| Export 1 | Export 2 | GDP 1 | GDP 2 | |
|---|---|---|---|---|
| + p < 0.1, * p < 0.05, ** p < 0.01, *** p < 0.001 | ||||
| (Intercept) | 0.704 | 1.354+ | 0.112 | 0.243+ |
| (0.724) | (0.692) | (0.127) | (0.128) | |
| L(exM, 1) | 0.676** | 1.135*** | ||
| (0.222) | (0.177) | |||
| imM | 0.273 | 0.307* | -0.003 | -0.023 |
| (0.184) | (0.127) | (0.020) | (0.022) | |
| imSev | -0.106 | -0.130 | 0.098** | 0.110*** |
| (0.247) | (0.146) | (0.029) | (0.024) | |
| L(imM, 1) | -0.151 | 0.031 | ||
| (0.166) | (0.023) | |||
| L(imSev, 1) | -0.485* | -0.083* | ||
| (0.182) | (0.030) | |||
| L(pdb, 1) | 0.917*** | 0.938*** | ||
| (0.024) | (0.022) | |||
| Num.Obs. | 18 | 18 | 18 | 18 |
| R2 | 0.881 | 0.967 | 0.997 | 0.998 |
| Log.Lik. | 32.291 | 43.772 | 70.818 | 76.085 |
| RMSE | 0.04 | 0.02 | 0.00 | 0.00 |
Servicification, manufacturing
and the Indonesian third unbundling
Krisna Gupta
April 22, 2025
Intro
Services, trade, and the third unbundling.
The issue in trade in services.
Servicification in manufacturing.
Indonesian services
Indonesia has always been a net importer of trade. Export services is dominated by tourism, while import services is dominated by logistics and business services.
Indonesian government often concerned with deficit trade, but trade in services has often neglected in the discussion.
But more!
With the ever decreasing cost of trade, separating a value up to tasks level (Baldwin, Freeman, and Theodorakopoulos 2024; Kimura 2018).
Feedback mechanism from the third unbundling may benefits domestic manufacturing (Kimura 2018).
In fact, exporting high-value services directly can be a good strategy for growth.
Third unbundling
About the course
The state of trade in services in Indonesia
Services as manufacturing inputs
using Input-Output.
services import-manufacturing export cointegration.
Trade in services mode
Mode 1, cross-border supply from the territory of one WTO member country into the territory of another (for example, an architect in the U.S. sending plans to a client in Singapore);
Mode 2, consumption abroad (for example, an Australian tourist taking a vacation in Las Vegas, or an Argentine citizen coming to the United States for health care);
Mode 3, commercial presence (for example, the branch of an American bank in South Africa extending loans to local entrepreneurs); and
Mode 4, the presence of “natural persons” for a limited period of time in another country (for example, the representative of an American software company spending a month in France installing the firm’s products on a French company’s computers).
Services trade in Indonesia
Trade in services is complicated amid 4 modes (Magiera 2011):
mode 2 & 4 → Visa and KITAS regulations
mode 3 → investment and operational.
Magiera (2011): complicated authorities, unlike goods. Makes it hard to discuss Deep Trade Agreements (Syahputri and Gupta 2024).
IJEPA: no evidence it improves services trade (Syahputri and Gupta 2024)
IJEPA
IJEPA really is the first bilateral trade agreement that Indonesia signed that discusses services.
Syahputri and Gupta (2024) run a two regression model on the effect of IJEPA on trade in services.
First: exploit difference-in-difference, with IJEPA implementation in 2007.
Second: use trade restrictiveness index by scrapping through IJEPA (very labor intensive)
Both fails to find conclusive evidence of IJEPA’s impact.
Data: BaTIS
First launched in 2017 by OECD and WTO (Liberatore and Wettstein 2021),
Balanced data from two trading partners.
Not very good outside of rich countries.
used to build other databases like TiVA.
| Code | Category description |
|---|---|
| SA | Manufacturing services on physical inputs owned by others |
| SB | Maintenance and repair services n.i.e. |
| SC | Transport |
| SD | Travel |
| SE | Construction |
| SF | Insurance and pension services |
| SG | Financial services |
| SH | Charges for the use of intellectual property n.i.e. |
| SI | Telecommunications, computer, and information services |
| SJ | Other business services |
| SK | Personal, cultural and recreational services |
| SL | Government goods and services n.i.e. |
Trade by partner,2021
Singapore is the most important partner in trade in services for Indonesia. China, on the other hand, is the main buyer of Indonesia’s services export
Trade by sector, 2021
Indonesia’s imports dominates exports in all categories bar travel (SD). Additionally, the highest traded services in Indonesia are transport (SC) and business services (SJ)
Top services: travel
The only net export got punished by the pandemic. China+Australia important export destination,
Top services: transport
Singapore’s dominance is apparent here. Very important for manufactures trade.
