestry-derived revenue did not improve forest management in the study districts.
The study revealed dynamic and fl uid district-level forest politics. District forestry decision making and operations reflected the interplay between the legal–regulatory framework, centre–district relations, relations among district-level actors, and organisational and individual actor interests.
Ambiguity and inconsistency in the legal–regulatory framework, and central actors’ reluctance to forgo powers, resulted in a bitter centre–district power struggle. Perceiving their window of opportunity to be insecure, district actors vigorously pursued short-term benefits from forest exploitation. Despite the centre's efforts to retain and subsequently regain its powers, the case study district governments were able to develop strategies, at least for a period, to safeguard the benefits they and other local-level actors derived from regional autonomy.
Power relations among actors have shaped district-level timber politics. Local actors increasingly infl uenced government decision making and forestry operations in the districts, and destabilised the previously firm position of centrally linked actors operating at district level. However, as decentralisation progressed, the centre's policies ultimately determined district decisions, eclipsing local actors’ infl uence.
Forest exploitation continued at the district level at the expense of longer-term forest sustainability. Given the absence of strong downward accountability mechanisms, vertical accountability to the judiciary was the most effective mechanism for keeping districts’ forestry powers in check.
The research results suggest that the framework developed here is useful for analysis of forest governance dynamics at district level under decentralisation. Both de jure and de facto powers were important in analysing how decentralisation operated in practice. The institutional analysis that highlights the importance of decentralised financial powers, and the analysis of the role of various accountability relations beyond conventional downward accountability, were relevant and useful.
Finally, the rapidly evolving nature of Indonesia's decentralisation, and its progression beyond the early phase investigated by this research, suggest the importance of establishing whether outcomes and trends reported here will continue, or will change as decentralisation and associated institutions mature.
© 2008 Ida Aju N. Pradnja Resosudarmo
Local Leadership in Transition Explaining Variation in Indonesian Subnational Government
Christian von Luebke ([email protected]) Accepted 2007, Australian National University, Canberra
Why do some local governments perform well, while others perform badly? That question, which frames the analyses of this study, connects to a wider puzzle in recent development debates. Many post-authoritarian regimes that have embarked on pronounced decentralisation and local democracy reforms have displayed, if anything, declining government performance over the last 10 years. The persistence of bureaucratic inefficiencies and corruption, irrespective of efforts to ‘move governments closer to people’, calls for a deeper inquiry into the dynamics of local decision making following decentralisation. Indonesia provides an excellent case study of these dynamics. Indonesia's rapid regime change, from centralised authoritarian to decentralised democratic rule, has brought about a large variation in sub-national policy outcomes. This is particularly evident in strongly diverging tax, licensing and corruption practices across Indonesia's 440 newly empowered district governments. These pronounced business climate variations make it possible to test two contending explanations for government performance: (1) ‘societal pressure’, which is advocated as an essential reform mechanism in good-governance literatures; and (2) ‘government leadership’, which emerges as a key determinant in recent policy reform literatures.
Based on eight district cases (comprising 1,000 business surveys and 120 in-depth interviews) and multivariate regression analyses (using data from over 200 districts), I demonstrate that societal pressure is less significant in explaining local policy outcomes than is government leadership. In Indonesia's early transition to democracy, reform pressures from local firms and district councillors are largely absent owing to collective action problems and dysfunctional political incentives. For most firms, the benefits of engaging in collective reform action rarely justify the costs of doing so: this holds true for small firms that face high coordination and retaliation costs, for Chinese minorities who anticipate disproportional social and bureaucratic risks, and for large firms that expect higher benefits from sustaining collusive government ties than from scrutinising public shortcomings. Local business chambers and district councils rarely take the initiative to solve these collective action problems: while the former lack membership and resources, the latter remain occupied with securing party list positions at national or provincial levels.
Conversely, the quality of local government leadership emerges as a salient determinant of local policy outcomes. Qualitative and quantitative analyses show that a number of district leaders have skilfully used the powers of their office—motivated by political career aspirations, national acknowledgment and prospective donor funding—to forge reform coalitions and introduce local business climate improvements. They have introduced new monitoring instruments—such as call-in talk shows and SMS/email complaint boxes—that reduce collective action problems and encourage societal actors to report bureaucratic shortcomings and transgressions. These initiatives provide local constituencies with a means to voice their concerns and, at the same time, allow government leaders to strengthen support bases for reform efforts and upcoming elections. In response to the ‘good governance’ debate, this study demonstrates that government leadership can be an effective, and often under-estimated, reform mechanism, which compensates for weak societal pressures in early transition periods.
© 2008 Christian von Luebke
The Economic Role of Formal and Informal Inter-Firm Networks in the Development of SMIEs: Study of Symbiosis in the Indonesian Garment Industry
Latif Adam ([email protected]; [email protected]) Accepted 2007, University of Queensland, Brisbane
This study examines the development of SMIEs (small and medium industrial enterprises) from the perspective of internal firm management, and identifies the factors that lead SMIEs to develop and maintain long-term inter-firm networks. It also analyses to what extent and in what ways inter-firm networks contribute to improvement in the performance of SMIEs.
