batam: life after the ftz? - iseas–yusof ishak institute › images › pdf ›...
TRANSCRIPT
Batam: Life after the FTZ?
Siwage Dharma Negara and Francis E. Hutchinson
ISEAS-Yusof Ishak Institute
October 2018
Abstract
Once an island of high-tech production and turbo-charged growth, Batam’s economic fortunes have
waned of late. The traditional pillars of the manufacturing sector have contracted, investment levels
have fallen, the island’s growth rate is below the national average, and unemployment has increased
sharply. In response, policy-makers are promoting the development of new sectors to diversify the
island’s economic base. There are debates on whether Batam’s status should be changed from a Free
Trade Zone (FTZ) to a Special Economic Zone (SEZ) to draw in more investment. This paper aims
to contribute to the debates on how to revitalize the island’s economy. Using data from the
Manufacturing Survey of Large and Medium-Sized Firms, this study analyses the growth and
performance of Batam’s three largest manufacturing branches (electronics, electrical goods, and ship-
building) over 2008-2015. These results are then compared with those from firms in the same sectors
in Java and Sumatera. An econometric analysis is undertaken to determine whether the island’s FTZ
status is related to improvements in productivity, output, and exports. The results of these exercises
are then evaluated in light of these policy choices.
Keywords: Indonesia, Batam, FTZ, electrical & electronics, ship-building, productivity
JEL Classification: O14, R11, R12
________________________________________________________________________________
No. 2018 - 5
1
Batam: Life after the FTZ?
Siwage Dharma Negara and Francis E. Hutchinson
1. Introduction
In the 1990s, Batam enjoyed growth rates in the teens and was the fastest-growing part of Indonesia.
Leveraging its proximity to Singapore, strategic location along major shipping routes, superior
infrastructure, and high-level political backing, the island’s economy developed quickly following
key liberalization reforms enacted in 1989.
Over the next two decades, from virtually no industrial production at all, Batam developed
into one of Indonesia’s key centres of manufacturing, with substantial investment from Singaporean,
Japanese, and European firms. By 2009, the island housed some eighty electrical and electronics
firms, many with facilities employing thousands of workers. From the mid-2000s onwards, this was
complemented by scores of ship-building companies who were attracted by the same attributes. At
the industry’s height in 2011-2013, almost half of Indonesia’s 250 ship-yards were located in Batam.
Due to these two sectors, along with tourism, the island has become a key source of foreign exchange
for Indonesia.
This outward-oriented production has been a boon to Batam, enabling it and its mother
province, the Riau Islands, to enjoy higher than average growth rates. In the 1990s, the island’s
economy grew at stellar levels, well above 10 per cent p.a. From 2000 to 2010, while expanding at
more modest rates, nonetheless Batam and the Riau Islands grew considerably faster than did
Indonesia as a whole (Figure 1).
This trend continued until 2015, with both entities growing 1-2 per cent faster than the national
average. Despite experiencing massive inflows of people from other parts of the country, economic
growth has outpaced population increase, with the result that the Riau Islands is the wealthiest
province in the country – Jakarta excepted (BPSc 2017). However, the days of rapid growth may well
be over. In 2016, the island and the province experienced lower growth rates, roughly at the national
average. In 2017, the economies of Batam and the wider Riau Islands grew at a mere 2 per cent,
substantially below Indonesia’s aggregate growth of 5 per cent (Figure 2). Available projections
indicate that this trend will continue in 2018.
2
Figure 1: Economic Growth 2000-2010
(% year on year)
Source: BPSc, various years
Figure 2: Economic Growth 2011-2017
(% year on year)
Source: BPSa, various years
0
1
2
3
4
5
6
7
8
9
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0
PE
R C
EN
T
Batam Riau Islands Province Indonesia
0
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013 2014 2015 2016 2017 2018
Riau Islands Batam Indonesia
3
As with the island’s meteoric rise, the reasons for this downturn lie largely with Batam’s
manufacturing sector. On one hand, the electrical and electronics (E&E) sector has been stagnant
since 2010, when a record thirty firms left in one year following a major industrial relations dispute
(van Grunsven and Hutchinson 2016). Since then, the remaining base of E&E firms has further
dwindled, with large factories such as Panasonic, NIDEC, and Sanyo closing down. New investments
have been rare, and have generated fewer jobs than in the past (Hutchinson 2017).
This has been compounded by a massive downturn in the ship-building sector. In the 2011-
2012 period, Batam’s 115 shipyards employed some 250,000 formal sector workers, and produced
200 tugboats and 700 barges per year. However, due to excess capacity, a sharp drop in oil prices,
and domestic regulatory changes, the sector contracted sharply after this. In 2013, only 11,000
workers were employed in ship-building (Negara 2017).
This downturn has spread to other parts of the manufacturing sector, too. According to
Batam’s Manpower Agency, in 2015-2016, more than 110 firms closed operations (Straits Times, 2
November 2017). This trend has continued unabated, with fifty-three firms closing in the first half of
2017. As to be expected, this has had an impact on unemployment levels. In 2015 and 2016,
unemployment in the Riau Islands was 9 per cent, substantially above the national average of 6 per
cent (BPSb 2016).
These trends are also mirrored in flows of investment into Batam. Foreign direct investment
(FDI) slowed down after the end of the commodity boom in 2012. In relative terms, the Riau Islands
has lost ground to other provinces such as Central and West Java, which have begun to develop their
industrial bases on the back of increasing levels of FDI (Figure 3a). Likewise, relative to other parts
of Indonesia, Batam’s small size and recent development means it lacks a large private sector with
deep pockets to invest in local projects. Consequently, domestic direct investment (DDI) in Batam is
dwarfed by the quantum of investment in other locations such as West, Central, and East Java (Figure
3b).
