Revitalising Indonesia’s manufacturing : the productivity conundrum

In light of the continuing importance, but declining dynamism, of the manufacturing sector, 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 to mid-1980s, to upgrade its manufacturing to higher value-added activities.