Title

The effect of Indonesia trade liberalization on price-cost margins and technical efficiency

Date of Award

1997

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Advisor(s)

J. David Richardson

Keywords

Indonesian text

Subject Categories

Economics

Abstract

It is suspected that in a protected market dominated by only a few firms, the domestic market tends to be oligopolistic. This condition permits domestic firms to exercise market power. Trade liberalizaton increases competition, which forces domestic firms to behave more competitively. This argument in fact is a hypothesis about how firms react to change in trade policy. Therefore, testing it carefully requires firm-level data. Moreover, it can be argued that trade liberalization forces domestic firms to improve their technical efficiency to compete with foreign producers, since lacks of competition induce domestic firms not to make enough effort to cut their production costs.

The main purpose of this study is to investigate the impacts of trade reforms on price-cost margin as well as on technical efficiency within the context of the Indonesian manufacturing sector using firm-level data for the period 1990-93. To study the competitive effects of trade liberalization, this study uses a structural econometric model to estimate the mark-ups of firms can be calculated from the accounting data. This study finds insignificant negative correlation between import competition and the mark-ups of firms. Thus, this study provides no support for the import-discipline hypothesis. Furthermore, to investigate the effects of trade reform on the technical efficiency of firms, this study uses a stochastic frontier model, and estimates firm time invariant technical inefficiency and regresses this estimate of technical inefficiency of firms on the attributes of firms such as firm size, firm exporting status and firm import competing status. This study finds that big exporters are technically more efficient than small exporters, while firms that operate in extensive import competing industries may be technically more efficient than firms that operate in less extensive import competing sectors. Finally this study attempts to correlate price-cost margin, international competition and technical inefficiency simultaneously. This study finds that in Indonesia, import competition not only forces domestic firms to lower their price, but also forces domestic firms to improve their technical efficiency. These two effects almost cancel each other, leaving little effect on price-cost margin.

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