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: We acknowledge financial support from the Economic Research Institute for ASEAN and East
Asia (ERIA). We are grateful to useful comments from to referees. The paper is under review for
a special issue of Asia Pacific Business Review (www.tandfonline.com/fapb).
Corresponding author, email: rajah@um.edu.my
1. Introduction
The automotive industry is a key contributor to national economic growth,
particularly in large industrialised countries. The global automotive industry produced
approximately 70 million units each year since the turn of the millennium (Ulengin,
nsel, Aktas, & Kabak, 2010). While the United States, Japan and Germany are the
major automobile producers of national brands in the world, others such as Korea,
China and India have increasingly become important.
A number of developing countries introduced policies to promote automotive
assembly as an engine of industrialization, as well as, to save foreign exchange through
import-substitution. Indonesia is no different as through import substitution foreign
assemblers were attracted to the country. A localization policy was continued strongly
during Suhartos long presidency that stimulated even the introduction of Indonesiabased models by foreign firms, such as Toyota. The introduction of regional
production strategies and a strong domestic market helped Indonesia sustain growth in
automobile production despite the liberalization that followed as President Habibie
succeeded President Suharto.
The growing technological capabilities enjoyed by automotive firms in Indonesia
was identified by Rasiah and Amin (2010). It will be interesting to identify the drivers
of such technological capabilities. Hence, this study seeks to examine the influence of
host-site institutional support, foreign ownership and regional linkages on firm-level
technological capabilities in the automotive industry in Indonesia. The rest of the essay
is organized as follows. The next section discusses the development of the industry in
Indonesia followed by the theoretical considerations and methodology. The
subsequent section analyses the results. The final section presents the conclusions.
introduced strict controls over the domestic automotive industry, including the banning
of imported CBU (completely built up) vehicles. Foreign companies were also
prevented from investing directly in assembly and distribution activities within the
industry. Since then, Indonesia has become a more welcoming place for foreign
automotive manufacturers thanks to the removal of foreign ownership restrictions and
other deregulation measures during the 1990s (KPMG, 2014).
In 1983, government attempted to rationalize the automotive industry by requiring
car assembler to reduce the number of car brands and models they assembled to
achieve economies of scale. However this regulation was not implemented effectively
because of strong rejection from vested interests in the industry. Another decree was
stipulated in 1983 on compulsory use of locally made components. However this
decree was not successful due to the lack of technology, capital and skills in technical
areas of the small and medium scale manufacturers. In 1993 government terminated
the deletion program and replaced it with the Incentive program. Indonesian
government introduced harmonized system under WTO system in 1999. In this
harmonized system, the local content programs were removed and Indonesia signed
the trade-related investment measures (TRIMS).
Automotive production has developed rapidly in Indonesia since 1980 with the
number of car and motorcycle parts producers expanding by three folds and four folds
respectively. Although Indonesias prominence as an automotive player is low in
comparison to some of its neighbours, the potential market for automotive producers
and importers in the country is expected to expand. Growth is expected to be driven
by an expanding middle class and a broadening economic base.
3. Theoretical Considerations
Technological capabilities (TC) form the main concept of this paper, and the key
relationships that will be examined in this article are TC, and host-site institutional
support (HI) and foreign ownership (FO), and TC and regional linkages (RL). The
influence of the control variables of age and size on the dependent variables is also
examined.
High tech institutional (HI) support was estimated using the following 5 proxies:
HI - f (RDG, TTI, RU, RDSE, IRD)
Where RDG refers to R&D grants enjoyed by the firm from the host government
(Yes=1; No=0); TTI refers to Likert scale rating (1-5) of the presence of technical
strong training institutions, RU refers to Likert scale rating (1-5) of the presence of
research universities; RDSE refers to Likert scale rating (1-5) of the presence of strong
supply of R&D scientists and engineers; IRD refers to Likert scale rating (1, 5) of the
presence of incentive for R&D activities.
Regional production linkages (RL) is also used as an explanatory variable. RL were
estimated using the following formula:
RL = RS/TS + RP/TP
Where RS/TS refers to percentage share of intermediate sales in total sales to firms in
East and Southeast Asia; RP/TP percentage share of intermediate purchases in total
purchases from East and Southeast Asia.
Foreign ownership (FO), Size (S) and age (A) were used as the control variables,
and were measured as follows:
FO = foreign equity in total equity.
A = age of the firm
S = workforce
Tobit regression model was used to investigate the relationship between TC and HI;
and TC and RL controlling for FO, size and age using the following equation:
TC = + 1 HI + 2 FO + 3 A +
TC = + 1 RL + 2 S + 3 A +
(1)
(2)
A stratified random sampling procedure based on size was adopted to gather data
from the automotive firms in Indonesia. The survey questionnaire was sent to
automotive firms in 2013. Although data on employment, sales, exports, R&D
expenditure and training expenditure were drawn from the years 2000, 2006 and 2011,
the analysis is confined to 2011. The empirical analysis is based on 93 automotive
firms, which amounted to 68.9 percent of the population of automotive firms in
Indonesia.
and median of the logarithm of ages 3.10 and 3.13 years respectively with a minimum
age of 1.94 years and a maximum age of 3.71 years. The mean and median of foreign
ownership are 0.67 and 0.66 with maximum and minimum of 0.89 and 0.52. The mean
and median of the logarithm of S are 6.24 and 6.13 respectively. The standard
deviation for S is 1.00 with maximum and minimum of 9.00 and 4.00.
Before analysing the relationship between technological capabilities and
institutional support, and technological capabilities and regional production linkages
we checked for heteroscedasticity problems using the White test as a cross-sectional
regression model is deployed here. Table 1 and 2 show the results. The p-value of Fstatistic for first equation and second equation are 0.2639 and 0.8030, which fail to
reject the null hypothesis, and hence, they do not suffer from hoteroskedasticity
problem.
Table 1: Equation (1): White test for Heteroskedasticity
F-statistic
Obs*R2
Scale exp. SS
1.312156
11.37162
7.448134
Prob. F (9,37)
Prob. 2 (9)
Prob. 2 (9)
0.2639
0.2511
0.5906
0.587438
5.622367
4.744077
Prob. F(9,69)
Prob. 2 (9)
Prob. 2 (9)
0.8030
0.7770
0.8560
R2
0.030746
0.064518
0.057801
VIF
1.031721
1.068968
1.061347
VIF
1.014066111
1.092779134
1.080977074
Table 6 shows that the relationship between RL and TC is significant. The Tobit
regression shows that RL is positively correlated with TC at 5 percent significance
10
Prob.
0.7193
0.0018
0.9653
0.0064
6. Conclusions
The statistical results show that the relationship between HI and TC is significant
and positive suggesting that the provision of training institutes, R&D labs and
universities, and R&D scientists and engineers has helped strengthened firm-level
technological capabilities in the automotive firms in Indonesia. FO and RL are also
important as it is positively correlated with TC. The results support a strong role for
11
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