Globalization of the Automotive Industry:
Is Indonesia Missing Out?∗
Moekti P. Soejachmoen
Mandiri Institute
Plaza Bapindo, Mandiri Tower 18th floor
Jl Jend. Sudirman Kav 54-55
Jakarta 12190, Indonesien
moekti.soejachmoen@bankmandiri.co.id
Abstrakt
International trade in automotive and auto parts has grown rapidly during the last two decades but
Southeast Asia’s largest economy, Indonesien, is lagging behind in its export performance. This paper
uses a comparative perspective in examining Indonesia’s role in automotive production networks in
the context of the contemporary debate on opportunities for reaping gains from economic globaliza-
tion through engagement in global production sharing.
This research aims to answer two questions; the first addresses the determinants of a country’s partic-
ipation in the global production network, the second asks why Indonesia is being left behind in global
production networks. Our analysis is based on the Jones and Kierzkowski fragmentation theory. Der
unbalanced panel trade data for 98 countries for the period 1988–2007 are estimated using the least
square dummy variable method. The results show that in Asian countries, foreign direct investment
openness is the most important determinant followed by trade cost, trade openness, competitive-
ness, and labor quality. Indonesia is being left behind for a number of reasons, such as restrictive for-
eign investment policies, higher trade costs and remaining high protection in the automotive sector in
terms of tariff and non-tariff measure, and a low education level that hampers the absorption capacity
in technology.
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1. Einführung
International trade in automotive and auto parts has been growing rapidly in the last
two decades. Globally, auto parts trade increased from US$ 109 billion in 1988 to almost US $680 billion in 2007, with an annual growth of 8.7 Prozent, which reflects the higher
intensity of global production networks in the automotive industry. There is a shift in a
∗ The paper was presented at the Asian Economic Panel (AEP) Meeting in Seoul, Südkorea, 13–14
Marsch 2014 and is part of author’s dissertation entitled “Why is Indonesia Left Behind in Global
Production Networks?” submitted to the Australian National University, Australia. The writer
wishes to acknowledge the many helpful comments of the referees. Their suggestions significantly
improved the quality of this paper.
Asian Economic Papers 15:1
C(cid:3) 2016 by the Earth Institute at Columbia University and the Massachusetts
Institute of Technology
doi:10.1162/ASEP_a_00394
Globalization of the Automotive Industry: Is Indonesia Missing Out?
global production pattern from the North America and European countries’ dominance
in the1960s to Japanese dominance in the 1970s and 1980s. And for the last 20 Jahre, manche
Asian countries such as Japan, China, Südkorea, and Thailand have increased their
production shares in the global market.
The participation of developing countries in the automotive industry was made possible
by technology developments and innovations in telecommunication and transportation,
which enabled the automotive industry to fragment its production process into smaller
segments in which components of productions or assemblies can be relocated to different
places based on cost advantages. The relocation of segmented production process creates
global production networks. Indonesien, as the largest economy in Southeast Asia, seems
to be missing out on the opportunity to reap gains from globalization in the automotive
industry, Jedoch.
Using a comparative perspective, this paper examines Indonesia’s role in automotive pro-
duction networks in the context of the contemporary debate on accessing the gains from
economic globalization through engagement in global production networks. The auto-
motive industry is one of the biggest in the world and employs more than 8 million peo-
ple making vehicles directly, and more than 40 million people indirectly through related
manufacture and services sectors. In principle, the automotive industry is an assembly
industry, where more than one thousand parts and components (P&C) are produced by
independent industries.
This paper provides a new contribution to the empirical studies on global production
Netzwerke. While the existing studies focus on selected countries and group of countries,
this research covers 98 countries with a share of manufactured exports of more than 0.01
percent and over longer period (1988–2007). This benchmark is used to make sure there is
no selection bias and that all counties in this data set export auto parts.
Abschnitt 2 reviews the literature on the product fragmentation. Abschnitt 3 discusses the de-
velopment of automotive global production networks in general, followed by a discussion
on Indonesia’s participation in the global production networks. Abschnitt 4 develops an
analytical framework for examining the factors affecting a country’s participation in the
global production networks. Abschnitt 5 discusses the definition of the variables and the
data sources. Estimation results are reported in Section 6, and Section 7 concludes.
2. Product fragmentation
A production network is a nexus of inter-connected functions and operations through
which goods and services are produced, distributed, and consumed (Henderson et al.
2002). A global production network takes place when an industry can fragment its
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
production process into smaller segments, thus enabling components of production or
assemblies to be relocated in several countries with a vertically integrated production pro-
Prozess. Global production networks are also known as “international production sharing”
(Ng and Yeats 2001), “distributed manufacturing”, or “dispersed manufacturing” (Cheng
and Kierzkowski 2001).
Anfänglich, all production processes were conducted in one place as a single integrated pro-
duction block. Technology developments, Jedoch, together with innovations in telecom-
munications and transportation, promoted the development of a fragmented production
process that consists of more than one production block. These production blocks are not
independent, but are connected through service links such as transportation, Design, qual-
ity control, insurance, research and development (R&D), telecommunications, and other
services. Several patterns of interdependence between production blocks and service links
can be envisaged. One possibility is that the output of one production block can become
an input for another production block, while a more complex relationship among produc-
tion blocks exists where there is a simultaneous operation of several production blocks
and the output of each of these is assembled in the last production block. The degree of
fragmentation can be measured by the number of stages or production blocks. As the de-
gree of fragmentation increases, so does the importance of service links for connecting the
different production blocks.
