Sources of Productivity Growth in the Indonesian Manufacturing Industries

Martha Ranggi Primanthi; Kaliappa Kalirajan

doi:10.58567/jea02040002

Authors

Martha Ranggi Primanthi Department of Economics, Faculty of Economics and Business, Airlangga University, Surabaya, Indonesia
Kaliappa Kalirajan Arndt Corden Department of Economics, Crawford School of Public Policy, Australian National University, Canberra, Australia

DOI:

https://doi.org/10.58567/jea02040002

Keywords:

Total factor productivity growth,, Varying coefficients stochastic frontier analysis,, Technological progress, Technical efficiency, Indonesia

Abstract

Generating output growth by adding more inputs into the production process may not be sustainable in the long run for any economy, given the limited resources. On the other hand, if productivity growth dominates the production process, it will generate more output without excessive increase in input use. Hence, this paper examines whether the output growth in Indonesia’s manufacturing sector is excessive inputs driven or productivity driven. Productivity driven growth is measured by Total Factor Productivity (TFP) growth, which is decomposed into its major components of technological progress and technical efficiency within the framework of varying coefficients stochastic frontier analysis (VSFA) using Indonesia’s annual Large and Medium Manufacturing Industries Survey data over the period 2002–2014. The measurement of the components of TFP growth not only provides more insights and better understanding of the dynamic nature of the production processes, but also has important policy implications. The mean TFP growth during the period 2002-2014 was estimated to be 4.3 per cent and was mostly contributed by technological progress experienced by firms. The policy implication is that technical efficiency could still be improved for the selected technology to reap the full benefit of increasing output from the chosen technology.

Author Biography

Martha Ranggi Primanthi, Department of Economics, Faculty of Economics and Business, Airlangga University, Surabaya, Indonesia

Lecturer, Department of Economics.

Her Website URL is: Martha Ranggi Primanthi, SE., MIDEC., Ph.D. - FEB Unair

References

Baltagi, B.H., 2009, ‘Longitudinal data analysis,’ Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 172, no. 4, pp. 939-940. https://academic.oup.com/jrsssa/issue/172/4

Hill, H. & Kalirajan K. P., 1993, ’Small Enterprise and firm-level technical efficiency in the Indonesian garment industry’, Applied Economics, vol. 25, no.9, pp. 1137-1144. https://www.tandfonline.com/toc/raec20/25/9

Hulten, C. R., Dean, E. R. & Harper, M. J., 2001, ‘Total factor productivity. A short biography’, The New Developments in Productivity Analysis, University of Chicago Press, pp.1-54. https://www.nber.org/books-and-chapters/new-developments-productivity-analysis

Kalirajan, K. P. & Obwona, M. B., 1994, ’Frontier production function: the stochastic coefficient approach’, Oxford Bulletin of Economics and Statistics, vol. 56, no. 1, pp. 87-96.

Kalirajan, K. P., Obwona, M. B. & Zhao, S., 1996, ‘A decomposition of total factor productivity growth: the case of Chinese agricultural growth before and after reforms’, American Journal of Agricultural Economics, vol. 78, no. 2, pp. 331-338. https://digital.library.cornell.edu/catalog/chla5032826_5388_001

Lee, L.-F.,& Griffiths, W. E., 1979, “The prior likelihood and best linear unbiased prediction in stochastic coefficient linear models” Center for Economic Research, University of Minnesota, Discussion paper 79–107. https://conservancy.umn.edu/handle/11299/54966

Margono, H & Sharma, S. C., 2006, ‘Efficiency and productivity analysis of Indonesian manufacturing industries’, Journal of Asian Economics, vol. 17, pp. 979-995. https://econpapers.repec.org/article/eeeasieco/default13.htm

Margono, H, Sharma S. C., Sylwester, K & Al-Qalawi, U., 2011, ‘Technical efficiency and productivity analysis in Indonesia provincial economies’, Applied Economics, vol. 43, pp. 663-672. https://doi.org/10.1080/00036840802599834

Parham D, 2011 Definition, importance and determinants of productivity. http://goo.gl/sXnaax.

Prabowo, H. E. T. & Cabanda, E., 2011, ‘Stochastic frontier analysis of indonesian firm efficiency’, International Journal of Banking and Finance, vol. 8, pp. 14-34. https://doi.org/10.32890/ijbf2011.8.2.8426

Sari, D. W., Khalifah, N. A., & Suyanto, S., 2016. ‘The spillover effects of foreign direct investment on the firms’ productivity performances’, Journal of Productivity Analysis, vol. 46, no. 2, pp. 199-233. https://doi.org/10.1007/s11123-016-0484-0

Suyanto, R. S., Salim, R.& Bloch H., 2009, ‘Does foreign direct investment lead to productivity spillovers? Firm level evidence from Indonesia’, World Development, vol. 12, pp. 1861-1876. https://doi.org/10.1016/j.worlddev.2009.05.009

Suyanto, R. S., Salim, R., & Bloch, H., 2014, ‘Which firms benefit from foreign direct investment evidence from Indonesian manufacturing’, Journal of Asian Economics, Vol 33, pp. 16-29. https://doi.org/10.1016/j.asieco.2014.05.003

Suyanto, R. S. & Salim, R., 2011, ‘Foreign direct investment spillovers and technical efficiency in the Indonesian pharmaceutical sector: firm level evidence’, Applied Economics, vol. 45, no. 3, pp. 383-395. https://doi.org/10.1080/00036846.2011.605554

Swamy, P. A. V. B., 1970, ‘Efficient inference in a random coefficient regression model’, Economterica, vol. 38, no. 2, pp. 311-323. https://doi.org/10.2307/1913012

Timmer, P., 1999, ‘ Indonesia’s accent on the technology ladder: capital stocks and total factor productivity inIndonesian manufacturing, 1975–95’, Bulletin of Indonesian Economic Studies, vol. 35, pp. 75–89. http://www.tandfonline.com/doi/abs/10.1080/00074919912331337497