Nothing to Fear but Fear Itself: Evidence on Imported Intermediates in Indonesia

The combination of an increasing trade imbalance, concerns about deindustrialization after several years of booming commodity prices, and rising imports of intermediate inputs and capital goods over the last decade has triggered new restrictive trade measures that have been gaining ground in Indonesia. The Indonesian government is concerned about the impacts that an increased reliance on imported inputs may have on domestic jobs and value added. In addition to use of imported intermediates by firms involved in global production networks, firms use these intermediates for various reasons, including value, variety, and quality. Drawing on the findings of recent research, this note examines the characteristics of firms that rely on imported intermediates, and the role of these foreign intermediates on product quality upgrading and product diversification in Indonesia during 1998–2009. After a careful examination of sector- and firm-level data from Indonesian manufacturing, analysis uncovered three important findings: first, that users of imported inputs in Indonesia are exceptional performers. These firms grow faster in terms of output, value added and employment; they are more productive; and they pay higher wages. Second, both the use and the availability of imported inputs have contributed to improved product quality in Indonesian manufacturing. Third, firms’ product diversification processes have been boosted by lower tariffs on inputs and by increased usage of imported versions. In light of these results, this note argues that facilitating imports of intermediate inputs is crucial to the performance of the most dynamic firms and that these intermediate imports diversify the Indonesian manufacturing sector while helping firms climb up the value chain.