The fragmentation theory developed by Jones and Kierzkowski (1990) stated that product
fragmentation is made possible by three key contributory factors. First is the development
in production technology that enabled slicing the production process into different pro-
duction blocks. Trade liberalization is second, and the advancement in communications
and transportation that have contributed to the decline in the cost of service links is the
third contributory factor.
Growth of a firm’s output level, increasing returns to scale, and the advantages of spe-
cialization encourage a firm to switch a production process from a vertically integrated
process to fragmented production blocks connected by service links. The service links in-
clude transportation, telecommunications, and various other coordination tasks, welche
are often subject to economies of scale.
Service links are essential for production networks to connect production blocks into one
integrated production process. Following Kimura and Takahashi (2004) elements of ser-
vice link costs can be categorized into four groups: trade costs, investment costs, commu-
nications costs, and coordination costs as shown in Table 1.
Trade costs are those costs related to the trade of parts and components (P&C) among
production blocks, be it in the same firm or with other firms (arm’s length firm), Bei der
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
Tisch 1. Elements of service link costs
Category
Trade costs
Subcategory
Details
transportation costs
policy barriers
shipment charge, freight charge
tariff barriers: ad valorem tariff, specific tariff, non-tariff
information costs
search costs for sellers or buyers, research costs for
barriers (quotas, Andere)
costs associated with the use
of different currencies
legal and regulatory costs
preference of foreigners
cost of exchange rate volatility, risk edge and uncertainty
direct and indirect costs to deal with legal regulatory issues
and procedures
local distribution costs
cost to utilize local infrastructure, and to efficiently deliver
goods to local consumers
policy barriers
indirect cost due to prohibition to entry, absence of national
treatment, and other FDI discriminated measures
Investment costs
information costs
contract enforcement costs
legal and regulatory cost
search cost for suppliers
direct and indirect costs to ensure contract implementation
direct and indirect costs for dealing with legal regulatory
Communications costs
Coordination costs
timeliness
uncertainty
Quelle: Kimura and Takahashi (2004).
issues and procedures
telecommunications costs, Internet fees
indirect costs due to inadequateness of timely delivery
indirect cost due to uncertainty regarding coordination of a
series of activities from production to shipment of end
Produkte
domestic and international level. Most production blocks located in foreign countries
are conducted through foreign direct investment (FDI); investment cost is therefore one
category in total service link costs. Openness of FDI policies, especially in developing
Länder, is an important factor determining participation in global production networks.
The other two categories are communications costs and coordination costs. Innovations in
telecommunications have significantly reduced the communications costs and encouraged
the development of production networks. Timeliness as one aspect in coordination costs
becomes important as holding inventories is costly. “Just-in-time” technology, developed
by Japanese production networks, has proven effective in holding down production costs.
daher, infrastructure development is a crucial prerequisite for global production net-
work participation as this is essential for “just-in-time” technology.
3. Globalization in the automotive industry
The automotive industry has experienced a transformation since its inception in the late
19th century, when France and Germany were the largest automotive producers but with
small domestic markets (Simarmata 1997). Global automotive production experienced a
change in the pattern of production as part of this transformation. Global production of
automobiles was initially dominated by North America and European countries in 1960s.
During the 1970s and 1980s, Japan showed dramatic development in automotive pro-
duktion, with an almost 55-fold increase in production and 15 percent annual growth—
from only 1.3 Prozent in 1960 Zu 28 Prozent in 1989. In 2000, China started to enter global
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
Tisch 2. Rank of car production (unit), 2000–14
Rank
2000
2005
2010
2014
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Vereinigte Staaten
Japan
Deutschland
Frankreich
Südkorea
Spanien
Kanada
China
Mexiko
Vereinigtes Königreich
Italien
Brasilien
Russland
Belgien
Indien
Poland
Czech Rep.
Truthahn
Thailand
Taiwan
Südafrika
Australia
Argentina
Schweden
Indonesien
Malaysia
Iran
Vereinigte Staaten
Japan
Deutschland
China
Südkorea
Frankreich
Spanien
Kanada
Brasilien
Vereinigtes Königreich
Mexiko
Indien
Russland
Thailand
Italien
Belgien
Truthahn
Iran
Poland
Czech Rep.
Malaysia
Südafrika
Others
Indonesien
Taiwan
Australia
Schweden
China
Japan
Vereinigte Staaten
Deutschland
Südkorea
Brasilien
Indien
Spanien
Mexiko
Frankreich
Kanada
Thailand
Iran
Russland
Vereinigtes Königreich
Truthahn
Czech Rep.
Poland
Italien
Argentina
Indonesien
Malaysia
Slovakia
Südafrika
Romania
Belgien
Taiwan
China
Vereinigte Staaten
Japan
Deutschland
Südkorea
Indien
Mexiko
Brasilien
Spanien
Kanada
Russland
Thailand
Frankreich
Vereinigtes Königreich
Indonesien
Czech Rep.
Truthahn
Iran
Slovakia
Italien
Argentine
Malaysia
Poland
Südafrika
Belgien
Ungarn
Romania
Quelle: OICA (http://www.oica.net).