The results indicate that although SMIEs play an important role in the Indonesian economy, they suffer from a number of problems either in securing and expanding their markets or in accessing capital, technology and raw materials. To ease these problems, some SMIEs develop inter-firm networks. This gives them an alternative means not only to secure and expand their markets but also to gain access to capital, technology, information and raw materials.
Using a binomial logit model, the study reveals that several attributes of entrepreneurs, particularly educational background, correlate positively with decisions by SMIEs to develop inter-firm networks. The higher the educational level of entrepreneurs, the more likely they are to develop networks. This may be because educational background correlates positively with the ability to build contacts and communicate with others. The better entrepreneurs communicate with others, the better able they are to develop inter-firm networks.
The study also indicates that trustworthiness and competence are fundamental determinants of the success of permanent networks. Thus, to develop such networks, SMIEs must not only build trust and competence but also find trustworthy and competent partners. The SMIEs studied use several initial mechanisms to develop networks. Interestingly, the initial mechanism that SMIEs choose determines whether or not their networks can be maintained permanently. If entrepreneurs develop networks through mechanisms other than trade and industry associations and government programs, this increases the sustainability of those networks.
Using an ordered probit model, the study shows that each type of inter-firm network positively influences the performance of SMIEs in terms of technological capabilities, competitiveness and growth. Engaging in more than one type of network improves the performance of SMIEs more than involvement in only one type of network. Further, entering a vertical network has a greater positive impact on improved SMIE performance than does entering a horizontal network.
The study reveals that long-term inter-firm networks provide much greater benefits to firms than do short-term networks. However, it also found that long-term networks can only be developed successfully if they are based on economic and profit motivations rather than social and political considerations. From an economic policy point of view, this suggests that, instead of intervening directly, the government can support the development of networks by designing and introducing a legal framework that can be used to solve the commercial disputes of firms in a network. If the government were also to eliminate various nuisance taxes and reduce tariffs and taxes on high-quality imported inputs, this would make it easier for SMIEs to develop networks. Finally, the government should eliminate discriminatory policies against SMIEs and implement anti-monopoly laws to ensure that SMIEs and LIEs (large insustrial enterprises) can compete fairly.
© 2008 Latif Adam
Local Clusters in Global Value Chains: A Case Study of Wood Furniture Clusters in Central Java (Indonesia)
Roos K. Andadari ([email protected]) Accepted 2008, Vrije Universiteit, Amsterdam
Small firms have some advantages but, according to internal firm theory, they also have disadvantages that arise from a lack of resources and cause them to be uncompetitive in the international market. To be able to overcome their disadvantages, cluster theory suggests that small firms can enjoy some economies by locating in clusters. Clustering provides opportunities for pooling of labour and other inputs, and for obtaining knowledge spill-overs. This literature also suggests that clustering offers collective efficiency by providing both external economies and scope for cooperation and joint action. Moreover, the competitive atmosphere arising from clustering encourages firms to be innovative. Some studies stress the importance of clustering with similar firms, while others emphasise the benefits of clustering with different firms. However, cluster theory focuses on benefits from local mechanisms involving local actors, and neglects the role of external actors. Global value chain theory stresses that firms will improve their competitiveness in international markets if they link to a global value chain, as this provides them with access to information and technology from the international market. This theory emphasises the role of external actors and neglects that of local actors.
Based on these different views of how to improve firm competitiveness, the study formulates the following research questions. What factors contribute to firm performance in small and medium scale enterprises in the wood furniture sector in Central Java? More specifically, what is the contribution to firm performance in the Central Java wood furniture clusters of (1) internal firm factors; (2) cluster externalities; and (3) international linkages?
Both secondary and primary data are used to answer these questions. The secondary data are based on relatively large and medium (L&M) firms in Central Java. They are taken from the annual manufacturing survey conducted by the central statistics agency for the 10 years from 1994 to 2003. The primary data are from the author's surveys of relatively large and medium firms in four clusters in Central Java in 2005, complemented by data on relatively small firms from the Jepara cluster in Central Java.
A production function approach is used to test the data in the first case; it reveals the importance of proximity of relatively L&M firms to firms of similar size and of linkages to foreign buyers. Proximity to small-scale firms has no impact on L&M firm performance, and neither does urban location. However, linking to international buyers improves firm performance. An integrated approach is used to test the primary survey data on the relatively L&M firms in four clusters. This indicates that cluster factors and linkages to foreign buyers are important to firm performance, in addition to internal firm factors. Among the cluster factors, the role of external economies is more conspicuous than local cooperation and competition. A multivariate analysis applied to small firms in the Jepara cluster shows that some of the variables that determine L&M firm performance are different from those that determine performance in relatively small firms.
© 2008 Roos K. Andadari