4
Figure 3: Realized Investment in Selected Provinces
Source: BKPM via CEIC
1,032 1,061
2,373
5,143
1,567
4,595
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Riau Islands Riau Central Java West Java East Java Jakarta
3a. FDI by province (US$ million)
2015 2016 2017
104
808
1,483
2,865
3,362 3,528
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Riau Islands Riau Central Java West Java East Java Jakarta
3b. DDI by province (US$ million)
2015 2016 2017
5
Exports from the Riau Islands fell year-on-year from US$16.8 billion in 2013 down to US$10.4
billion in 2016 (Figure 4), albeit with a slight recovery to US$12.3 billion in 2017.
Figure 4: Export-Import Value in Riau Islands Province
(US$ billion)
Source: BPS via CEIC
Consequently, the only bright spark on the horizon is the tourism industry. International
visitors to the Riau Islands have continued to climb, from some 1.5 million in 2008 to 2 million in
2015 – with three quarters going to Batam (BPSb 2017).
There are a number of reasons for this state of affairs. First, Batam presents a less compelling
case for business than in the past. Labour costs have increased substantially, with the island having
the second highest minimum wage in the country. Batam and the Riau Islands Province as a whole
fare poorly in comparison to Central and East Java, which offer much lower wage levels and better
logistical connections to population centres in Java and Sumatera. By way of comparison, in 2015
the minimum wages in Batam and the Riau Islands Province were Rp2.9 million and Rp2.2 million
respectively. The corresponding figures for both Javanese provinces were under one million (BPSb
6.97.5
8.3
12.7
16.5 16.216.8
15.7
11.6
10.4
12.3
-5.0
0.0
5.0
10.0
15.0
20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Export
Import
Trade balance
6
2016). An important contributory factor has been the island’s combustible industrial relations
situation (Hutchinson 2015).
Second, it appears that the overall regulatory environment in Batam is less favourable than it
used to be. Local-level administrative dysfunctions and overlaps between the municipal government
and centrally-run investment authority, BP Batam, have led to slower response times, inefficient
processing of licenses and permits, as well as investor uncertainty. For example, some 22,000 land
titles are in legal limbo, due to disparate rulings between these two agencies (Jakarta Post, 15 January
2015). This is further complicated by the relative newness of the Riau Islands provincial government,
which was established only in 2004. Investors have consistently ranked the province’s government
and institutional quality poorly (Tan et al. 2013, 2015, 2017).
Third, recent trends indicate that the nature of manufacturing investment into Indonesia is
changing. Reports such as the 2012 McKinsey report The Archipelago Economy: Unleashing
Indonesia’s Potential have argued that, given prevailing growth trends, the country will be the
world’s seventh largest economy by 2030. The country’s “consuming class” will expand, driven by
rising incomes and increasing urbanization. Corporate strategies have changed in response, away
from merely viewing the country as a site for production for export, to seeing it as a market in its own
right. For example, data released in 2016 by JETRO, the Japanese research agency, indicates that
more than 80 per cent of Japanese firms present in Indonesia anticipate earning more profits from
sales in the local market, versus a mere 20 per cent who see exports as driving profits. This pattern is
mirrored by Japanese firms operating in other major Asian markets such as China and India (JETRO
2016).
The declining appeal of Batam relative to other locations in the country is compounded by
another issue – the island’s legal status. In 2009, President Yudhoyono declared the island, along with
parts of Bintan and Karimun, as Free Trade Zones. This status entails privileges such as: suspension
of import and export duties; exemptions on income tax on imported goods; exemptions or reliefs from
local taxes; a reduction in land and building taxes; as well as a reduction in income taxes for projects
above a certain threshold (EIU 2017).
However, while the FTZ status means that imported equipment and vehicles are available
more cheaply in Batam, it also means that it is more expensive to procure local staples such as rice
and sugar, which legally need to leave the domestic market to reach the island. Furthermore, firms
based on Batam wanting to sell on the domestic market need to pay a 20 per cent tariff (Riau Bulletin
7
17 January 2012). This is further compounded by weak transport connections between Batam and
other parts of the country. Indeed, it is often quicker and cheaper to route shipments to Jakarta through
Singapore.
The economic downturn has had a number of impacts on Batam. In 2016, the central
government reasserted its authority and prerogatives over BP Batam, the agency charged with
investor liaison, marketing, and infrastructure management on the island. In contrast to previous
practice, when the provincial government was allowed input into personnel selection, that year the
top management tier of the organization was replaced with a team of experienced officials from
Jakarta named exclusively by President Joko Widodo (Antara 14 March 2016). The incoming team,
led by Hatanto Reksodipoetro, a former WTO negotiator and ambassador to Norway, carried out
internal checks and audits of finance processes as well as land sales.
A mere eighteen months later, Hatanto and his team were replaced with a second group of
centrally-appointed officials, this time led by Lukita Dinarsyah Tuyo, formerly the secretary of the
Coordinating Minister for Economic Affairs. He is accompanied by a team of four senior civil
servants, each heading one of BP Batam’s departments, namely: finance; planning and development;
business facilities; and general affairs and resources.
The new team has a number of tasks. First, restoring Batam’s industrial competitiveness and
attaining a growth rate of 7 per cent within two years. Second, revitalizing links between the
government and the private sector. Third, overseeing the island’s transition from an FTZ to a Special
Economic Zone (SEZ).
The economic downturn and the ensuing leadership changes have been accompanied by two
related sets of policy discussions. The first regards Batam’s economic strategy. Should the island
retain its focus on traditional manufacturing activities or should it re-orient itself towards new and
more service-related sectors such as airplane maintenance and repair, logistics, and the digital
economy (Juoro 2013)?