Notes: Production includes cars and commercial cars. Boldface highlights the South
asiatische Länder.
automotive production with a relatively high level of production at more than 2 Million
Einheiten. This decreased the dominance of Germany, Die Vereinigten Staaten, and Japan. Auto-
mobile production in the world reached its highest annual growth during the period
1989–2000, with almost 5 percent growth per annum. In 2000, Kanada, Südkorea, Und
Malaysia experienced higher growth in automobile production compared with other
Länder. This reflects the spread of technology from the United States and Japan to other
Länder. In 2014, China was still the biggest producer of cars in the world, with the an-
nual growth rate decreasing from 23 percent in period 2000–07 to 15 percent in period
2007–14. Germany and Japan showed a negative growth rate of production in those peri-
Odds, whereas Indonesia continued to increase its production—from around 400,000 cars in
2007 to more than 1.2 million cars in 2014 (as shown in Table 2).
The automotive industry has an extremely concentrated firm structure, with a small num-
ber of giant companies dominating global production. An important characteristic of auto
parts is that there are few fully generic P&C that can be used in a wide variety of final
products without extensive customization such as in the electronics industry. This char-
acteristic limits auto parts firms from achieving economies of scale in production and
economies of scope in design. The relationship between auto parts suppliers and car as-
semblers are typically captive and relational. Many components are larger and heavier
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
than electronics P&C and therefore relocation to close proximity of producer is preferable
to a more distant location.
East Asian countries contributed around 21–23 percent of autopart trade for the period
1988–2007. Among East Asian countries, Japan, China, Südkorea, and Thailand are the
major players in the auto parts trade. Japan’s role in export share has declined over time,
aus 18 Prozent in 1989 Zu 9 Prozent in 2007, although it is still the largest exporter of auto
parts in Asia. In der Zwischenzeit, China’s export share increased from a low 0.6 Prozent in 1992
to more than 7 Prozent in 2007. Other countries in Asia that experienced an increase in ex-
port share are South Korea, Thailand, and Indonesia. South Korea’s share increased from
1.5 Prozent in 1989 Zu 3 Prozent in 2007, and Thailand increased from only 0.2 Prozent in
1999 Zu 1.5 Prozent in 2007. In der Zwischenzeit, Indonesia’s export shares are relatively modest,
aus 0.2 Prozent in 1992 Zu 0.5 Prozent in 2007.
For the last 20 Jahre, the value of the auto parts trade has increased four-fold, aus
around US$ 165 billion in 1990 to US$ 680 Milliarde 2010. Japan was the largest exporter
of auto parts in Asia during this period, with an increase in export value from around
US$ 27 billion in 1990 to more than US$ 61 billion in 2008. Indonesia’s position in the ex-
port of auto parts was ninth throughout the period, with a substantial increase in export
value from only US$ 112 million in 1990 to almost US$ 3.5 billion in 2008. Thailand also
experienced a substantial increase in its export value, from US$ 312 million in 1990 to almost US$ 10 billion in 2008. This impressive performance makes Thailand one of the
major hubs in the regional automotive production network.
Wie erwartet, the major export destination countries for Indonesia and Thailand are Japan
und die Vereinigten Staaten, followed by other ASEAN countries. The destination for Indone-
sia’s exports has changed from 1990 Zu 2010. In den 1990ern, the major destination was
Singapur, not because Singapore has car assembler firms but because Indonesia used
Singapore as an entrep ˆot for export to other countries. Seit 2001, Jedoch, the main des-
tination of Indonesian export has been Japan and the United States, followed by other
ASEAN countries such as Thailand, Malaysia, Singapur, and the Philippines.
In comparison, Thailand’s major export destinations are Japan and the United States. In
the 1990s, the first destination was the United States, but from 2001 onward, Japan re-
placed the United States as Thailand’s first export destination, followed by other ASEAN
countries such as Malaysia and Indonesia. Zusätzlich, Thailand also exports auto parts
to more distant countries such as India and Brazil. Considering the size and weight of
auto parts compared with electronics parts and components, export of parts to relatively
distant countries reflects the importance of Thailand as a hub in regional and global au-
tomotive production networks. The increased intensity of intra-Asian trade reflects the
higher degree of global production networks in Asian countries.
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
4. Modell
The empirical model used in this paper is based on Jones and Kierzkowski’s (1990) frag-
mentation theory. The hypothesis is that this participation depends on relative costs as
well as service link costs. Relative costs are measured by the labor cost and real exchange
rate (RER). The service link costs are measured by the trade cost, infrastructure condi-
tion, trade openness, and FDI openness. The full specification of the model can be written
as follows:
ln Fragi,T
= α + β
1 ln Lab Costi,T
+ β
2 ln RERi,T
+ β
3Trade Costi
+ β
4Trade Openi,T
+ + β
5Infrastructurei
+ β
6FDI Openi,T
+ ϕ
1C + τ
t T + ε
ich,T
,
(1)
where subscript i represents the ith country, i = 1, 2, . . . , 98, and t represent the year, t =
1988, 1989, . . . , 2007. Fragi,t is fragmentation trade, which is measured by the real value
of exports of P&C. Labor cost (Lab_Cost) has a positive expected sign based on the new
trade and fragmentation theory whereby a higher-quality product requires higher capital-
intensity in production and in an open-economy the capital-rich country will export high-
quality products whereas the labor-rich country will export low-quality product. Der
higher capital intensity products require higher skill labor, which implies higher cost
of labor.
