Does competition and foreign investment spur industrial efficiency?: firm-level evidence from Indonesia

This study examines the effects of market competition and foreign direct investment on the technical efficiency of firms within the Indonesian manufacturing sector using a Stochastic Frontier Analysis. We employ a firm-level panel dataset for the period of 2010–2014, covering 400 subsectors, and employing two measures of industrial concentration as proxies for market competition. The results suggest that firms operating in less competitive sectors in Indonesia experience higher technical efficiency. Additionally, foreign ownership, international activity (export-import), and firm size are positively related to technical efficiency. Such findings suggest that the efficient structure hypothesis (ESH) applies in Indonesia, as more efficient firms gain in market share as a result from dynamic competition. Foreign direct investment (FDI) via horizontal spillovers has contributed to an increase in intra industry firms’ efficiency. Nevertheless, as industrial concentration increases, the positive effects in firm efficiency from FDI and from international trade (imports and export) tend to decrease.