Trade Liberalization, Market Share Reallocation, and Aggregate Productivity: The Case of the Indonesian Manufacturing Industry

We investigate how trade liberalization affects aggregate productivity growth, focusing on market reallocation as well as within-firm productivity improvement. To this end, using Indonesian plant-level data from 1993 to 2005, we estimate the plant-level impact of trade liberalization focusing on productivity, output, and the probability to exit. Then, using the simple dynamic simulation method, we calculate the likely impact if tariff rates remain constant in the initial period. Comparing the actual and counterfactual scenarios, our results show that although within-plant productivity improvement through tariff reduction has a sizable impact on aggregate productivity growth, the contribution of market share reallocation is less significant.