Product competitiveness is measured by the RER. Traditionell, the appreciation of do-
mestic currency raises the cost of imports and lowers that of exports. In production net-
funktioniert, Jedoch, the relationship can be reversed. The response of a country’s exports to
a change in the exchange rates should decline as the share of the imported components
of its exports rises. daher, the relationship between changes in RER and trade will be
smaller in the presence of production networks.
Fragmentation trade depends significantly on service links that connect the production
blocks and ensure that the production blocks interact effectively. Trade cost (Trade_Cost)
is crucial in determining the flow of goods between countries, especially in the frag-
mentation trade because of the double trade-cost incidence of exporting components
and re-importing them (or vice versa). Labor abundant countries that have low trade
costs import components and export assembled products, whereas countries with
higher trade costs import and assemble components for the local market only. A lower
trade cost will increase the trade flows in a country, and therefore the expected sign
is negative.
Trade openness (Trade_Open) has a positive expected sign because a country with a more
open trade flow is expected to have greater participation in the global production net-
works as it will be easier for the firms to move the auto parts across plants in different
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
Länder. An efficient infrastructure (Infrastructure) affects both communication and co-
ordination costs. This includes reliable and affordable telecommunications and electricity,
roads in good conditions, as well as reliable and efficient port management. FDI openness
(FDI_Open) is crucial because foreign producers are willing to bring the latest technology
when it is possible to have full foreign ownership in the country. Two dummy variables
are included in the model. Erste, the country dummy variable (C) captures the unobserved
country differences such as geographical location and historical involvement in the global
production networks. Zweite, the year dummy variable (T) controls for time-varying fac-
tors relating to auto parts such as technology and price changes.
5. Data
The model covers 98 countries that had more than 0.01 percent share of world manu-
factured goods export in 2007. The cutoff using the share of manufactured export was
chosen to avoid a selection bias problem. The data set was assembled from six different
databases: UN COMTRADE, ILO Laborsta, Index of Doing Business, UNCTAD database,
World Development Indicators (WDI), and the Logistic Performance Index by the World
Bank. The initial year is 1988, because it is the first year the UN COMTRADE database
started reporting under SITC Revision 3, on which the commodity listing of P&C in this
study is based. The end point is 2007, because this was the latest year for which data for
most of the variables are available, while the data for 2008–09 are liable to have been af-
fected by the 2008–09 global financial crisis.
The dependent variable (Frag) is the real value of export of P&C sourced from the UN
COMTRADE database. The real value is derived using the U.S. import price index for
automotives. For the automotive sector, the list of P&C has been modified from Athuko-
rala’s list (2011) by including other P&C, which are considered to be auto parts by the
Japan Auto Parts Industries Association (JAPIA) and the Indonesian Automotive P&C
Industries Association (GIAMM). Additional P&C goods include tires, safety glass, au-
tomotive electronics parts, brakes, and safety airbags. The complete list of P&C in the
automotive sectors is provided in Appendix A.
Labor cost (Lab_Cost) is represented by real wage, which is calculated from the nomi-
nal manufacturing wages in US$ deflated by the U.S. Wholesale Price Index. Trade cost
(Trade_Cost) uses administration cost for export at the port collected by the World Bank’s
Doing Business Survey. This cost does not include customs tariffs and duties or costs re-
lated to ocean transport, and only official costs are recorded.
Trade openness (Trade_Open) is measured as the ratio of total export and import to GDP.
This measurement has a shortcoming, as discussed in Athukorala and Hill (2010). Der
caveat of using this measurement is that it is a comparison between a net and a gross
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
concept. Trade is measured in gross terms (intermediate materials + value-added)
whereas GDP is measured on a value-added basis. Therefore the measured change in
trade orientation is sensitive to changes in import intensity of export production. Krug-
man (1995) argued that countries involved in production networks tend to have (arti-
ficially) high trade-to-GDP ratios. Therefore the inclusion of this variable will raise an
endogeneity problem and an instrumental variable is needed to overcome the problem.
The data are sourced from the WDI Logistic Performance Index constructed by the World
Bank is used as a proxy infrastructure condition. The variable used to represent FDI open-
ness is a ratio of FDI inflow stock to GDP sourced from the UNCTAD database. The use of
FDI stock instead of FDI flow is to avoid high fluctuation in the data.
There is a possible two-way causation between trade costs and trade flows. Besides
the effect of trade costs on trade flows, it is possible that higher trade flows will stimu-
late lower trade costs because exporters and importers become more efficient and thus
they can influence the government to reduce the trade costs. The Hausman-Wu speci-
fication test is conducted to judge whether this causation is a problem in the data com-
piled in this study. The result rejects the null hypothesis that there is causality from
trade flows to trade cost. Therefore there is no evidence that trade flows will lower the
trade costs.
There is still a possibility of endogeneity of trade openness, Jedoch. Quality of democ-
racy and political institution from the Polity IV database is used as an instrument. Der
democracy variable is the difference between the democracy and the autocracy scores
in this database, averaged over the period. It measures the competitiveness and regula-
tion of political participation, the openness and competitiveness of executive recruitment,
and the constraints on the executive. These instrument variables are directly correlated to
trade openness but not directly related to the trade flows.
