Globalization of the Automotive Industry: Is Indonesia Missing Out?

Abstract

International trade in automotive and auto parts has grown rapidly during the last two decades but Southeast Asia's largest economy, Indonesia, is lagging behind in its export performance. This paper uses a comparative perspective in examining Indonesia's role in automotive production networks in the context of the contemporary debate on opportunities for reaping gains from economic globalization through engagement in global production sharing. This research aims to answer two questions; the first addresses the determinants of a country's participation in the global production network, the second asks why Indonesia is being left behind in global production networks. Our analysis is based on the Jones and Kierzkowski fragmentation theory. The unbalanced panel trade data for 98 countries for the period 1988–2007 are estimated using the least square dummy variable method. The results show that in Asian countries, foreign direct investment openness is the most important determinant followed by trade cost, trade openness, competitiveness, and labor quality. Indonesia is being left behind for a number of reasons, such as restrictive foreign investment policies, higher trade costs and remaining high protection in the automotive sector in terms of tariff and non-tariff measure, and a low education level that hampers the absorption capacity in technology.

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