The Microeconomics of

Competitiveness
Yudo Anggoro, Ph.D
Global Competitiveness Report 2019
What makes a competitive nation?
 Firm’s Competitive Advantage and
Value Creation
• A firm is said to have a competitive advantage
in a market if it earns a higher rate of
economic profit compared to the average
economic profit in the industry

• Economic profit earned by a firm depends on

the market conditions as well as the economic
value created by the firm

8
Economic Competitiveness Defined
“…the ability of an economy to attract and
maintain firms with stable or rising market
shares in an activity while maintaining or
increasing standards of living for those who
participate in it” (Storper, 1997)

“…ultimately competitive regions and cities are

places where both companies and people
want to locate and invest in” (Kitson, Martin,
and Tyler, 2004)
 5.80
%
21.31% 2.60%
7.31%

5.50
57.49% %
 Most of economic activities are still concentrated in Java island
where 57% of Indonesia’s population reside
Sumatra
• Total area: 480,793 sqkm
• Population: 50.6 million
• Population density: 105/sqkm
• Population growth: 1.92%
• GDR P: IDR 468 trillion
• Industry focus: agriculture,
m ining, manufacturing
Kalimantan
• Total area: 544,149 sqkm
• Population: 13.8 million
• Population density: 27/sqkm
• Population growth: 1.98%
• GDR P: IDR 190 trillion
• Industry focus: agriculture, mining
Indonesia
• Total area: 1,904,579 sqkm
• Land: 1,811,549 sqkm
• W ate r: 93,000 sqkm
• Population (2010): 237.6 million
• Population (2016): 258.2 million
• % of population based on living
are a: 53% urban and 47% rural
Papua
• Total area: 416,060 sqkm
• Population: 3.6 million
• Population density: 11/sqkm
• Population growth: 2.32%
• GDR P: IDR 23 trilion
• Industry focus: mining and fishery

Jakarta
• Total area: 664 sqkm
• Population: 9.6 million
• Population density: 14,497/sqkm
• Population growth: 1.11% Sulawesi
• GDR P: IDR 395 trillion • Total area: 188,522 sqkm
• Industry focus: trading and services • Population: 17.4 million
• Population density: 97/sqkm
• Population growth: 1.64%
Java Bali • GDR P: IDR 107 trilion
• Total area: 129,438 sqkm • Total area: 5780 sqkm • Industry focus: fishery, agriculture, mining
• Population: 136.6 m illion • Population: 3.9 million
• Population density: 1,117/sqkm • Population density: 730/sqkm
• Population growth: 1.28% • Population growth: 1.24%
Source: Indonesia Statistics Bureau • GDR P: IDR 1,356 trillion • GDR P: IDR 29 trillion
• Industry focus: manufacturing, • Industry focus: tourism
agriculture, trading

• Indonesia ranks as the fourth largest population in the world after C hina, India and US. 258 million people reside in a land area of 1.9 mn km2.
Many investors are attracted to operate on Java (specifically West Java) due to its large population.
• 53% of the population live in urban areas. It is estimated that the urbanization rate would increase to 60% by 2025.

© 2017 PT Deloitte Konsultan Indonesia

1
Logistics Costs in Indonesia
Source: Wikipedia as of 2017
With a population of more than 250 million
and a nominal GDP of USD 941 billion,
Indonesia emerge as Southeast Asia’s biggest
economy

Economics

• In terms of GDP, Indonesia is

ranked the first in SEA.
• Indonesia recorded relatively
stable economic growth of
5.2% in 2016 despite global
economic volatility.
• To boost the economic growth,
the government has introduced
15 successive economic
policy packages since Sept
2015.

Ease of doing business

Corruption
Ease of Doing St art ing a Enf orcing
Count ry Percept ion
Business Rank Business Contracts
Index Rank
Singapore 2 6 2 8
M alaysia 23 112 42 54
T hailand 46 78 51 76
Brunei 72 84 93 N /A
V ietnam 82 121 69 112
I ndonesia 91 151 166 88 • Indo
P hilippines 99 171 136 95 inve
C ambodia 131 180 178 pavi
L ao PDR 139 160 88 139 Asia
M yanmar 170 146 188 147 cou
E ast T imor 175 145 190 123 succ
Ease of doing business rank has improved, thanks to on
government’s effort to simplify business permits. C orruption is infra
still endemic, although the government is trying to eradicate • Goin
© 2t0h1i7sP.TDeloitte Konsultan Indonesia 8 arou
 Cluster and Competitiveness
▪ In order to obtain economic competitiveness,
it is important for industries and economic
activities to locate close to each other.