There are two estimation techniques available for panel data regression: fixed and ran-
dom effects. Because the difference among countries is important, the fixed-effect esti-
mation is used for this model. The fixed-effect estimator can be implemented in three
ways: time demeaning (or within transformation), the first-difference, or the least square
dummy variable (LSDV). The first two cannot be implemented in this model because they
will eliminate the time-invariant variables such as trade cost and infrastructure condi-
tion, all of which are important for the model. Andererseits, the LSDV technique
with country and time dummies can handle the time-invariant variables. Endlich, to guard
against the heteroscedasticity problem, I use the heteroscedasticity-consistent standard
Fehler (d.h., the White correction) clustered by country.
Tisch 3 summarizes the information on data sources for variables as explained here.
9
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
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10
Asian Economic Papers
Globalization of the Automotive Industry: Is Indonesia Missing Out?
Tisch 4. Estimation results for auto parts, 1988–2007
Dependent variable: Alle
real export value
Länder
Developed Developing Asian
Länder
Länder
Länder
lnLab_Cost
lnRER
lnXCost
Infrastructure
lnTrade_Open
lnFDI_Open
d_Ind
d_Thai
_cons
0.257∗∗
(0.119)
0.053∗
(0.028)
0.524
(0.691)
4.197∗∗∗
(0.294)
0.777∗∗
(0.333)
0.533∗∗∗
(0.157)
∗∗∗
0.575∗∗∗
(0.205)
0.027
(0.037)
2.911
(0.211)
1.972∗∗∗
(0.337)
1.517∗∗∗
(0.409)
−0.049
(0.106)
0.315∗∗
(0.139)
0.007
(0.037)
0.493
(0.979)
3.114∗∗∗
(0.444)
0.282
(0.368)
0.347∗∗
(0.175)
−7.299
(5.422)
−19.864∗∗∗
(2.689)
−3.004
(7.808)
Instrumental var.
Country dummy
Year dummy
NEIN. of observations
Adjusted R2
NEIN
Ja
Ja
995
0.973
NEIN
Ja
Ja
497
0.982
NEIN
Ja
Ja
517
0.962
0.339∗∗
(0.150)
0.347∗∗
(0.164)
∗∗
−1.532
(0.681)
1.412
(1.047)
−0.994∗∗
(0.442)
2.212∗∗∗
(0.588)
−0.063
(0.935)
1.616∗∗∗
(0.273)
12.486∗∗
(4.959)
Ja
NEIN
Ja
266
0.845
Notes: Time and country dummies are included, but the results are suppressed here.
Standard errors based on White’s heteroscedasticity correction cluster by country are
given in parentheses, with statistical significance (two-tailed test) denoted as follows:
∗∗∗
∗∗
Statistically significant at the 1 percent level;
statistically significant at the 5 Prozent
∗
Ebene;
statistically significant at the 10 percent level.
6. Results and discussion
6.1 Determinants of participation in automotive global production networks
Tisch 4 depicts the estimation results for all models of auto parts. Infrastructure condition,
measured by the Logistic Performance Index, is the most important variable that deter-
mines the participation in the global production network. The coefficient for developing
countries is larger than for developed countries. This larger coefficient implies that par-
ticipation in global production networks by developing countries is more sensitive to the
improvement of infrastructure quality than it is for developed countries.
An efficient infrastructure affects both the communications and coordination costs, als
shown in the elements of service link costs by Kimura Takahashi, and Hayakawa (2007).
Efficient infrastructure includes reliable and affordable telecommunication and electric-
ität, roads in good conditions, as well as reliable and efficient port management. Das ist
especially the case for the automotive sector where just-in-time delivery is crucial. Reli-
able infrastructure is necessary to guarantee that delivery from one production network
to another in the same country as well as delivery from warehouse to port for export.
This characteristic differentiates the fragmentation trade from the traditional trade flows,
where real wages and competitiveness are the most important factors.
11
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
There are several studies that focus on the role of infrastructure in global production net-
works and all found the same results. Golub, Jones, and Kierzkowski (2007) find evidence
that successful exporters of manufactures in East Asia have relatively favorable service
links such as transport and telecommunications infrastructure. Lim˜ao and Venables (2001)
emphasize the relation between infrastructure and trade cost especially for landlocked
Länder. A deterioration of infrastructure will raise transportation costs and reduce
trade flows. Their closer investigation on Southern African countries found that low trade
flows in these countries are caused by poor infrastructure.
The estimated coefficients for trade openness are positive and significant for the automo-
tive sector. Trade openness is a result of trade liberalization and the automotive sector is
usually highly protected in developing countries. There is considerable government in-
volvement in this sector because the automotive sector is considered as a vital sector in
national economic development strategies. These government interventions support the
development of domestic production and protection for domestic production; they are
usually in the form of high import tariffs and non-tariff barriers, both on the auto parts
and the final goods. Trade liberalization in the automotive sector in the form of a reduc-
tion of tariff barriers and/or the elimination of non-tariff barriers increases trade openness
and affects the trade of auto parts. Several studies in developing countries confirmed that
trade liberalization, especially for intermediate inputs, increases the variety of imported
intermediate input and firms’ productivity, which in turn increases their exports.
The estimated coefficients for FDI openness are positive and significant except for de-
veloped countries. With full ownership, a foreign carmaker is willing to bring the latest
technology into the host economy and improve managerial practices and practice close
supervision of assembly/production by bringing in foreign technicians and managers.
l
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.
As discussed by Kimura (2008), because of resource limitations, the late-comers in the
developing countries do not have to improve their overall investment environment for
the whole economy to attract more FDI. They can focus on a minimal set of FDI facilita-
tion, infrastructure services, and convenient service link arrangements at some specific
locations to attract the initial wave of production blocks. One of the major bottlenecks to
overcome is the high service link cost such as customs clearance and logistics, welche sind
included in the trade cost measure.
