IMPORT SUBSTITUTION AND FIRM PERFORMANCE: THE CASE OF INDONESIA'S REFRACTORY INDUSTRY
DOI:
https://doi.org/10.30998/xs8es533Keywords:
Firms Performance, Import Substitution Industrialization, Manufacturing Industry, Tariff Protection, Trade PolicyAbstract
Growing protectionist policies have renewed interest in import substitution industrialization (ISI) as a strategy to reduce dependence on imported intermediate goods and strengthen domestic manufacturing. Despite its increasing adoption, empirical evidence on the firm-level effects of tariff-based import substitution remains limited, particularly in small-scale manufacturing industries. This study examines the impact of Most Favored Nation (MFN) tariff protection on firm performance in Indonesia’s refractory industry. Using an unbalanced panel dataset of 3,000 firm-year observations from BPS-Statistics Indonesia covering the period 2010–2015, the study employs a fixed-effects panel estimation to evaluate the effects of tariffs on output, input, employment, imports, and labor productivity while accounting for firm heterogeneity through interaction models. The findings reveal that higher tariff protection significantly reduces firm output, input utilization, and employment, reflecting increasing production costs and constrained access to imported intermediate inputs. Although tariffs are positively associated with labor productivity, the improvement primarily reflects a mechanical increase caused by labor downsizing rather than genuine technological upgrading or production efficiency. Moreover, private domestic, foreign-owned, and local government-owned firms are more adversely affected than central government-owned enterprises, indicating heterogeneous responses to protectionist policies. These findings challenge the effectiveness of unconditional tariff-based import substitution and suggest that sustainable industrial development requires conditional and time-bound protection, investment in upstream raw material processing, improved trade facilitation, and stronger technological capability to enhance long-term competitiveness within global value chains.
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