7. Foreign Ownership and Productivity in the Indonesian Automobile Industry: Evidence from Establishment Data for 1990–99

Abstract

This paper investigates the productivity differentials between foreign and local establishments and the determinants of productivity in the Indonesian automobile industry, using the establishment-level data for 1990-1999 collected by the Central Bureau of Statistics (BPS) of Indonesia. According to the traditional theory of multinational corporations (MNCs), foreign-affiliated establishments are expected to have higher productivity than local establishments because MNCs have several ownership-specific advantages, including superior production technology and managerial resources. The results suggest that the labor productivity of foreign-affiliated establishments is higher than that of local ones, as expected. However, a comparison of total factor productivity (TFP) levels in foreign and local establishments reveals no significant evidence that foreign plants have higher TFP that can be attributed to their ownership-specific advantages. Moreover, the source of TFP growth and the cost elasticities for foreign and local establishments are analyzed using the cost function framework. It is found that both foreign and local establishments exhibit increasing returns to scale and that capital utilization is extremely inefficient in foreign establishments. The greatest part of TFP growth is explained by the scale effect and the capital utilization effect, while the technological change effect is negligible both for foreign and local establishments. The paper thus concludes that the small size of the Indonesian automobile market prevents both the foreign and the local plants from exploiting scale economies.