The Impact of Special Economic Zones and Government Intervention on Firm Productivity: The Case of Batam, Indonesia

Abstract

Various studies have explored the effects of industrial agglomeration and special economic zones (SEZs) in Asia, but there has been a lack of data-driven analysis of SEZ performance. This paper provides a case study on Batam, which has been developed as an SEZ through government-to-government (G2G) cooperation, offering lessons for other developing countries. The study examines the effects of industrial zones, foreign investment and government intervention on firm productivity, using an ex-post evaluation method and econometric models. The paper does not find conclusive evidence that Batam’s status as an SEZ affects firm productivity and growth. Although firm agglomeration proves beneficial for firm productivity, it is not clear that SEZ policy has driven this productivity. The paper argues that government policies should stimulate innovation and inter-firm cooperation to increase knowledge spillovers and technology transfer instead of focusing on attracting investment.

Berbagai studi telah menelaah dampak dari aglomerasi industri dan Kawasan Ekonomi Khusus (KEK) di Asia, namun hanya sedikit yang menganalisis kinerja KEK berbasis data. Tulisan ini menggunakan studi kasus dari KEK Batam, yang dibangun menjadi KEK melalui kerjasama pemerintah dengan pemerintah (G2G), menawarkan pelajaran bagi negara-negara berkembang lainnya. Kajian ini menelaah dampak dari kawasan industri, investasi asing, dan intervensi pemerintah pada produktivitas perusahaan, dengan menggunakan evaluasi ex-post dan model ekonometrika. Tulisan menemukan dampak status Batam sebagai KEK pada produktivitas perusahaan dan pertumbuhan tidak konklusif. Meskipun aglomerasi perusahaan terbukti bermanfaat bagi produktivitas perusahaan, tidak jelas apakah kebijakan KEK yang memacu produktivitas tersebut. Tulisan juga mengemukakan bahwa kebijakan pemerintah seharusnya menstimulasi inovasi dan kerjasama antar perusahaan untuk meningkatkan limpahan pengetahuan dan transfer teknologi alih-alih hanya berfokus pada upaya menarik investasi.

Keywords:

• special economic zone
• SEZ
• agglomeration economies
• firm productivity
• ex-post evaluation
• econometric analysis

JEL classifications:

• C2
• C23
• L6
• L60
• R1
• R12

ACKNOWLEDGMENTS

The authors thank Dr Delik Hudalah and Dr Fikri Zul Fahmi for their technical comments, and Santi Sopandi for helping with the tables and graphs. This research was made possible by a grant from the Bandung Institute of Technology (Institut Teknologi Bandung), awarded under its 2017 program for research, community service and innovation (Program Penelitian, Pengabdian kepada Masyarakat, dan Inovasi ITB 2017).

Notes

1 See https://kek.go.id/berita/2020/01/Tiga-KEK-Baru-Ditetapkan-di-Singhasari-Likupang- dan-Kendal-Bakal-Jadi-Pusat-Pariwisata-Internasional-Industri-Kreatif-Hingga-Topang- Neraca-Perdagangan-268.

2 The results are available from the corresponding author upon request.