Essays on firm diversification strategies: Evidence from Indonesian medium and large manufacturing plants

Abstract

From a theoretical perspective, Chapter 4 extends two theoretical models in explaining a firm's behaviour in terms of the variety of products it produces (product scope) and puts forward three hypotheses, the first is drawn from original models and the second and the third come from extended models. The first hypothesis depicts the relationship between productivity and product scope in an inverted U-shaped curve (Feenstra & Ma 2007) or in a concave and positive monotonic curve (Baldwin & Gu 2009). Second, a firm in a more competitive market has generally a leaner product scope than firms in a less competitive market. Third, the gap between product scope for exporters and non-exporters starts from a negative value and then becomes more positive for higher levels of productivity. While this gap declines after a firm reaches a high enough level of productivity in the extended Feenstra and Ma model, the gap becomes almost stagnant at very high productivity in the extended Baldwin and Gu model. For empirical analysis, this chapter examines supply-side and competition factors as determinants of product scope in Indonesian medium and large manufacturing plants during 2000-2012. The results indicate an inverted U-shaped relationship between productivity and product scope as predicted in the first theoretical hypothesis, although this is not consistently significant in all specifications. The third theoretical hypothesis can also be proven in one of the experiments. Factors such as being larger in size, having less competition, or being older is not only associated with, but may cause, a plant to produce more products. Having access to imported materials or exporting is also associated with having a wider product scope for plants. There is a weak indication that majority-foreign-owned plants tend to have a leaner product scope compared to domestic plants. This study also finds a non-monotonic relationship between product scope and quintiles of export intensity in the form of an inverted V-shaped curve (maximum in first quintile), which may depict the plants' behaviour to introduce new products at lower export intensity and to refine the product choices as they become more focus on export market. Chapter 5 examines the impacts of both product scope and product concentration on the export performance of Indonesian manufacturing plants for the period 2008-2012. A normalised concentration index is used to exclude non-varying concentration values from single-product exporters and the technical influence of product scope in the value of the concentration index. The main finding of this chapter is that broader product scope and more concentrated product portfolio generate higher export. This shows that economies of scope and economies of concentration coexist in the plant's effort to increase its exports. By investigating the heterogeneous impacts, this chapter finds that the return of product scope expansion is higher for GPS exporters when compared with non-GPS exporters. Furthermore, this chapter also finds that product scope takes three years before affecting plant productivity. Chapter 6 examines the impacts of both market scope and market concentration on the export performance of Indonesian manufacturing plants for the period 2008-2012. A normalised concentration index is used to eliminate non-varying concentration values from single-market exporters and the technical influence of product scope in the value of the concentration index. The main finding of this chapter is that broader market scope and a more concentrated market portfolio generate higher export levels. By examining the heterogeneous impacts, this chapter finds that the return on market concentration is higher for older, more experienced in export, and larger plants. Furthermore, this chapter also finds that market concentration takes one year before affecting plant productivity and profitability, while it takes two years before market scope affects plant profitability.