globalization and the electronics industry: is indonesia missing out
TRANSCRIPT
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©Wikipedia
Globalization and the Electronics Industry:
Is Indonesia Missing Out
Moekti P. Soejachmoen, USAID – SEADI Project
Forum Kajian Pembangunan
24 October 2012
©Gunawan Kartapranata ©White House
Outline
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• Background
• Globalization in Electronics Industry
• Research Questions
• Theoretical Background
• Analytical Framework
• Results
• Conclusions
Background
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• Electronics industry is one of the largest and fastest
growing industries
• The fast development was triggered by the product
fragmentation which is accelerated by its
characteristics: – It has separable processes which are very labour
intensive in some parts, but can start with a very simple skill.
– The value-to weight ratio is very high which means fragmentation amongst different locations is still economical
Production and Trade of Electronics Parts and Components ($
billions), 1990 – 2005
4 Source: Production data from Yearbook of World Electronics Data
Trade Data from UN-COMTRADE
Background
• East Asia is a favourable choice for the US and Japanese firms because it has:
– Some basic technological capacities
– Large market
– Abundant low cost labor which is relatively skilled labor
– More open and friendly environment for FDI
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Share of Electronics Parts and Components Exports
to World Exports, 1987 - 2007
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Source: UN-COMTRADE
Share of Electronics Parts and Components Exports to Manufactured
Export: 1990 - 2010
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Source: UN-COMTRADE
Share of Electronics Parts and Components Exports
to GDP: 1990 - 2010
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Source: UN-COMTRADE
Research Questions
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• What are the determinants of a country’s participation
in global production networks
• Why is Indonesia missing out in the electronics global
production networks
Theoretical Background: Global Production Network
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• Based on Jones and Kierzkowski (1990)
• Global production network occurs when a process of
production can be fragmented into several production
blocks and relocated to different locations (countries)
• Three contributory factors:
– The development in production technology
– Trade liberalization
– Advancement in communications and transportation
Theoretical Background: Global Production Network
• Product Fragmentation will occur if:
– Production cost falls drastically, which includes labor
cost, capital cost, technology change and the nature of the
production technology
– Service links cost to connect production blocks is low
enough, which includes falling of transportation cost,
communication cost, foreign investment policies and trade
barriers
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Analytical Framework
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• A country is considered to participate actively in
global production networks if both exports and
imports in parts and components increase
significantly overtime
• Dependent Variable: value of export of
electronics parts and components
• Explanatory variables: – Relative Costs
– Service Link Costs
– Other variables
Estimation Model:
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titi
tii
tii
tititi
TC
OpenFDItureInfrastruc
OpenTradeCostTrade
RERCostLabFrag
,
,65
,43
,2,1,
_
__
ln_ln
Relative Costs
Service Links
Costs
Other Variables
Where: i=country, t=time
Estimation Method
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• Pooled panel data for:
– 98 countries
– period 1988-2007
• Least Square Dummy Variable technique
• Endogeneity problems: using Instrumental Variables:
– Quality of democracy and political institution
• Heteroscedasticity-consistent standard errors
Estimation Results for the Electronics Sector ,
1988 – 2007
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Developed Developing
lnLab_Cost 0.735*** 0.501**
(0.259) (0.218)
lnRER 0.066 0.056
(0.045) (0.053)
lnXCost -0.493 1.201
(0.302) (1.278)
lnTrade_Open 1.217** 0.725
(0.523) (0.593)
Infrastructure 1.110** 3.184***
(0.492) (0.694)
lnFDI_Open -0.022 -0.019
(0.147) (0.050)
_cons 7.932 -9.908
(3.697) (12.853)
Instrumental Var. No No
Country Dummy Yes Yes
Year Dummy Yes Yes
No. of Observation 496 559
Dependent
Variable:
Real Export Value
All Electro P&C
Factors affecting participation in the GPN
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• A country’s participation in the electronics GPN depends on both production cost factors and the service links factors.
• Infrastructure condition is the most important variable that determines the participation in the global production network.
• Skilled labor is important in increasing a country’s participation in the global production network and it is highly related to education level.
Challenges faced by Indonesia to increase participation in
the GPN
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• Quality and quantity of Indonesia’s
infrastructure:
– Poor infrastructure conditions are considered as the
second most problematic factor for doing business in
Indonesia
– Ranked 56th among 59 countries in 2012 for the
adequacy of infrastructure (Malaysia – 26th, Thailand
– 49th)
– Underdeveloped infrastructure as the third most
important barrier in the service sector (JETRO)
Challenges faced by Indonesia to increase participation in
the GPN
• Less open foreign investment regime and
less friendly business environment in
Indonesia:
– The implementing regulations of the 2007
Investment Law are still lagging
– The lag of uniform interpretation of the Law and
Negative List
– The foreign ownership restriction imposed by the
government for 25 sectors is a major concern for
the MNCs especially for the industries that are
technology intensive and have proprietary rights
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• Quality and availability of skilled labour:
– The completion rate of tertiary education is very low,
only 1.4 percent in 2010
– Indonesia’s technology capacity is still limited
– The very low investment in R&D: R&D investment as a
percent of employee compensation in US majority
affiliates
• Indonesia: 0.6 percent (the lowest)
• Singapore and Taiwan:19 percent (the highest)
• China: 14.9 percent
• Malaysia: 11.2 percent
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Challenges faced by Indonesia to increase participation in
the GPN
Conclusion
• What Indonesia should do?:
– Improve its investment policies and business
environment in general
– Improve infrastructure condition
– Improve education level: Matching between
industry needs and the school curriculum is
necessary
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