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Previous studies using the augmented gravity model found different results on the re-
lationship between labor cost and export of P&C depending on the countries used in
the models. Athukorala and Yamashita (2006) found a negative and significant relation-
ship for East Asian countries, whereas Zeddies (2011) found a positive and significant
relationship for the EU. East Asian countries can be regarded as developing countries
that are labor intensive, whereas the EU members are developed countries that are more
12
Asian Economic Papers
Globalization of the Automotive Industry: Is Indonesia Missing Out?
technology intensive. Another study by Athukorala (2009) An 40 countries found a nega-
tive but insignificant relationship between labor cost and export of P&C.
The positive and significant coefficient for developed countries agrees with previous
Studien. The positive and significant coefficient for developing countries is a new find-
ing, which is due to the different level of analysis. The existing studies were conducted
for P&C for all sectors, whereas this research focuses on P&C for automotives. The pos-
itive effect of labor cost to participation in global production networks in developing
countries therefore suggests that a higher labor cost implies higher labor productiv-
ität, which in turn will produce a higher export value since it relates to higher quality
of products.
Quality of labor is closely related to the level of technology in each country. Technologie
capacity becomes a more important determinant, as the increase in labor wage leads to
a decline in the comparative advantage in simple labor intensive activities (Hill 2001).
Technology capacity has a positive impact on participation in global production networks
through export, as argued by Lall (2000) and Fagerberg (1996). Products with simple tech-
nologies tend to have slower market growth, limited potentials, smaller scope to upgrade
Technologie, and fewer spillovers to other activities.
This positive and significant coefficient for Lab_Cost suggests that skilled labor is im-
portant in increasing a country’s participation in the global production network and
it is highly related to education level. Higher labor cost relates to higher quality of la-
bor, and therefore it is crucial for a country to improve its education system and pro-
vide an environment that facilitates the supply of highly skilled labor that can support
technology development.
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A country’s competitiveness, as measured by the real exchange rate, has a positive ef-
fect on the fragmentation index, as predicted by the traditional trade theory. An increase
in RER reflects the depreciation of the domestic currency, which in turn makes the ex-
ported P&C more competitive in the world market. The coefficients for both developed
and developing countries are not significant, Jedoch, and this concurs with the findings
of Arndt and Huemer (2005) and Athukorala and Yamashita (2009) that the link between
exchange rate and trade is weakened in the global production network trade.
F
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3
From this analysis, it can be concluded that the determinants of participation are different
in developed and developing countries in the automotive global production network. In
the developed countries, participation through export of auto parts is highly dependent
on trade cost, Infrastruktur, trade openness, and labor quality. Andererseits, Par-
ticipation of the developing countries depends on infrastructure condition, FDI openness,
and labor quality.
13
Asian Economic Papers
Globalization of the Automotive Industry: Is Indonesia Missing Out?
6.2 Why is Indonesia missing out?
The second research question is why Indonesia has been left behind in the globalization of
the automotive sector. To answer this question, equation (1) is modified by replacing the
country dummy variables with dummy variables for ASEAN-4 countries, which includes
Indonesien, Malaysia, die Phillipinen, and Thailand. Singapore is not included because
Singapore is considered as new industrialized economy whereas the other four countries
are considered as developing countries. The estimation equation for the second question
is as follows:
ln Fragi,T
= α + β
1 ln Lab Costi,T
+ β
2 ln RERi,T
+ β
3Trade Costi
+ β
4Trade Openi,T
+ β
+ ϕ
5Infrastructurei
3d Phil + ϕ
+ β
6FDI Openi,T
.
t T + ε
ich,T
+ ϕ
1d Ind + ϕ
2d Thai
(2)
4d Mal + τ
To make a reasonable comparison between Indonesia and other countries, equation (2) Ist
estimated for Asian countries data rather than the full data set or the developing countries
data set.
The estimation result for the export side is depicted in the last column of Table 3. Der
coefficient of d_Ind is negative, as expected. In der Zwischenzeit, the estimated coefficients for
d_Thai are positive and significant, which means that Thailand is ahead of other Asian
Länder, and this is consistent with the fact that Thailand is one of the major hubs of
automotive production for regional and global markets.
From the estimation results, the major determinants for the Asian countries to partici-
pate in the automotive production networks are FDI openness, trade cost, labor quality,
and competitiveness. The author provides the following analytical narrative based on the
empirical findings.
Indonesia is relatively more restrictive toward FDI compared to Thailand and Malaysia.
There are rather ambivalent attitudes toward FDI. The FDI policy (In 1974) requires the
establishment of a joint venture for foreign investment in Indonesia. Although this policy
was changed in 1994 allowing 100 percent of foreign ownership in Indonesia, the frequent
policy changes affected the automotive industry as it created uncertainty for both domes-
tic and foreign investments. Because majority of foreign ownership was not permitted
Vor 1994, Japanese car makers were reluctant to transfer the related technology to their
partners in Indonesia, which resulted in less participation from Indonesia in the regional
production networks as compared with Thailand.
