Financial Crisis and Productivity Evolution : Evidence from Indonesia

We examine how the productivity of different industries changes over the course of a financial crisis by exploiting cross firm, within industry differences in productivity resulting from the Asian financial crisis of 1997. We show that the crisis coincided with dramatic changes in productivity patterns within the manufacturing sector and that many of these changes were sustained in the long run. In particular, an increasing number of industries experienced decreases in average firm productivity during the crisis that continued through the post-crisis period. Further, we find that productivity recovery in the post-crisis period is driven not by increases in the productivity of existing firms, but rather by the entry of new firms. Finally, we find differences in productivity responses to the financial crisis between different types of firms. While the impact of exporters on productivity evolution remains constant over the crisis, we find that the productivity of domestically owned firms is far more sensitive to changes in the economic environment than foreign owned firms. Further, foreign exporters were the only set of firms that avoided decreases in productivity during the crisis, suggesting that only access to both alternate forms of capital and international markets can help to smooth investment and maintain productivity growth over a financial crisis