Top services: ICT services
Perhaps the most relevant services to leap-frogging and feedback. Also the highest beneficiary of the pandemic.
Top services: biz services
Other business services includes consulting management, research and development, and trade-related services (Liberatore et al. 2021)
All in all
Singapore is important for Indonesia
Travel carry the trade balance. Most travel exports comes mainly from tourism, which is bad since the pandemic punishes it disproportionately.
Trade agreements play a huge role in improving trade in services.
Measures that affects movement of natural persons (e.g., qualification harmonization), and other non-tariff measures like computing requirement and investment list are crucial as trade in services can be done in 4 different modes that got affected by these rules.
Service restrictiveness
OECD generates an index for service restrictiveness, called Services Trade Restrictiveness Index
It is generated through sets of questions regarding how easy it is for foreigner to offer services in a given countries.
Some questions includes: Foreign equity restrictions, licensing requirements, nationality restrictioons, etc
STRI is annually updated and can be freely downloaded.
STRI
STRI
STRI
STRI
STRI
All in all
services trade is gaining traction and importance. The future of growth source?
Indonesia’s drop of STRI mainly comes from FDI relaxation, which is important for mode 3.
Database like BaTIS and STRI is great! Need more use!
Services and manufacturing
It is important to distinct manufacturing services and servicification.
Manufacturing services can mean a service on manufacturing inputs owned by someone else (Liberatore and Wettstein 2021), e.g., clothing.
More broadly, Servicification of manufacturing: the increasing use, production, and sale of services (Lodefalk 2017)
In general, share of services in manufacturing firms’ output are increasing.
Why servicification
Some services are integral to manufacturing (e.g., transportation, insurance)
services may improve productivity (e.g., R&D, consulting)
product differentiation (e.g., software, aftersales)
reduces barrier to entry to new market or GVC integration.
The third unbundling
Unbundling: how much part of the supply chain of production can be traded across border increase the use of comparative advantage (Baldwin 2016; Kimura 2018).
- trade cost: 1st, communication costs: 2nd, face-to-face costs: 3rd.
3 development paths: step-by-step, leap-frogging, feedback (Kimura 2018)
The last two makes services ever more important:
leap-frog to supplying part of a services tasks, or;
Feedback, using services to improve manufacturing.
Services in manufacturing
Melitz (2003): non-trivial trade cost makes small-margin firms lose.
Services can lower this cost: brigde information gap on the market, business customs and regulations in other countries, especially for new firms entering export market (Lodefalk 2014)
In Sweden, firms with higher services embeded in its final products increases its intensity of export (Lodefalk 2014)
In Indonesia, 10 per cent increase in service intensity of a firm increase its productivity by 7 to 8 per cent (Hing and Thangavelu 2023)
ARDL
In my (upcoming) bookchapter, I use ARDL cointegration analysis by using aggregate export and import data from the central bank (Bank Indonesia, n.d.)
exMt=α0+α1exMt−1+α2imMt+α3imSevt+νiexMt=γ0+γ1exMt−1+γ2imMt+γ3imSevt+γ4imMt−1+γ5imSevt−1+υipdbt=δ0+δ1pdbt−1+δ2imMt+δ3imSevt+ωipdbt=θ0+θ1pdbt−1+θ2imMt+θ3imSevt+θ4imMt−1+θ5imSevt−1+ηi
where exM is log manufacturing exports, pdb is log manufacturing GDP, imM is log manufacturing imports and imSev is log services imports, all for Indonesian level in time t, where t is from 2005 to 2023.
Specifications that we run are ARDL(1,0,0), the least restrictive, and ARDL(1,1,1) which is considered from AIC, BIC and RMSE (Pesaran and Smith 1995; Natsiopoulos and Tzeremes 2022).
ARDL
Figure 13: Indonesian trade dynamics
ARDL
ARDL
Indonesia’s current import service does not seem to contribute much to the country’s manufacturing export.
This corroborates findings in ICIO regression.
Indonesian firms does not seem to have much in house services to begin with, and those who do are only a small fraction of very productive firms (Hing and Thangavelu 2023).