The second question pertains to Batam’s status, and specifically whether it should: retain its
FTZ status; relinquish it altogether; or transition to an SEZ. This latter arrangement would involve
specific areas within Batam being designated as customs-free areas, and the remainder being re-
incorporated into the domestic economy. This would bring the island more in line with a number of
zones being established elsewhere in the country. However, the transition raises questions regarding
the FTZ status bestowed on firms already present on the island, whether companies and industrial
8
parks will have to be relocated to specific enclaves, and which central government ministry would
ultimately be responsible for supervising the new SEZ.
Using data for the 2008-2015 period from the Manufacturing Survey of Large and Medium-
Sized Firms, Indonesia’s largest and most comprehensive data source, this paper aims to contribute
to these two policy debates.
First, the study compares employment, output, exports, and labour productivity in the three
largest and most important manufacturing branches in Batam – electrical goods, electronics, and
shipbuilding – with firms in these same sectors in Java and Sumatera. This is done to see whether
Batam retains a comparative advantage in any of these sectors. Should the island constitute a pocket
of high output, exports, and productivity in one or more of them, then this would suggest that policy-
makers should retain the sector(s) in future plans. The case to the contrary, this would then support
initiatives to move Batam’s towards alternative activities, particularly services.
Second, this paper complements the abovementioned comparison with an econometric
exercise to explore the underlying drivers of industrial performance in the three locations. A variable
pertaining to Batam’s FTZ status is included to determine whether this has been a determining factor
in the island’s past economic performance. Should this not be the case, then this would suggest that
changing Batam’s FTZ status would pose fewer issues for its underlying attractiveness as a site for
investment.
After this introduction, the next section will use survey data to compare Batam’s industrial
performance overall and in the selected industry branches with Java and Sumatera. The subsequent
section will carry out the econometric analysis. The fourth and final section will conclude and draw
out implications for policy.
2. Batam’s Comparative Advantage
The main data source used in this paper is the Manufacturing Survey of Large and Medium-Sized
Firms (Statistik Industri (SI)) from Badan Pusat Statistik (Statistics Indonesia). The SI data provides
establishment-level information on all large and medium manufacturing firms in the country on an
annual basis. The SI questionnaire asks each firm information about its: overall production; exports;
imports; employment; wages; capital; and foreign ownership, inter alia.
9
On average, some 24,000 firms are covered by the survey. However, it does not cover micro
or small enterprises, defined as establishments with fewer than twenty employees. That said, data
from the survey can still capture key dynamics in Indonesia’s manufacturing sector, since large and
medium firms account for around 60 per cent of the country’s GDP (Amiti and Davis 2011).
For this exercise, data pertaining to the 2008-2015 period is evaluated. This period is long
enough to capture prevailing trends and also maximizes the availability of recent data. The BPS
changed industrial classification codes in 2010, consequently the time series before and after has been
homogenized to ensure comparability.i While Batam was awarded FTZ status in 2009, it enjoyed a
largely comparable status prior to this – entailing no significant break in incentives and related
provisions (Wong and Ng 2009).
In the subsequent paragraphs, firms in Batam are compared with their counterparts in Java
and Sumatera. Following a comparison of the number of firms, the number of workers employed, and
the proportion of females employed and their evolution over time in each of the three locations, the
performance of firms is compared in terms of: average output; exports and imports; and productivity.
For ease of analysis, focus remains on three manufacturing activities that are of vital importance for
Batam: electronics; electrical goods; and the shipbuilding & ship repair industry.
Based on the Survey’s main findings, some 21,460 (or 83 per cent) of the 24,000 firms
surveyed are located in provinces on Java and 2,785 (or 8.8 per cent) on Sumatera. With only 494
firms, the Province of the Riau Islands (PRI) accounts for only around 1.5 per cent of the total firm
population. Within PRI, 84 per cent of firms (415) are based in Batam, the most industrialized part
of the province.
Table 1 depicts the relative importance of these three sectors in each location in 2015 by firm
number. As can be seen, while these firms are more numerous in the other two locations, they are
proportionately more important for Batam’s firm base.
Table 2 sets out the proportion and number of firms exporting and importing over the 2008-
2015 period in the three locations. With regards to international linkages, approximately 18 per cent
of firms nationwide reported that they export some portion of their outputs and 20 per cent reported
that they import some portion of their inputs. Batam is clearly more integrated in international
production networks as the proportion of firms engaged in international trade, be it exporting or
importing, is noticeably higher than in Java and Sumatera. This could indicate that FTZ status has
contributed to Batam’s high export-import intensity.
