Sources of Productivity Growth in the Indonesian Manufacturing Industries

Martha Primanthi and Kaliappa Kalirajan
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Martha 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

Journal of Economic Analysis, 2023, vol. 2, issue 4, 31-46

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.

Keywords: Total factor productivity growth; Varying coefficients stochastic frontier analysis; Technological progress; Technical efficiency Indonesia (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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