Revealing the Impact of Relaxing Service Sector FDI Restrictions on Productivity in Indonesian Manufacturing

Abstract

The services sector in Indonesia accounts for more than half of total value added, employs more than 55 million workers, and provides 35 percent of overall inputs to the productive sectors of the economy. Improving quality, increasing diversity and reducing costs in service sectors produce is likely to greatly improve Indonesia s competitiveness across all sectors. With a focus on the manufacturing sector, this note argues that relaxing restrictions on competition and on the participation of foreign firms, in services can be expected to improve service sector performance, and lead to economy-wide benefits in terms of productivity and competitiveness. It does so by reviewing the international evidence available, and by presenting new evidence for Indonesia on the positive spillovers that easing restrictions has had on the productivity of domestic manufacturing firms. The economic impact of these spillovers is sizable. In fact, spillovers from service sector reform account for about 8 percent of the observed increase in Indonesian manufacturing productivity over the period 1997-2009.