10
Table 1: Sectors of Interest (2015)
Sectors Batam Java Sumatera Indonesia
Electronics 59 (14.2%) 248 (1.2%) 31 (1.1%) 317 (1.2%)
Ship-building 57 (13.7%) 62 (0.3%) 96 (3.4%) 200 (0.76%)
Electrical Goods 20 (4.8%) 312 (1.5%) 69 (2.5%) 345 (1.31%)
Total 415 21,460 2,785 26,322
Source: Authors’ calculation based on Statistik Industri
Table 2: Number and Proportion of Firms Exporting/Importing to Total Establishments
Batam Java Sumatera Indonesia
Exporting Importing Exporting Importing Exporting Importing Exporting Importing
2008 110 176 2,805 3,707 542 492 3,771 4,416
2009 116 164 2,887 3,532 600 464 3,925 4,135
2010 137 153 3,163 3,613 690 413 4,387 4,151
2011 142 167 3,359 3,742 725 458 4,573 4,327
2012 140 167 3,426 4,172 743 491 4,630 4,907
2013 140 179 3,497 4,803 773 497 4,758 5,532
2014 141 191 3,240 5,004 625 499 4,308 5,742
2015 134 281 3,225 5,562 529 634 4,174 6,612
Batam Java Sumatera Indonesia
Exporting Importing Exporting Importing Exporting Importing Exporting Importing
2008 37.3% 59.7% 13.2% 17.5% 20.8% 18.9% 14.7% 17.2%
2009 40.4% 57.1% 14.2% 17.3% 24.5% 18.9% 16.0% 16.9%
2010 48.4% 54.1% 16.2% 18.5% 29.7% 17.7% 18.8% 17.8%
2011 51.8% 60.9% 17.3% 19.2% 30.2% 19.1% 19.6% 18.5%
2012 49.5% 59.0% 17.5% 21.3% 30.3% 20.0% 19.6% 20.8%
2013 46.8% 59.9% 17.9% 24.5% 31.5% 20.3% 20.1% 23.3%
2014 45.3% 61.4% 16.0% 24.7% 24.8% 19.8% 17.6% 23.4%
2015 32.3% 67.7% 15.0% 25.9% 19.0% 22.8% 15.9% 25.1%
Source: Authors’ calculation based on Statistik Industri
11
As regards exports versus imports, in Batam the proportion of firms importing keeps
increasing, but the proportion of firms exporting has been declining since 2011 (Table 2). This
suggests that, despite its export orientation, the domestic market is increasingly important for a
growing proportion of firms in Batam. Firms in Java demonstrate a similar trend of increasing imports
and decreasing exports. Conversely, more firms in Sumatera export rather than import over the period
under study, with the exception of 2015.
Table 3 shows the number of firms in the three industries in Batam, Java and Sumatera. It can
be seen that Java has the largest number of firms in both the electrical goods and computer &
electronics sectors. Meanwhile, Sumatera has more firms in its shipbuilding and shipyards sector than
Batam or Java.
Table 3: Total Number of Firms in Key Industries in Batam, Java and Sumatera, 2008-2015
Electrical goods Electronics Shipbulding & repair
Batam Java Sumatera Batam Java Sumatera Batam Java Sumatera
2008 14 242 24 62 136 78 16 53 44
2009 16 222 25 55 160 65 20 50 44
2010 13 274 23 58 189 71 19 45 43
2011 17 276 26 51 187 63 17 50 43
2012 18 279 26 51 191 64 20 49 48
2013 17 305 27 52 232 64 37 49 63
2014 20 306 29 48 230 58 39 53 69
2015 20 312 31 59 248 69 57 62 96
Source: Authors’ calculation based on Statistik Industri
Turning to employment levels, Table 4 illustrates the number of manufacturing workers in the
three locations during 2008-2015. It shows that employment levels have been relatively stagnant in
Batam over this period, at around 140,000-150,000 workers. In contrast, employment levels in Java
have been growing steadily from around 3.6 million in 2008 to 4.4 million in 2015. Manufacturing
employment in Sumatera has also been growing steadily, climbing from 497,000 in 2009 to 565,000
in 2015.
12
It is interesting to note that Batam has a high concentration of female workers. Due to the
island’s early development of the E&E sector, the island has been a reputed centre of employment
for women. However, Table 4 also shows that the share of female workers to total employment in
Batam declined from around 60 per cent in 2008 to 50 per cent in 2015, converging to almost the
same level as Java. Meanwhile, the share of female workers to total employment in Sumatera has
been continuously declining from around 38 per cent in 2008 to around 30 per cent by 2015.
Table 4: Total Number of Manufacturing Employees and of Female Workers
in Batam, Java and Sumatera, 2008-2015
Batam Java Sumatera
Female % Total Female % Total Female % Total
2008
90,504 59.3%
152,538
1,800,670 49.1%
3,664,190
203,356 37.5%
541,903
2009
77,983 60.0%
129,985
1,797,510 49.6%
3,622,195
180,894 36.4%
497,503
2010
81,078 54.2%
149,682
1,820,425 48.3%
3,768,500
178,888 34.2%
522,806
2011
81,193 55.0%
147,593
1,864,075 48.4%
3,850,595
185,105 32.7%
565,529
2012
74,257 53.3%
139,297
2,007,482 48.8%
4,115,023
184,779 33.4%
553,984
2013
69,404 50.6%
137,277
2,051,371 48.9%
4,194,992
178,686 32.1%
556,325
2014
69,766 50.1%
139,337
2,118,672 48.8%
4,342,849
179,190 32.2%
555,711
2015
72,832 50.9%
143,057
2,185,583 49.7%
4,393,566
175,501 31.0%
565,551 Source: Authors’ calculation based on Statistik Industri
With regard to average employment per establishment, Figure 5 shows that firms in Batam,
on average, employ considerably more workers than their counterparts in Java and Sumatera.
However, in all three sectors of interest, this trend is narrowing, indicating that over time firms in
Batam are employing fewer workers. The decline in employment level in Batam was started in the
electronics industry around 2011, then followed by the shipbuilding & repair in 2012. Meanwhile,
the employment level in the electrical industry experienced a big decline only around 2015.
13
Figure 5: Employment Trends in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
As mentioned above, firms in Batam have a relatively high concentration of female workers.
In particular, Figure 6 shows that in the electronics and electrical goods industries, firms in Batam,
on average, employ more female workers than their counterparts in Java and Sumatera. However, this
is not the case in ship-building, where all three locations demonstrate low levels of female
participation (below 1 per cent). When seen in aggregate, the overall share of women employed in
the three sectors has progressively declined in Batam and Sumatera, but has remained stable in Java.
