Agglomeration , Transport , and Regional Development in Indonesia

How effective are public interventions in addressing significant regional disparities in formal manufacturing concentration in a developing economy? We examine the aggregate and sectoral geographic concentration of manufacturing industries for Indonesia, and estimate the impact of factors influencing location choice at the firm level. We distinguish between natural advantage, including infrastructure endowments, wage rates, and natural resource endowments, and production externalities, arising from the co-location of firms in the same or complementary industries. The methodology pays special attention to empirically distinguishing the impact of measured production externalities from unobserved local characteristics. Depending on the sector, we find that a mix of both forms of regional advantage explains the geographic distribution of firms. Based on the estimated location choice model, we illustrate the potential impacts of policy interventions on manufacturing distribution by simulating the effectiveness of transport improvements on relocation of firms. Our findings suggest that improvements in transport infrastructure may only have limited effects in attracting industry to secondary industrial centers outside of Java, especially in sectors already established in leading regions. The findings underscore the challenges for addressing the industrial fortunes of lagging regions, either through local decentralized policy interventions or national policies focused on infrastructure development. World Bank Policy Research Working Paper 3477, January 2005 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. * This paper is part of a larger effort to understand the impact of spatial policy interventions on the regional distribution and performance of economic activities, particularly in lagging sub national regions. The research has been funded by a World Bank research program grant on “Urbanization and Quality of Life”. We would like to thank the Indonesian Central Bureau of Statistics (BPS) for facilitating access to establishment level data, Alejandro Badel for excellent research assistance, and Ani Dasgupta and Neil McCulloch for useful discussions on regional development issues in Indonesia. ** Authors names in alphabetical order. Author for correspondence: Somik V. Lall, Development Research Group, World Bank, 1818 H Street N.W., Washington DC 20433. Email: slall1@worldbank.org, Fax: 1 202 522 3230 P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed