Abstract
The aim of this study is to analyze the export orientation of the manufacturing industry sector in Indonesia. In order to achieve this objective, Cobb-Douglas production function, consisting of foreign direct investment (FDI) and labor, was developed. The data from the Industrial Survey conducted by the Central Bureau of Statistics (Badan Pusat Statistik/BPS) for the period 2005-2015 with 249 manufacturing companies as samples. Based on the Hausman test, the fixed-effect model is more appropriate to be used in this study. The results from the estimation indicate that FDI and labor have a positive and significant impact on the growth of the export manufacturing industry. Labor has a stronger effect on exports than on FDI, where the coefficient of labor is 3.696 and of FDI is 0.302. On the basis of this result, it could be concluded that FDI and labor lead the export orientation to the Indonesian manufacturing industry.
Highlights
The industrial sector plays an important role for the Indonesian economy
Development of foreign direct investment (FDI), labor, and export in Indonesia's manufacturing industry The manufacturing industry has a chain effect that is created by increasing the value-added of raw materials, absorption local labor, increasing investment and exports
Estimation results show that FDI and labor have a significant positive effect on exports
Summary
The industrial sector plays an important role for the Indonesian economy. This sector has the largest contribution to Indonesia’s GDP, with the main sub-sectors, including mining and manufacturing. In 2018, the contribution of the manufacturing industry increased to 72.25 per cent or to USD 130.09 billion, an increase of 3.98 per cent compared to the previous year (Kementerian Perindustrian Republik Indonesia, 2019). This figure is relatively lower than the contribution of exports to the manufacturing sector in other developing countries, such as Thailand, Malaysia and Philippines, with contributions up to 90% higher. Indonesian government is committed to encourage the productivity of the manufacturing sector in order to optimize the potential of the export market Such activities are consistent with the results of Ramadhani, Rachman, Firmansyah, & Sugiyanto (2018) namely exports have a significant positive effect on GDP. He argues that one of the strategies to strengthen economic fundamentals is to restructure and strengthen the export performance of a country
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