Doctoral Thesis / Dissertation from the year 2017 in the subject Geography / Earth Science - Regional Geography, grade: Ph.D., , language: English, abstract: Differences in agglomeration externalities and industrial regimes between locations generate performance differentials for their localized economic activities. For more than two decades, scholars have debated which externality is dominant for growth and under which regime. The present study aims to resolve this debate by analysing the influence of agglomeration economies on the growth of five-digit manufacturing sectors and firms in Indonesia between 2000 and 2009 discriminating cities and regencies. Specialization, competition, population density, human capital, and a set of varieties are employed. This is conducted shedding the light on policy implications of economic variety sectoral decomposition functional to revitalize Indonesian manufacturing growth after the Asian Financial Crisis, which substantially hits the Indonesian economy and manufacturing. Empirical evidence reveals that Indonesian policymakers should develop initiatives to support the competitiveness of key labour-intensive industries and manufacturing transformation towards knowledge-based productions. This can be achieved through promoting key specialised clusters characterized by large sectoral interconnectivity favouring inter and intra-industry knowledge spillovers, which allow underpinning the competitiveness of clusters and overcoming the two typical drawbacks of highly specialized locations (lock-in and lack of resilience). The formation of human capital, and the development of technologically advanced industries come to light as crucial drivers to construct a more conductive innovative environment and reduce manufacturing exposure to external industry-specific shocks. Population density and industrial diversity antithetically influence manufacturing growth in cities and regencies due to their economic heterogeneities.

This study examines the effect of agglomeration economies on productivity growth in Indonesian manufacturing industries during the first decade of this century. Productivity growth is measured at the firm level using the Färe-Primont Productivity Index. Each firm's productivity growth is then regressed against a set of firm and industry characteristics, including three measures of agglomeration representing the effects of specialisation, diversity and competition. The results show evidence of a positive specialisation effect and a negative diversity effect for aggregate manufacturing and sub-sectors. Furthermore, there are mixed effects across industries, suggesting that Porter's competition externalities stimulate firm productivity growth under some conditions but not others.

"How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? Deichmann, Kaiser, Lall, and Shalizi examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. They distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, the authors find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, they illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. The findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development"--Abstract.

"How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? Deichmann, Kaiser, Lall, and Shalizi examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. They distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, the authors find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, they illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. The findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development. This paper--a product of the Infrastructure and Environment Team, Development Research Group--is part of a larger effort in the group to examine the impacts of spatial policy interventions on the location and performance of economic activity"--World Bank web site.

How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? The authors examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. They distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, the authors find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, they illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. Their findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development.

The importance of the agglomeration process in facilitating growth and productivity increases in Indonesia's manufacturing sector cannot be ignored. The agglomeration process is associated with improved productivity as firms enjoy external benefits from either urbanization or from the sharing of inputs available in certain locations. Evidence suggests that Java remains the main corridor for manufacturing activities, with large cities attracting manufacturers that are looking for externalities from urbanization. However, there are signs that some firms are shifting to new locations in other cities and forming new agglomerations in areas that these firms find more favorable. With regional autonomy, issues relating to local governance, infrastructure, and uncertainties in local regulations are increasingly important and can undermine the process of agglomeration. Some programs promoting certain locations as special economic zones (SEZs) are experiencing difficulties in attracting manufacturing investors. Understanding these challenges should help policymakers to strengthen the underlying factors that facilitate manufacturing agglomeration.

Indonesia's gross domestic product growth rate declined significantly after the Asian financial crisis (AFC) of 1997–1998. The country's potential and balance-of-payments growth rates are only about 5.5% and 3%, respectively. One important reason is that the country's industrialization pace declined after the AFC. Today, Indonesia is still exporting many unprocessed natural resources and simple manufactures (not complex products) with a low income elasticity of demand. This report analyzes how Indonesia's manufacturing sector could diversify and upgrade during 2020–2024 and beyond. This is essential if Indonesia is to attain upper middle-income status as soon as possible. Policy makers and the private sector need to collaborate to identify the coordination failures that hamper the discovery of those products that Indonesia could successfully produce and export. These must be complex products with a high income elasticity of demand. The report proposes a number of policies to expedite this process.