All in all
By itself, Indonesian services export relies on travel. Looks to be net-importing for some time.
Services content in manufacturing seems to be an untapped potential: increasing services content may be beneficial for Indonesian manufacturing thus the feedback mechanism a la Kimura (2018).
Exports will be needed if manufacturing to increase its services content beyond transport to justify the cost.
Challenges
Regulatory restriction and uncertainty.
Services typically delivered through 4 modes, all controlled by various ministries.
Most FTA doesn’t take trade in services seriously.
Negative investment list.
Intense services often are not needed unless more complex and diverse prodects are required.
- the need to diversify only comes after the firm is already big.
References
Baldwin, Richard. 2016. The Great Convergence: Information Technology and the New Globalization. Book. Belknap Press of Harvard University Press.
Baldwin, Richard, Rebecca Freeman, and Angelos Theodorakopoulos. 2024. “Deconstructing Deglobalization: The Future of Trade Is in Intermediate Services.” Journal Article. Asian Economic Policy Review 19 (1): 18–37. https://doi.org/https://doi.org/10.1111/aepr.12440.
Bank Indonesia. n.d. “Statistik Ekonomi Dan Keuangan Indonesia.” Dataset. Bank Indonesia,. https://www.bi.go.id/id/statistik/ekonomi-keuangan/seki/Default.aspx#headingFour.
Hing, Vutha, and Shandre Mugan Thangavelu. 2023. “Does Servicification Enhance Firm Productivity? Evidence from Indonesia.” Journal Article. Journal of Southeast Asian Economies 40 (3): 299–317. https://remote-lib.ui.ac.id:2065/stable/27278631.
Kimura, Fukunari. 2018. “Unbundling Regimes and Development Strategies in ASEAN: Old Issues and New Challenges.” Journal Article. Southeast Asian Economies 35 (1): 13–21. https://doi.org/10.1355/ae35-1c.
Liberatore, Antonella, Rodolfo Ostolaza, Malik Bani Hani, Silvia Amiel, Maria Fernanda L’Hopital, Markie Muryawan, Vysaul Nyirongo, and Habibur Khan. 2021. “C.6 Trade in Services Classifications.” Report. International Monetary Fund. https://www.imf.org/external/pubs/ft/bop/2021/pdf/VM2/21-05.pdf.
Liberatore, Antonella, and Steen Wettstein. 2021. “The OECD-WTO Balanced Trade in Services Database (BaTIS).” Report. OECD/WTO. https://www.oecd.org/content/dam/oecd/en/data/methods/OECD-WTO-Balanced-Trade-in-Services-database-methodology-BPM6.pdf.
Lodefalk, Magnus. 2014. “The Role of Services for Manufacturing Firm Exports.” Journal Article. Review of World Economics / Weltwirtschaftliches Archiv 150 (1): 59–82. http://remote-lib.ui.ac.id:2063/stable/44211761.
———. 2017. “Servicification of Firms and Trade Policy Implications.” Journal Article. World Trade Review 16 (1): 59–83. https://doi.org/https://doi.org/10.1017/S147474561600029X.
Magiera, Stephen. 2011. “Indonesia’s Investment Negative List: An Evaluation for Selected Services Sectors.” Journal Article. Bulletin of Indonesian Economic Studies 47 (2): 195–219.
Melitz, Marc J. 2003. “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.” Journal Article. Econometrica 71 (6): 1695–725. https://doi.org/10.1111/1468-0262.00467.
Natsiopoulos, Kleanthis, and TNickolaos G Tzeremes. 2022. “ARDL Bounds Test for Countegration: Replicating the Pesaran Et Al. (2001) Results for the UK Earnings Equation Using r.” Journal Article. Journal of Applied Econometrics 37 (5): 22. https://doi.org/doi.org/10.1002/jae.2919.
Pesaran, M. Hashem, and Ron Smith. 1995. “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels.” Journal Article. Journal of Econometrics 68 (1): 79–113. https://doi.org/https://doi.org/10.1016/0304-4076(94)01644-F.
Syahputri, Evanti Andriani, and Krisna Gupta. 2024. “Analysis of the Effect of Indonesia-Japan Economic Partnership Agreement (IJEPA) on the Trade in Service Sector in Indonesia.” Journal Article. Jurnal Manajemen Industri Dan Logistik 8 (1). https://doi.org/10.30988/jmil.v8i1.1356.
Servicification, manufacturing and the Indonesian third unbundling Krisna Gupta April 22, 2025