Revitalizing Indonesia’s manufacturing: the productivity conundrum

In light of continuing importance of the manufacturing sector, but declining dynamism, this paper
investigates trends in productivity at firm levels. It finds that labour productivity has been either
stagnant or falling in labour intensive manufacturing. The paper uses firm level cross-sectional and
time series data and employs GMM techniques to estimate determinants of productivity. It finds that
real wage is the most important variable that influences firm level productivity, followed by capital
intensity. Contrary to the common perception, foreign ownership and export-orientation are not
found to have statistically significant influence on firm level productivity. This finding is consistent for
firms of all sizes – large, medium, small and micro. This implies that Indonesia can use wages policy,
as Singapore did during the late 1970s-mid 1980s, to upgrade its manufacturing to higher value added
activities.