Trade cost and infrastructure affect Indonesian participation in the automotive pro-
duction network because they increase uncertainty in delivering auto parts from one
14
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Globalization of the Automotive Industry: Is Indonesia Missing Out?
production block to another. In interviews with auto parts firms in Jakarta, I found that
many prefer to locate their plants near the port to avoid the traffic congestion to and from
the port. If they must locate near the port, they prefer to avoid peak hours and choose to
transport the parts at nights or on weekends. Although the additional cost of paying over-
time for the drivers is still cheaper than the cost of congestion, this additional cost still
affects the competitiveness of their products.
An unexpected result from this model is the negative and significant coefficient for trade
openness. As explained earlier, trade openness should have a positive impact on the
trade of auto parts because the automotive sector is a protected sector and therefore any
trade liberalization will improve the trade of auto parts. The negative coefficient in this
model means that more open trade in the Asian countries leads to less trade in auto parts,
especially in technology intensive auto parts. Because most Asian countries are develop-
ing-Länder, protection for the automotive sector is usually in the form of an import ban
on cars, with the intention of developing the domestic car industry. Because the domes-
tic car industry (especially the auto parts producers) is not yet fully developed, Jedoch,
the car industry has to import vital auto parts and these are usually technology inten-
sive parts. When the automotive sector is liberalized, the import ban on cars can be lifted
and the domestic car industry can import cars rather than technology intensive parts.
Trade openness therefore has a negative impact on the trade of the technology intensive
auto parts.
For Asian countries, labor cost and technology capacity are the other determinants that
affect participation in the automotive global production network. Labor cost depends not
only on the wage level but also on labor productivity. Labor productivity and technology
capacity are closely related to a country’s education and the skill level of its labor. Indone-
sia’s human capital quality still lags its neighbors. Erste, the quality of labor in Indonesia
is relatively low compared with the neighboring countries. The completion rate of ter-
tiary education is low (nur 1.4 Prozent in 2010), and the completion rates for primary and
secondary education were 37.4 percent and 22.8 Prozent, jeweils, In 2010. Compar-
ing Indonesia with other South East Asian countries reveals that for the quality of labor
force, In 2001 Indonesia is the second lowest of ten countries and Cambodia is the lowest.
Improving education conditions in Indonesia is critical for attracting FDI as well as for
improving Indonesia’s absorptive capacity.
The relatively low education level in Indonesia hampers the absorption capacity for new
Technologie, as argued by Jacob and Szirmai (2007). Indonesia’s technology capacity is
still limited compared with other Asian countries. Many high-tech projects such as air-
craft, shipbuilding, railroads, telecommunications, and steel and machinery were devel-
oped before the 1997–98 Asian financial crisis, but these projects have been abandoned
since the crisis and no technology policies have been created to replace them. Infolge,
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Indonesia remains near the bottom of the technology ladder in the region (Lipsey and
Sj ¨oholm 2010). One indicator of this is the low investment in research and development.
This holds true not only for the public sector, but also for foreign companies operating
in Indonesia. A survey by the U.S. Bureau of Economic Analysis shows that R&D invest-
ment as a percent of employee compensation in U.S. majority affiliates in Indonesia is
nur 0.6 Prozent, the lowest compared with other Asian countries (such as Korea, Singa-
pore, China, and Malaysia). The highest percentage is Singapore and Taiwan at about 19
Prozent, followed by China (14.9 Prozent) and Malaysia (11.2 Prozent), and the next lowest
is Thailand at about 2.1 Prozent. The reluctance of U.S. affiliates to invest in R&D is closely
related to the ownership restrictions discussed earlier.
There are several reasons why Indonesia is not as advanced as Thailand in the automotive
global production network. Erste, its investment policies toward foreign investment are
more restrictive, especially the restriction on 100 percent foreign ownership that discour-
ages foreign carmakers from making any substantial investments in Indonesia. Zweite,
Indonesia’s infrastructure is in poor condition, which not only reduces the competitive-
ness of P&C goods, but also limits the domestic demand for cars. Endlich, protection for
the domestic car industry, which is reflected in the relatively higher import tariffs for cars
and auto parts, restricts Indonesia’s growth in this area.
7. Abschluss
This paper provides analysis on the deteminants of a country’s participation in the auto-
motive global production networks. From the estimation results, it can be concluded that
service link is important in determining a country’s participation in the global prodution
Netzwerke, especially infrastructure, and the second important issue in developing coun-
versucht, followed by FDI openness.
In der Zwischenzeit, the reason that Indonesia is being left behind in the automotive global pro-
duction networks is because of the relatively more restrictive investment policies toward
foreign investment, trade cost, labor quality, and competitiveness.
With a huge domestic market in Indonesia, which creates economies of scale, it is ex-
pected that the Indonesian automotive industry can participate more in the global
production network than it can in its current condition. Its participation is hampered,
Jedoch, because of its investment policies, trade costs, and the remaining high pro-
tection in the automotive sector. All of these influence the openness of trade. Both cen-
tral and local governments have to provide efficient investment procedures with clearer,
more consistent, and simplified procedures at the lowest possible cost to attract more for-
eign investment in Indonesia. A resurgence of nationalist sentiment, manifested through
non-tariff barriers, discourage participation in global production networks. Technisch
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ministries should base their non-tariff barrier decisions on analytical studies that clearly
outline the costs and benefits of such policies instead of ad hoc decisions triggered by
nationalist sentiment. This transparent and systematic process will increase business con-
fidence on Indonesia.
