How Much Does Turnover Matter? Evidence from Indonesian Manufacturing Total Factor Productivity Growth, 1975-95

Indonesian manufacturing exhibits a dual structure, with a sector composed of a few dominant large and long-lived companies, along with a sector composed of numerous small and medium enterprises and displaying dynamic turnover. Using manufacturing plant-level panel data (1975-95), we decompose total factor productivity (TFP) growth into intra-plant TFP growth, market share reallocation among incumbents and plant turnover effect. Both market share reallocation from low to high productivity growth plants, and the process of turnover among small- and medium-scale plants offer a high and positive contribution to aggregate TFP growth. This is, however, cancelled out both by the reallocation of market shares from high to low productivity level plants, and incumbents' intra-plant productivity losses. This suggests that the turnover process in the small- and medium-scale sector is essential to aggregate TFP growth, but that the process of catching up within manufacturing is not yet advanced enough to provide the full benefits.