200
300
400
50
060
0a
ve
rag
e e
mp
loym
en
t
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
14
Figure 6: Share of Female Employment in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
Turning now to output, exports, imports, and productivity, Figure 7 compares the trends of
output production (in logarithmic) between firms in in the three sectors in Batam, Sumatera and Java.
The data shows, on average, firms in Batam have higher output compared with their counterparts in
Java and Sumatera, but that output levelled off in 2014. With regard to the specific sectors, firms in
Batam produced more outputs than firms in Java and Sumatera, particularly in the electrical goods
and electronics sectors, and this trend is increasing. In the shipbuilding and repair industry, while still
higher than their counterparts in Java and Sumatera, the average output of firms in Batam has
declined, particularly since 2014. Meanwhile, firms in Sumatera and Java are showing increasing
levels of output, possibly due to the growth of the domestic market.
.3.3
5.4
.45
sha
re o
f fe
male
work
er
of to
tal w
ork
er
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
.2.3
.4.5
.6.7
shar
e o
f fe
mal
e w
ork
er o
f to
tal
wo
rker
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
.06
.07
.08
.09
.1sh
are
of
fem
ale
wo
rker
of
tota
l w
ork
er
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
15
Figure 7: Output Production Trends in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
Looking at manufacturing as a whole, firms in Sumatera export the most, followed by Batam
and then Java. Looking over time, while exports in all three locations have increased, those from
firms in Batam levelled off in 2014. Regarding the specific sectors, Figure 8 shows that for the
electronics and electrical goods sectors, firms in Batam perform better than those in Java and
Sumatera. In the shipbuilding industry, in line with declining output, the average export of firms in
Batam has declined since 2014 (see Figure 8, bottom left). It is noteworthy that even though exports
of shipbuilding industry in Java have declined sharply since 2012, their output has been increasing
since 2013 (Figure 7, bottom left). This is because, unlike Batam, the shipbuilding industry in Java
mostly caters to the domestic market, which has been experiencing increased demand due to the
government’s maritime projects and cabotage rulesii.
15
15
.51
61
6.5
17
17
.5lo
g o
utp
ut
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
16.5
17
17.5
18
18.5
log o
utp
ut
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
15
16
17
18
19
log o
utp
ut
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
16
Figure 8: Export Trends in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
Another interesting fact about manufacturing firms in Batam is the high import content of
their production inputs. Figure 9 shows that, on average, firms in Batam imported around 50 per cent
of their total inputs. This is much higher compared with firms in Java and Sumatera, at around 10 and
4 per cent, respectively. This corroborates the finding of Amiti and Davis (2011), namely that only a
fraction of firms in Indonesia are linked up to global production networks.
Particularly for electronics firms in Batam, their dependence on imported components is very
high, approaching 90 per cent of the total inputs and this trend is relatively stable. In contrast, if we
look at the levels of imports of components for the electrical goods and shipbuilding industries, they
are lower at around 60 per cent and the trend is declining.
15
.516
16
.51
71
7.5
18
log
exp
ort
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
12
14
16
18
20
log e
xpo
rt
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
10
12
14
16
18
log e
xp
ort
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
17
Figure 9: Share of Imported Inputs in Production in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
The trends in productivity levels across the three locations are striking. Despite their greater
incorporation into global production networks, their greater number of workers and higher output and
export levels, Total Factor Productivity (TFP) levels in Batam are the lowest. When viewed in relation
to TFP levels in Java and Sumatera, it is evident that productivity levels in Batam are lagging by a
significant margin. In addition, despite a fall following the Global Financial Crisis and a short period
of stagnation, productivity levels in Batam are actually increasing, overtaking Sumatera in 2015
(Figure 10). This finding is puzzling and worth further examination.
Turning to the three specific sectors, firms in Batam have relatively comparable labour
productivity level compared with their counterparts in Java. Particularly in the electrical and
electronics industries, labour productivity of firms in Batam increased in 2015 (Figure 10). On the
contrary, labour productivity in shipbuilding & repair has declined in the same year.
0.2
.4.6
.8share
of im
port
ed inpu
t of to
tal in
put
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
.2.4
.6.8
shar
e o
f im
po
rted
in
pu
t o
f to
tal
inp
ut
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
0.2
.4.6
.8sh
are
of
imp
ort
ed i
np
ut
of
tota
l in
pu
t
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
18
Figure 10: Productivity Trends, 2008-2015
Source: Authors’ calculation based on Statistik Industri
As mentioned above, one factor that may account for lower productivity levels and declining
employment levels in Batam is the island’s higher wages. Figure 11 shows that firms in Batam on
average pay higher wages than their counterparts in Java and Sumatera - particularly for electronics
and shipbuilding. With declining output and export levels, wage increases place high pressure on
profit levels, pushing firms to reduce headcount.
17
17
.21
7.4
17
.61
7.8
log
TF
P
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
11
.512
12.5
13
13.5
log
ou
tput pe
r w
ork
er
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
11
12
13
14
log
ou
tput per
wo
rker
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
19
Figure 11: Average Wage per Worker in Selected Industries, 2008-2015
Source: Authors’ calculation based on Statistik Industri
3. Econometrics Findings
This section examines the factors driving the industrial performance of firms in Indonesia. The
hypothesis is that firms located in FTZs receive advantages such as specialized facilities as well as
expedited approvals and additional financial incentives. Consequently, it is hypothesized that these
firms perform better compared to those located outside FTZs. To test this, a reduced-form function
(1) is estimated using ordinary least squares (OLS) with firm fixed effects, µi, to control for
unobserved firm-level heterogeneity:
8.5
99.5
10
10.5
11lo
g w
age
2008 2010 2012 2014 2016
Batam Sumatera
Java
All industries
9.5
10
10
.51
1lo
g w
age
2008 2010 2012 2014 2016
Batam Sumatera
Java
Electrical goods
99.5
10
10
.511
log w
age
2008 2010 2012 2014 2016
Batam Sumatera
Java
Shipbuilding & repair
20
Outcomeit = f (Outcomeit-1, FTZ_dummyi, Xit, µi, εit ) (1)
The outcome variables are the log of firm-level total factor productivity (TFPit), output per
worker (yit), exports (xit), and employment (nit). The key variable of interest is the FTZ dummy, which
is equal to one if the firm is located in Batam. Other control variables, Xit, include wage level (wit),
firm age (ageit), foreign participation dummy (FDIit), firm exporting dummy (exportit), and firm
importing dummy (importit). Finally, a lagged dependent variable is included to capture dynamic
effects in the data and deal with autocorrelation (Keele and Kelly 2005).