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Appendix A. List of parts and components in the automotive sector
SITC3 ISIC2 ISIC3 Description
1. Auto Parts
3551
6251
6252
62541
62591
66471
66472
66481
69915
69941
74315
7438
7481
74821
74822
7485
7486
7489
74443
74363
74364
74999
3551
3551
3551
3620
3620
3620
3811
3819
3829
3829
3829
3829
3829
3829
3829
3829
3829
3829
3829
3829
2511
Tyres, pneumatic, neu, of a kind used on motor cars (including station wagons and racing
2511
2511
2511
2610
2610
2610
2899
2899
2912
2912
2913
2913
2913
2913
2913
2913
2915
2919
2919
2919
cars)
Tyres, pneumatic, neu, of a kind used on buses or lorries
Tyres, pneumatic, neu, of a kind used on motorcycles and bicycles of a kind used on
motorcycles
Inner tubes
Safety glass, consisting of toughened (tempered) or laminated glass of toughened (tempered)
glass
Safety glass, consisting of toughened (tempered) or laminated glass of laminated glass
Rear-view mirrors for vehicles
Other mountings, fittings and similar articles suitable for motor vehicles
Springs and leaves for springs, of iron or steel
Compressors of a kind used in refrigerating equipment
Parts for the pumps, compressors, fans and hoods of subgroups 743.1 Und 743.4
Transmission shafts (including camshafts and crankshafts) and cranks
Bearing housings, incorporating ball- or roller bearings
Bearing housings, not incorporating ball- or roller bearings; plain shaft bearings
Flywheels and pulleys (including pulley blocks)
Clutches and shaft couplings (including universal joints)
Parts, n.e.s., for the articles of group 748
Other jacks and hoists, hydraulic
Oil or petrol filters for internal combustion engines
Intake air filters for internal combustion engines
Other machinery parts, not containing electrical connectors, insulators, coils, contacts or other
electrical features
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Appendix A. Continued.
SITC3 ISIC2 ISIC3 Description
71651
3831
3110
Electric generating sets with compression-ignition internal combustion piston engines (diesel or
7169
77812
77821
77823
77833
77834
77835
77313
76211
3831
3839
3839
3839
3831
3839
3839
3839
3832
3110
3140
3150
3150
3190
3190
3190
3190
3230
76212
3832
3230
76422
76423
76425
88571
71391
3832
3832
3832
3853
3829
3230
3230
3230
3330
3430
semi-diesel engines)
Parts, n.e.s., suitable for use solely or principally with the machines falling within group 716
Electric accumulators (storage batteries)
Filament lamps (other than flash bulbs, infrared and ultraviolet lamps and sealed-beam lamp
Einheiten)
Sealed-beam lamp units
Parts of the equipment of heading 778.31
Electrical lighting or signalling equipment (excluding articles of subgroup 778.2), windscreen
wipers, defrosters and demisters, of a kind used for cycles or motor vehicles
Parts of the equipment of heading 778.34
Ignition wiring sets and other wiring sets of a kind used in vehicles, aircraft or ships
Radio-broadcast receivers not capable of operating without an external source of power, of a
kind used in motor vehicles (including apparatus capable of receiving radio-telephony or
radio-telegraphy) incorporating sound-recording or reproducing apparatus
Radio-broadcast receivers not capable of operating without an external source of power, of a
kind used in motor vehicles (including apparatus capable of receiving radio-telephony or
radio-telegraphy) not incorporating sound-recording or reproducing apparatus
Loudspeakers, mounted in their enclosures
Loudspeakers, not mounted in their enclosures
Audio-frequency electric amplifiers
Instrument panel clocks and clocks of a similar type, for vehicles, aircraft, spacecraft or vessels
Parts, n.e.s, for the internal combustion piston engines of subgroups 713.2, 713.3 Und 713.8,
suitable for use solely or principally with spark-ignition internal combustion piston engines
71392
3829
3430
Parts, n.e.s, for the internal combustion piston engines of subgroups 713.2, 713.3 Und 713.8,
3843
78431
3843
78432
3843
78433
3843
78434
3843
78435
3843
78436
3843
78439
3844
78535
3844
78531
3844
78536
3844
78537
3320
82112
62593
3551
1. Assembly
3843
3843
3843
3843
7841
71321
71322
71323
3430
3430
3430
3430
3430
3430
3430
3591
3592
3592
3592
3610
9999
3410
3410
3410
3410
suitable for use solely or principally with compression-ignition internal combustion piston
engines
Bumpers, and parts thereof
Other parts and accessories of bodies (including cabs)
Brakes and servo-brakes and parts thereof
Gearboxes
Drive-axles with differential, whether or not provided with other transmission components
Non-driving axles, and parts thereof
Other parts and accessories
Parts and accessories of motorcycles (including mopeds)
Invalid carriages, whether or not motorized or otherwise mechanically propelled
Parts and accessories of invalid carriages
Parts and accessories of other vehicles of group 785
Seats of a kind used for motor vehicles
Used pneumatic tyre
Chassis fitted with engines, for the motor vehicles of groups 722, 781, 782 Und 783
Reciprocating piston engines of a cylinder capacity not exceeding 1,000 cc
Reciprocating piston engines of a cylinder capacity exceeding 1,000 cc
Compression-ignition engines (diesel or semi-diesel engines)
1. Car Body Maker
78421
78425
3843
3843
3420
3420
Bodies (including cabs), for the motor vehicles of groups 781,
Bodies (including cabs), for the motor vehicles of groups 722, 782 Und 783
Quelle: Author’s list.
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