Why is Indonesia left behind in global production networks?

Abstract

International trade in electronics and automotive including their parts and components has grown rapidly in the last two decades, but Southeast Asia's largest economy, Indonesia, is lagging behind in its export performance. This research uses a comparative perspective in examining Indonesia's role in electronics and automotive production networks in the context of the contemporary debate on opportunities for reaping gains from economic globalization through engagement in global production networks. This research aims to answer two questions, the first addresses the determinants of a country's participation in the global production network; the second is why Indonesia is being left behind in the global production networks. To the best of the author's knowledge, this study is the first systematic analysis to determine why Indonesia has been left behind in global production networks. The analysis is conducted at two levels: macroeconomic and firm-level analysis. The macroeconomic analysis is based on the Jones and Kierzkowski's fragmentation theory. The unbalanced panel trade data for 98 countries for the period 1988-2007 for the electronics and automotive sectors are estimated using the least square dummy variable method. Meanwhile, the firm-level analysis is based on Robert and Tybout's model on firm heterogeneity and its implications for international trade. The random effect probit dynamic model is adopted for the estimation using Indonesia's firm level data for the both sectors for the period 1990 - 2007. From the macroeconomic analysis, the service link cost variables are a more important determinant than the production cost variables in determining a country's participation. Infrastructure is the most important determinant in developing countries for both sectors, followed by labour quality and FDI openness. For developed countries, trade openness is the most important determinant in the electronics sector and trade cost the most important in the automotive sector. For both, the second most important is labour quality in the electronics sector and infrastructure in the automotive. Indonesia is being left behind in the electronics global production network because of the poor condition of its infrastructure; the relatively more restrictive investment policies towards foreign investment, and the low education level which hampers the absorption capacity in technology which is important in the electronics sector. With the huge domestic market in Indonesia which creates economies of scale, it is expected that the Indonesian automotive industry could participate more in the global production network than it does in its current condition. However its participation is hampered because of its investment policies, trade costs and the continuing high protection in the automotive sector. From the firm-level analysis, a decision to engage in the global production networks through export activities depends on firm characteristics as well as sunk cost and a location spillovers effect. For both electronics and automotive sectors, larger and foreign owned firms with higher labour quality and located in similar locations are more likely to participate in the production networks. It is concluded that Indonesia needs to improve its infrastructure condition, investment policies and education level to increase its participation in the global production networks. -- provided by Candidate.