Agglomeration economies and decentralization policy: the case of Indonesia’s manufacturing sector

This paper examines the degree to which agglomeration economies of manufacturing activities has changed from 2000 until 2015, a period when Indonesia substantially decentralized its economic development system. Using micro dataset of Indonesian Large and Medium Industries Survey, this paper acquires relatively interesting results. The trend of high concentration of manufacturing activities, as identified by the Ellison-Glaeser measure of agglomeration economies, did not significantly decline of both 2-digit and 4-digit industrial codes at province level in decentralized government. The plateauing levels of agglomeration index are prevalently found in few industries that are strongly relied on manufactured inputs or natural resources and by the industrial necessity to agglomerate. The evidence presented in this paper suggests that efforts to deconcentrate manufacturing activities across regions, as exemplified by initiative to establish Special Economic Zones (SEZs) and by the intergovernmental fiscal transfers, are considerably subdued in the short run. Therefore, some industrial organization considerations are needed to robust the impact in the long run.