Analysis of the Effect of Regional Characteristics on Technical Efficiency: (Case Study on Light Manufacturing Industry in Indonesia 1995 – 1997)

This paper attempts to investigate the level of relative technical efficiency, productivity and the role of regional characteristics on technical efficiency performance of firms in Indonesian’s light manufacturing industry. Data Envelopment Analysis, Malmquist Productivity Index and regression analysis are used on BPS’s secondary data of 3364 establishment during 1995-1997. Empirical results show that average technical efficiency had been low and the decline of technical efficiency was occurred. Considerable productivity growth was found in most of industrial sectors, but it was mainly accomplished through technical progress rather than efficiency improvement. Regression analyses indicate that the level of technical efficiency was influenced by regional characteristics, where industrial specialization, competition and urban size had positive impacts. The present of industrial knowledge spillovers between industries and from foreign direct investment was not supported by the empirical estimation. Empirical results also shows that foreign owned firms dan medium scale firms were more likely to have higher level of relative technical efficiency.