Equation (1) is estimated as an unbalanced panel for the years 2008–2015 using OLS
estimation. Summary statistics are provided in Table 5.
Table 5: Summary Statistics
N Mean St. dev
ltfp
ly
lx
ln
lw
fdi
xport
mport
age
batam
log (total factor productivity)
log (output)
log (export)
log (number of worker)
log (wage)
Dummy FDI=1 if Foreign share>0
Dummy export=1 if export>0
Dummy import=1 if import> 0
Firm age
Dummy FTZ if Batam=1
14,614
181,285
34,458
195,018
195,012
195,018
195,018
195,018
195,018
195,018
17.5
15.86
16.30
4.19
9.55
0.09
0.76
0.20
2.99
0.01
1.73
2.17
2.37
1.19
1.12
0.29
0.43
0.40
2.29
0.11
Source: Authors’ calculation
Table 6 shows the correlation matrix among variables of interest. It can be seen that there is a
weak correlation between FTZ status and the control variables.
21
Table 6: Correlation Among Variables
Source: Authors’ calculation
Table 7 shows the estimation results of the reduced form equation (1) using OLS with firm
fixed effect. Surprisingly, the FTZ dummy variable is not significant in accounting for the observed
performance of Batam-based firms. This then suggests that FTZ status does not provide significant
economic advantage for firms on the island in terms of output, exports or employment.
Conversely, factors that are driving the performance of firms are: wage level; foreign
participation; exports; imports; and firm age. Wage level has a positive and significant effect on the
level of output, productivity and exports, but no significant effect on employment. This finding is in
line with the finding of Tadjoeddin et al. (2017) on efficiency wage hypothesis, which argues that
higher wages are associated with increases in firm productivity or efficiency, or they reduce costs
associated with turnover in industries where the costs of replacing labour are high.
22
Foreign participation has a positive and significant effect on the level of output, exports and
employment.iii The export dummy has a positive and significant association with levels of
productivity, output and employment. Meanwhile, the import dummy also has a positive and
significant association with firm’s output and employment. Firm age has a positive and significant
association with productivity, output and export levels. However, it has a negative and significant
association with firm’s level of employment. Arguably, more experienced firms tend to be more
capital intensive.
Table 7: Estimation Results (Level)
Output TFP Export Employment
Lag output (t-1) Wage Dummy FDI Dummy Export Dummy Import Firm age Dummy FTZ Lag TFP (t-1) Lag Export (t-1) Lag employment (t-1)
0.225*** (0.003)
0.122*** (0.003)
0.150*** (0.024)
0.064*** (0.007)
0.170*** (0.015)
0.072*** (0.001) -0.064 (0.561)
0.061*** (0.009) 0.062
(0.051) 0.078** (0.029)
0.022*** (0.004)
0.192*** (0.011)
0.110*** (0.008) 0.090* (0.044)
0.034 (0.033)
0.052*** (0.004) -0.029 (0.645)
0.212*** (0.007)
-0.001 (0.001)
0.056*** (0.010)
0.034*** (0.003)
0.028*** (0.006)
-0.008*** (0.001) 0.331
(0.208)
0.492*** (0.002)
R-squared Within
Between Overall
0.14 0.87 0.74
0.06 0.90 0.78
0.08 0.89 0.74
0.24 0.97 0.89
N 146,576 10,271 26,784 159,641 Notes: All estimation include constant term and they are all statistically significant.
Robust standard errors are in parentheses. * p<0.05, ** p<0.01, *** p<0.001
Source: Authors’ calculation
23
To test the robustness of the model, the dependent variables are replaced with the growth rate.
Table 8 shows the estimation results of the reduced form equation (1) using the growth variables as
the outcome variables (output growth, productivity growth, export growth and employment growth).
The results are mostly similar to the regression results in level (Table 7).
Table 8: Estimation Results (Growth)
Output TFP Export Employment
Lag output (t-1) Wage Dummy FDI Dummy Export Dummy Import Firm age Dummy FTZ Lag TFP (t-1) Lag Export (t-1) Lag employment (t-1)
-0.392*** (0.003)
0.054*** (0.002) 0.103** (0.033)
0.087*** (0.022)
0.108*** (0.021)
0.010*** (0.002) 0.813
(0.752)
0.040** (0.008) 0.001
(0.077)
-0.005 (0.006)
-0.434*** (0.013)
0.046*** (0.007) 0.050
(0.062)
0.028 (0.049) 0.015** (0.005) 0.823
(0.876)
-0.401*** (0.007)
-0.000 (0.001)
0.044*** (0.014)
0.027*** (0.009)
0.034*** (0.009)
-0.008*** (0.001) 0.324
(0.267)
-0.319*** (0.003)
R-squared Within
Between Overall
0.16
0.008 0.10
0.18 0.02 0.11
0.16
0.002 0.08
0.10 0.07 0.03
N 117,351 7,421 20,934 128,971 Notes: All estimation include constant term and they are all statistically significant.
