The Effect of Trade and Foreign Ownership on the Technical Efficiency of Indonesia’s Textile Industry

Abstract

This study empirically examines the effect of trade (exports and imports) and foreign ownership on the technical efficiency of apparel industry in Indonesia from 2007 to 2013. Panel data and the maximum likelihood estimation approach to the stochastic frontier analysis (SFA) were applied for the analysis. While controlling for the spillover effect and firm size in the inefficiency model of the apparel industry, our empirical strategy indicates that the apparel industry has not yet reached the maximum level of technical efficiency. Export participation, foreign ownership, and spillover assert an increasing and significant influence on technical efficiency, while the import of raw materials asserts a negative and significant effect. Additionally, the mediation of exports and foreign ownership, and foreign ownership and firm size, increases the industry’s technical efficiency, while the mediation effect of firm size and imports, and firm size and spillover, reduce the industry’s technical efficiency. Recommendations based on the findings are outlined for policymakers.