Does competition and foreign investment spur industrial efficiency?: firm-level evidence from Indonesia

Abstract

This study examines the effects of market competition and foreign direct investment on the technical efficiency of firms within the Indonesian manufacturing sector using a Stochastic Frontier Analysis. We employ a firm-level panel dataset for the period of 2010–2014, covering 400 subsectors, and employing two measures of industrial concentration as proxies for market competition. The results suggest that firms operating in less competitive sectors in Indonesia experience higher technical efficiency. Additionally, foreign ownership, international activity (export-import), and firm size are positively related to technical efficiency. Such findings suggest that the efficient structure hypothesis (ESH) applies in Indonesia, as more efficient firms gain in market share as a result from dynamic competition. Foreign direct investment (FDI) via horizontal spillovers has contributed to an increase in intra industry firms’ efficiency. Nevertheless, as industrial concentration increases, the positive effects in firm efficiency from FDI and from international trade (imports and export) tend to decrease.

Clustering and firm productivity spillovers in Indonesian manufacturing

“…Starting from the upper part of Table 3, the results of the production frontier show that the overall production factors (labor, capital, raw materials, and energy) have positive coefficients and significant impacts on output at a 99% significance level (or alpha 1%). Meanwhile, each production factor's coefficient is smaller than 1, which is in line with the production theory and similar to the findings in Sari et al (2016) and Esquivias and Harianto (2020). Although the functional form in this current study is different from those in Sari et al (2016) and Esquivias and Harianto (2020), the findings are similar.…”

“…Meanwhile, each production factor's coefficient is smaller than 1, which is in line with the production theory and similar to the findings in Sari et al. (2016) and Esquivias and Harianto (2020) . Although the functional form in this current study is different from those in Sari et al.…”

“…Although the functional form in this current study is different from those in Sari et al. (2016) and Esquivias and Harianto (2020) , the findings are similar.…”

“…The recent studies (for example Abdullah and Chowdhury, 2020 ; Latief et al., 2020 ; Nguyen et al., 2020 ) address the mixed findings of the earlier studies by pointing out the firm heterogeneity issue; it is argued that firm heterogeneity might reduce the precision of findings as some firms are not fully extracting the productivity benefits from FDI; hence empirical findings of existing literature remain inconclusive. Firm heterogeneity issue can be minimized by clustering firms into homogenous groups and estimate them separately ( Chen et al., 2020 ; Kowalski, 2020 ) or adding some specific factors that accounted for the variation in ability to grasp productivity benefits, such as firm age, ownership, and competitiveness ( Esquivias and Harianto, 2020 ; Morrales and Moreno, 2020 ) or breaking down the FDI-productivity into technology and efficiency ( Nguyen et al., 2020 ). This paper contributes to the empirical debate within the framework of foreign direct investment to Indonesia by clustering firms into nine homogenous groups based on product similarity in the International Standard of Industrial Classification (ISIC).…”

The mechanisms of the impact of high-tech product export trade on regional carbon performance

“…Some scholars also agree with the existence of learning-by-exporting. Esquivias and Harianto (2020), for example, argued that export activities contribute to promoting technological progress, because export companies need to compete in foreign markets. Mazzi et al (2020) confirmed that the productivity of export companies has increased after entering the international market.…”