▪ Location matters

▪ Those economic activities form economic

clusters
 The Economy of Agglomeration

Marshall’s Industrial Perroux’s Growth Porter’s Industry

Agglomeration (1920) Pole theory (1955) Clusters (1990)

• Industrial agglomeration reduces transportation costs-the cost of moving goods,

people, and ideas (Marshall 1920).

• Growth pole theory (Perroux 1955): growth is not uniform over an entire region,
but instead takes place around a specific pole.
 Clusters
• Today’s economic map of the world is
dominated by clusters: critical masses – in one
place –of unusual competitive success in
particular fields.
• Clusters are a striking feature of virtually every
national, regional or state economy
• Silicon Valley, NC Research Triangle, Boston’s
Route 128 or Bollywood
• Indonesia?
 Cases in Japan：Automobile Industrial Cluster
☆ An automobile is composed of more than 30,000 parts. Most of the parts are manufactured in particular
areas (region, country) where the automobile industrial clusters are formed.
[Example]: Toyota (Toyota City, Aichi), Mazda (Hiroshima), Nissan (Iwaki City, Fukushima), etc.

Production in a particular area (region, country)

Various Vehicle body

screws Engine Iron,
aluminum

Fuel tank Chassis

Automobile
Various meters
(Core Industry) Suspension

Rubber
Window glass Tires

Panting, anti-rust Seats

Wheels Bearings
agents

Lighting equipment
 Wine Industrial Cluster Wine brewing
☆ The wine industrial cluster in California forms the machines
linkage of companies and industries concerned,
universities, research institutes, as well as relevant Barrels/Bottles
administrative and other organizations.
Caps/corks
Municipalities
Support Labels
Vine stock plants

Fertilizers/Pesticides Wholesale
Grape /Retail
Wineries
Harvesting
machines
farmers Exporters
Irrigation
technology Restaurants
Support
Tourism
Agricultural
Universities/Agricultural
cluster
research institutes
Source: Made based on “Porter’s Cluster Theory” (Prof. Seiji Harada, Nagaoka Univ.) 6
 Categorization of Clusters (1)
A company plays the key role in a cluster
: Within a cluster
1. Marshall type 2. Italian type : A company

3. Hub & spoke type 4. Satellite type

Material: Made based on “Cluster Theory” (Mining Industry Development Study Department, JICA, March 2002) 7
 Categorization of Clusters (2) ：Within a cluster

1. Marshall type 2. Italian type ：A company

- Type found in an early stage of - MSEs form a network without a

cluster development. hierarchy.
- There is no hierarchy. - A cluster in the area called “The Third
- Once a network is formed and Italy” in 1970s
“single-line companies and labor - Appearance of a leading company
divisions” generate, the cluster leads the cluster to the “Hub & spoke
becomes an “Italian type.” type”

Material: Made based on “Cluster Theory” (Mining Industry Development Study Department, JICA, March 2002) 8
 Categorization of Clusters (3)
: Within a cluster
3. Hub & Spoke type 4. Satellite type
: A company

- The cluster most frequently - A network in which a leading company

of the “Hub & Spoke Type” is found
found.
outside of the cluster.
- A hierarchical structure exists. - Companies under a leading company
are significantly affected by the
- MSEs are gathered under a company’s management strategy, and
leading company in the cluster thus the cluster becomes unsecured due
as a group of contractors . to the difficult acquisition of information

Material: Cited from “Cluster Theory” (Mining Industry Development Study Department, JICA, March 2002) 9
 Why Clusters

• Clusters (Porter 1990):

➢ Concentration of interconnected firms
➢ In a specific geographic location
➢ Not only compete but also cooperate

• Benefits:
➢ Lowering transportation cost.
➢ Increasing productivity
➢ Building dialogue and collaboration
➢ Fostering innovation
➢ Providing labor market pool
➢ Specialization
Zara and Zaragoza
Toyota US Headquarters
Map of Clusters in the US
Plan of Clusters in Indonesia
 MARKET ORIENTATION OF
INDUSTRIAL PRODUCT

IMPORT SUBSTITUTION (IS): EXPORT ORIENTATION (EO):

▪ Emphasizes Domestic ▪ Free market mechanism in

Consumption
▪ Characterized by High
Intervention of the state
▪ Given to industries that support
Agriculture
▪ For developing countries, it
helped to catch up and develop
economies
which free intervention from
Government
▪ Focus on export
▪ The implementation impact in
non-oil and gas manufacturing
sectors
▪ Only benefited for few
conglomerates due the relation
between political & business
corporation
INDUSTRIAL
POLICY IN
INDONESIA

