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Economic and Political Networks and Firm Openness: Evidence from Indonesia

Daichi Shimamoto and Yasuyuki Todo

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: Using firm-level dataset from the manufacturing sector in Indonesia, we examine how firms' ties with the government in receiving rents and with other firms and their managers' trust toward foreigners and views of globalization are correlated with each other. We find that firms' strong political ties are associated positively with the level of managers' trust toward domestic citizens and the number of domestic buyers and suppliers and negatively with their level of trust toward foreign nationals. In turn, managers' trust toward foreign nationals and firms' transactions with foreign firms are positively correlated with each other, and trust and business networks within the country also show a positive correlation. When managers are more trusting of domestic citizens or when firms transact more with domestic firms, managers are more likely to have a negative view of globalization, incorporating such factors as the foreign ownership of firms and free trade. The results suggest a vicious cycle between the political ties of local firms and protectionist views and policies against globalization, which leads to economic stagnation due to a lack of diffusion of knowledge from abroad. This mechanism may explain why middle-income countries experience economic stagnation and cannot escape the "middle-income trap."

New Economics Papers: this item is included in nep-bec, nep-pol, nep-sea and nep-soc
Date: 2015-07
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Working Paper: Economic and Political Networks and Firm Openness: Evidence from Indonesia (2015) Downloads
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