The Importance of Manufacturing Firms' Location on Outputs, Research and Development

Penulis: Yuventus Effendi, Pusat Kebijakan Ekonomi Makro

The disparity between the West and East regions of Indonesia has been recognised by the government as one important issue in Indonesian economic development. To overcome this issue, the government implemented several strategies such as dedicated zone for manufacturing, industrial zone, and integrated economic development zone. Moreover, the government also offers several tax incentives for the firms that do research and innovation. Therefore, this study evaluates the importance of localised economic activities into the special zone as well as the role of research and innovation to enhance the optimality of manufacturing sector in Indonesia. This paper utilises the endogenous growth model with OLS estimation to estimate the parameters’ value for location, research, and innovation to the level of the manufactured output. While to analyse the determinant of a firm to decide whether to do research and innovation is done by using Logit estimation. This study finds that location is positively and significantly correlates to the changes of output. Moreover, this study reveals that if a firm conducts research and innovation, the importance of location to the changes of output relatively decreases. Regarding of determinants of the decision to do research, this study finds that location also an important factor.