Entry, exit and productivity of Indonesian electronics manufacturing plants

Melbourne Institute Working Paper No. 08/06

Date: April 2006


A. Palangkaraya
J. Yong


We study the link between plant turnover and productivity using Indonesian plant-level data for the period of 1990-95. First, we compare productivity differentials among incumbents, entrants, and exiting plants by constructing the Farrell technical efficiency index using data envelopment analysis. We test the significance of these differentials using Simar and Wilson (1998) bootstrap algorithm and Li’s (1996) nonparametric test of closeness between unknown distributions. We find that the incumbent plants are on average the most productive group in every year of the estimation period. Also, the new plants are relatively less productive than the exiting plants in the early years. However, they are more productive than the exiting plants in the later years. Second, and more importantly, we estimate the productivity change during the study period using the Malmquist productivity change index and decompose the change to see if the differences in measured productivity change among the three groups of plants come from differences in the efficiency change or the technical change. Since the existing literature rarely distinguishes between these two different components, little is known whether exiting plants are less productive because of their in ability to catch up to the current frontier or to adopt a better technology. Similarly, not much known whether entrants’ ability to survive come from their being equipped with a ’better’ technology or being able to catch up to the current frontier. Our findings indicate that although new plants enter with relatively lower productivity levels, they exhibit the high est productivity change during the early years. In addition, we find entrants’ high productivity growth in the early period is due to a movement toward the frontier, while in the later period is due to an upward shift of the technology frontier. Exiting plants, on the other hand, exhibit the lowest productivity change during the early years when entrants experience high productivity change.

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