Robust standard errors are in parentheses. * p<0.05, ** p<0.01, *** p<0.001
Source: Authors’ calculation
24
It is found that factors that are driving firms’ industrial growth are wage, foreign participation,
export, import, and firm age. Wage growth has a positive and significant effect on firm’s output,
productivity and export growth but no significant effect on employment growth. Foreign participation
has a positive and significant effect on the output and employment growth of firms. Both export and
import dummy variables have a positive and significant association with firm output and employment
growth. Meanwhile, firm age has a positive and significant association with output growth but a
negative and significant association with employment growth.
Overall, the estimation results are consistent with the findings from previous studies (Takii
2004, Aswicahyono 2009, World Bank 2012) that firms which are foreign-owned, export-oriented,
and particularly both, have higher productivity. There are at least two possibilities why the FTZ
variable is not significant in determining the industrial performance of firms in Batam. First, it may
be the case that the FTZ advantage has been captured by the other significant variables, such as
foreign ownership, export and import dummies. Because FTZ status enhances those variables, it may
have an indirect effect on firm’s performance. However, this indirect effect is not captured in the data.
Second, there are Bonded Zones and Warehouses in operation in other parts of the country. Firms
located within these areas enjoy similar benefits to those provided by Batam’s FTZ status.
Consequently, the “FTZ effect” could, in fact, be operating in all three locations.
The results of this study indicate that access to foreign participation and imported inputs is
very important for firm competitiveness. With improved access for foreign participation and imported
inputs, firms have access to global value chains (Amiti and Davis 2011). A higher share of imported
inputs in the manufacturing production in Batam indicates that firms located there have been
continuously integrating with global value chains more than firms in the other locations. That said,
overall firms productivity in the manufacturing sector in Indonesia in general and in Batam in
particular remains low. There are a number of factors contributing to low firms productivity,
including credit constraints, quality of human resources, regulatory barriers, and so on (Javorcik et
al. 2012, Kuncoro 2018). Unfortunately, the dataset that is used cannot control those variables.
However, most of these issues are frequently raised by businesses operating in the country.
25
4. Conclusion
Since about 2010, investment, firm numbers, and employment levels in Batam have dipped in key
areas such as electrical goods, electronics, and ship-building. This state of affairs has prompted
considerable introspection with regard to Batam’s future, particularly which economic sectors to
promote and whether the island’s FTZ status is a boon or a bane – particularly in today’s economic
climate.
This paper has sought to contribute to this discussion through comparing and contrasting
Batam’s overall industrial performance with Java and Sumatera. This has been complemented by an
in-depth analysis of three specific sectors: electrical goods; electronics; and shipbuilding, and an
econometric exploration of the impact of Batam’s FTZ status on firm performance.
These operations have revealed several findings. First, while relatively small in number, firms
in Batam in the electrical goods, electronics, and ship-building sectors employ more workers per
capita and have higher output levels, as well as a greater proportion of exports and imports relative
to their counterparts in Java and Sumatera. Surprisingly, relative to firms in these other two locations,
in general firms in Batam show considerably lower levels of productivity. Only in a select sectors,
i.e. electrical and electronics industries, firms in Batam show comparable productivity levels with
those in Java.
Second, despite more firms being established in Batam of late, the proportion of firms
exporting has been declining and the proportion of firms importing has been increasing. This suggests
that more and more firms in Batam outsource their intermediate inputs from imports and sell their
products on the domestic market. A similar pattern can be seen for firms in Java and Sumatera, in
which a growing proportion of firms sell on the domestic market as opposed to overseas. This
indicates that, over time, the domestic economy is more important for firms based in Batam.
Three, with regard to the three specific sectors studied, firms in the electronics and electrical
goods industries in Batam produce more outputs than their counterparts in Java and Sumatera.
Consequently, the island still has a strong comparative advantage in these two sectors. In contrast,
indicators pertaining to the ship-building sector paint a less positive story. Looking forward, these
results indicate that the first two sectors should remain central to strategies for the island, but that
further promotion of or investment into the ship-building sector may need to be re-evaluated.
Four, the number of workers in medium and large establishments in Batam has been relatively
stagnant at around 140,000-150,000 workers during 2008-2015. In contrast, employment levels in
26
Java and Sumatera have been growing. Given an increase in firm numbers in Batam, it is possible
that manufacturing is becoming more capital-intensive and less labour-intensive. In addition, the
share of female workers is declining in Batam, converging to almost the same level as in Java. This
suggests that either existing firms are altering their worker demographic or that the new activities on
the island are distinct.
Turning to the econometric exercise, FTZ status is not associated with higher levels of output,
exports or productivity. In contrast, contributing factors to better performance are: foreign ownership;
export orientation; use of imported inputs; wage levels; and firm age. It would appear that firms based
in Batam benefit from their inclusion into global production networks, rather than due to any specific
features provided by the island’s FTZ status. Even when indirect causality was explored, the findings
were not significant. This indicates that either it is other attributes that are driving investment into
Batam, or that the availability of similar investment incentives elsewhere in the country negates the
specific benefits available on the island. Consequently, there may be some leeway to alter Batam’s
investment framework without negatively affecting investment flows.
27
References
Amiti, Mary and J. Konings. 2007. “Trade Liberalization, Intermediate Inputs, and Productivity:
Evidence from Indonesia.” American Economic Review 97(5): 1611–38.
Amiti, Mary and Donald R. Davis. 2011. “Trade, Firms, and Wages: Theory and Evidence.” Review
of Economic Studies 79: 1–36.
