Comments by Somkiat Tangkitvanich, on Globalization of the Automotive Industry: Is Indonesia Missing Out?

Abstract

Somkiat Tangkitvanich: The paper examines two questions. The first question is related to the determinants of a country's participation in the global production network of auto parts and components. The second question aims to understand why Indonesia has been left behind in this global production network.The author uses regression analysis to answer both questions. She then concludes that, for developing countries, infrastructure is the most important determinant, followed by labor quality (proxied by labor cost) and FDI openness. For developed countries, trade cost is the most important determinant, followed by infrastructure. It appears to me that the author arrived at these conclusions by comparing the coefficients of the explanatory variables that were significant in the regression.It is fine to conclude that the participation in the production network of auto parts and components is influenced by the quality of infrastructure, trade and investment openness, and trade costs. It is wrong, however, to conclude that infrastructure and trade cost are the most important determinants for developing and developed countries, respectively. This is because the unit of each variable in the regressions is different and thus cannot be compared with one another. One can only conclude that one variable is more statistically significant than another.The author may consider using different variables to capture the factors believed to determine a country's participation in global production networks of auto parts and components. •Trade cost—the author appears to use the overall score of the World Bank's Doing Business as the proxy for the trade cost of a country. Most components of the score, however, are related to investment (e.g., starting business, dealing with construction permits, getting electricity, registering property, and obtaining credit), rather than trade. The author should have used the score for trading across borders, which is also reported by the World Bank, as the proxy.•Trade openness—the author uses the ratio of total export and import to GDP as the proxy for trade openness. One drawback of this proxy is that large countries like the United States tend to have low total trade to GDP because of their large domestic markets. A better proxy would be the average applied most favored nation (MFN) tariff rate, which directly measures trade barriers.•FDI openness—the author uses the ratio of FDI inflow stock to GDP as the proxy for FDI openness. As the focus of the paper is the export of auto parts and components, a more appropriate proxy would be the ratio of FDI inflow stock for the manufacturing sector to GDP. In other words, FDI stocks in the agriculture and service sectors should be excluded.•Competitiveness—the author uses exchange rate as the proxy for a country's export competitiveness. This is misleading as no country can maintain long-term competiveness by keeping its currency undervalued. The author should either find a more appropriate proxy for competitiveness—for example, the revealed comparative advantage index (RCA)—or simply refer to the variable as “real exchange rate”.The paper also shows, by means of using country dummy variables in the regression, that Indonesia lags behind other Asian countries in the participation in the global production network of auto parts and components. The author attributes the lag to the country's restrictive FDI policy, high trade cost, and low labor quality. In particular, Indonesia's FDI policy is criticized as creating uncertainty because of its frequent changes. The paper, however, does not describe Indonesia's trade and investment policies related to the auto sector and explain why they are bad for the sector in sufficient detail.It would also be useful to mention briefly a more recent development in the auto sector in Indonesia. During the past five years, the number of cars produced in Indonesia has grown quickly, passing the level of 1 million cars per year in 2012. Behind this development are direct investments by Japanese and Korean assemblers and parts makers. When these manufactures reach their efficient scales, Indonesia may no longer lag behind other countries in the participation in the global production network.