RCA Analysis with Selected Products to Enhance Prediction Power of Competitiveness

Recognition of the competitiveness of various export commodities is important in the design of industrial policies which shapes a country's structural transformation. The commonly used approach is the Revealed Comparative Advantage (RCA) which was introduced by Balassa in 1965. Over the years, Balassa's RCA has received a lot of criticism with improvement effort related to its consistency (ranking bias). This study therefore aims to examine the possibility of improving the RCA prediction power, while adhering to the principle of simplicity in the calculation as well as convenience in dealing with data availability. The calculation is conducted by selecting the products included in the analysis using the two steps approach. This examination revealed that the selection limited to top 250 export products (from 1,259 products in HS 4-digit), it is able to correct (restore) the position of Indonesian manufacturing sector. As a competitive sector (RCA> 1) it reflects the position of the sector as top 10 export, based on its share (export value). This approach also provided a new hint into Indonesia's export in Chinese market, especially after the implementation of the ASEAN-China Free Trade Agreement in 2010