Aswicahyono, Haryo. 2009. “A Survey of Micro-data Analyses in Indonesia.” edited by Jenny
Corbett and S. Umezaki in Deepening East Asian Economic Integration: ERIA Research
Project Report 2008-1, 456-472. Jakarta: ERIA.
Blomstrom, Magnus & Sjoholm, Fredrik. 1999. "Technology transfer and spillovers: Does local
participation with multinationals matter?" European Economic Review, vol. 43 (4-6): 915-
923.
BPSa. (Statistics Indonesia). Various years. Indikator Ekonomi. Jakarta: BPS.
BPSb. (Statistics Indonesia). Various years. Indikator Utama Kepulauan Riau. Tanjungpinang: BPS
Kepulauan Riau.
BPSc. (Statistics Indonesia). Various years. Produk Domestik Regional Bruto Propinsi-Propinsi di
Indonesia Menurut Lapangan Usaha. Jakarta: BPS.
EIU. 2017. Indonesia: Country Commerce Report. London: Economist Intelligence Unit.
Hutchinson, Francis E. 2017. “Rowing Against the Tide? Batam’s Economic Fortunes in Today’s
Indonesia”. Trends in Southeast Asia 2017/08. Singapore: ISEAS-Yusof Ishak Institute.
Hutchinson, Francis E. 2015. Mirror Images in Different Frames? Johor, the Riau Islands, and
Competition for Investment from Singapore. Singapore: ISEAS-Yusof Ishak Institute.
Javorcik, Beata; Fitriani, Fitria; Iacovone, Leonardo; Varela, Gonzalo; Duggan, Victor. 2012.
Productivity Performance in Indonesia's Manufacturing Sector. World Bank, Jakarta.
JETRO. 2016. 2016 JETRO Survey on Business Conditions of Japanese Companies in Asia and
Oceania. Tokyo: Japan External Trade Research Organisation.
Juoro U, Tan Khee Giap, and Tan K.Y. 2013. “Joint Expert Study on Competitiveness in Batam-
Bintan-Karimun.” Jakarta/Singapore: Komite Ekonomi Nasional/National University of
Singapore.
Keele, L. and Kelly N. J. 2005. “Dynamic Models for Dynamic Theories: the Ins and Outs of
Lagged Dependent Variables.” Political Analysis Vol 2(2): 186-205.
28
Kuncoro, A. 2018. “Manufacturing Trends under the Jokowi Presidency: The Legacy of Past
Administrations”. Paper presented at Conference: The Indonesian Economy under Jokowi:
A New Development Model?, ISEAS Yusof-Ishak Institute, Singapore, March 22.
McKinsey Global Institute. 2012. The Archipelago Economy: Unleashing Indonesia’s Potential.
Boston: McKinsey Global Institute.
Negara, Siwage Dharma. 2017. “Can the Decline of Batam’s Shipbuilding Industry be Reversed?”
ISEAS Perspective No. 10, 2017. Singapore: ISEAS-Yusof Ishak Institute.
Takii, Sadayuki. 2004. “Productivity Differentials between Local and Foreign Plants in Indonesian
Manufacturing, 1995”, World Development, 32: 1957-1969.
Tan, Khee Giap, Mulya Amri, Nurina Merdikawati, and Nursyahida Ahmad. 2017. 2015 Annual
Competitiveness Analysis and Development Strategies for Indonesian Provinces. Asia
Competitiveness Institute - World Scientific Series. Singapore: World Scientific.
http://www.worldscientific.com/worldscibooks/10.1142/10246.
Tan, Khee Giap, Nurina Merdikawati, Mulya Amri, and Blake Harley Berger. 2015. 2014 Annual
Competitiveness Analysis and Development Strategies for Indonesian Provinces. World
Scientific.
Tan, Khee Giap, Mulya Amri, Linda Low, and Kong Yam Tan. 2013. Competitiveness Analysis and
Development Strategies for 33 Indonesian Provinces. World Scientific.
Tadjoeddin, M. Z, I. Auwalin and A. Chowdhury. 2017. Revitalising Indonesia’s Manufacturing
The Productivity Conundrum, European Journal of East Asian Studies, Volume 16, Issue 1,
pp. 124 – 153.
Tybout, J.R. 2000. “Manufacturing Firms in Developing Countries: How Well do They Do and
Why.” Journal of Economic Literature, 38: 11–44.
van Grunsven and Hutchinson. (2015. “The Evolution of the Electronics Industry on Batam Island
(Riau Islands Province, Indonesia): an evolutionary trajectory contributing to regional
resilience?” Geojournal, 82(3): 475-92.
Wong P.K. and Ng K.K. 2009. “Batam, Bintan, and Karimun – Past History and Current
Development Towards Being A SEZ”. Singapore: Asia Competitiveness Institute, National
University of Singapore.
World Bank. 2012. “Productivity Performance in Indonesia’s Manufacturing Sector”, Policy Note
5. Jakarta: World Bank.
29
Endnotes
i For the period before 2010, BPS uses industrial classification or ISIC rev 3 (KBLI 15-37). From
2010 onwards, it uses ISIC rev 4 (KBLI 10-33).
ii Cabotage rules regulate shipping activities which takes place within a country's waters and
particularly restricts the activities of foreign vessels operating within its waters. The Indonesian
government has implemented the Cabotage rules through the Maritime Law No 17 of 2008, which
aims to limit the number of foreign vessels operating in Indonesian waters and to give greater
market share to Indonesian companies. The law requires companies to establish and licence
themselves as "Indonesian Sea Carriage companies". It must be incorporated in Indonesia and must
observe the 49 per cent foreign ownership limit.
iii However, Blomstrom and Sjoholm (1999) show that the degree of foreign ownership does
neither affect the level of labour productivity in foreign establishments, nor the degree of spillovers
in the Indonesian manufacturing.