PHASE I PHASE II PHASE III PHASE IV

1966-1967 1970 1980 1980-Present

▪ Era of Import ▪ Export ▪ More liberal ▪ Economic

Substitution orientation economy crisis
▪ Pro market ▪ Oil boom era agenda ▪ Growth
in nature ▪ Become private
major sector
industrial
exports
President Jokowi’s Plan
 The Sea Toll Concept

Development Scheme of Sea Toll’s Main and Sub Corridor

Loop Aceh
Loop North-East
Sulawesi and
Malahayati
North Maluku
BELAWAN (NEW BELAWAN)
Loop Pantai Timur Tarakan
Loop North Papua
Dumai Sumatera
Sibolga Goron alo
Loop Babel and t
Loop East Ternate
West Kalimantan Kalimantan
SORONG Manokwari
New
Loop West
Jayapura
Sulawesi Ambon Nabire
KalBar Port
Pulau Baai Pantoloan
Kendari
JAKARTA MAKASSAR Loop Maluku and
SURABAYA South-West Papua
Loop Pantai Barat New Bali Lombok Kupang Marauke
Sumatera

Loop East
Loop West Nusatenggara
Main Sea-Corridor Nusatenggara
TRACKS OF SHIPS
How about this?
 the politics in the government

Good
Coordinating Coordinating Coordinating
Minister 1 Minister 2 Minister 3 Hard

Difficult

Nearly
Minister 1 Minister 2 Minister 3 Minister X impossible

Echelon 1 Echelon 1 Echelon 1 Governor 1 Governor 2 Governor X

Head of Head of
Echelon 2 Echelon 2 Echelon 2 Mayor
District 1 District 2
Assumption: common objective
 In reality…

Year 1 Year 2 Year 3 Year 4 Year 5

41
 Productive Use of Inputs
• Today’s competition is more dynamic.
Companies can mitigate input-cost
disadvantages through global sourcing.
• Now competitive advantage rests on making
productive use of inputs, which requires
continuous innovation.
 Environment
• What happens inside a company is important,
but clusters reveal that the immediate
business environment outside companies
plays a vital role as well.

• Clusters often extend downstream channels

and customers and laterally to manufacturers
of complementary products.
 Stakeholders
• Many clusters include government and other
institutions such as universities, research
centers, think tanks, vocational training
providers, and trade associations.

• Clusters promote both competition and

cooperation. Rivals compete intensely to win
and retain customers. Without vigorous
competition, a cluster will fail.
 How Do Clusters Collaborate
• Inform –newsletters and cluster directories
• Learn – seminars, conferences, training
• Market – strategic plans for exports, cluster brochures
• Purchase –buyer-supplier linkages
• Produce –bid on projects, joint ventures
• Build Economic Infrastructure –technology transfer and
telecommunications

• Networking –formal and informal

Clusters are Critical to Competition
• Clusters increase productivity of companies
based in the area.
• Clusters drive the direction and pace of
innovation, which underpins productivity.
• Cluster allows each member to benefit as if it
had greater scale or as if it had joined with
others formally-without losing flexibility.
Measuring Industry Concentration
Location Quotient (LQ)
• A measure of an industry's concentration in an area
relative to a reference area, which is generally the rest of
the nation.
• It compares an industry's share of local employment with
its share of national employment.
Eir
E
LQ = r
Ein
En
 Interpreting Location Quotient
• If a location quotient equals to 1 then the
industry's share of local employees is the same as
the industry's share nationally.
• A location quotient greater than 1 means the
industry employs a greater share of the local
workforce than it does nationally, produces more
goods and services than are consumed locally,
which are exported.
• A location quotient less than 1 implies that the
industry's share of local employment is smaller
than its share of national employment.
 Location Quotient Calculation

Area Industry A Industry B Total LQa LQb

East 600 2250 2850 0.74 1.11
West 3300 7500 10800 1.07 0.97
South 900 3000 3900 0.81 1.08
North 1200 2250 3450 1.22 0.91
TOTAL 6000 15000 21000
 Change in LQ
• Large location quotient that is declining,
• Large location quotient that is increasing,
• Small location quotient that is declining,
• Small location quotient that is increasing.
 LQ Interpretation
• Location quotients are calculated for all industries
to determine whether or not the local economy
has a greater share of each industry than
expected when compared to a reference
economy.

• If an industry has a greater share than expected

of a given industry, then that "extra" industry
employment is assumed to be basic because
those jobs are above what a local economy
should have to serve local needs.
 Improve Productivity
• Better access to employees and suppliers
• Access to specialized information
• Complementarities
• Access to institutions and public goods
• Better motivation and measurement
 Clusters and Innovations
• Presence of sophisticated buyers
• Companies plug into customer needs and
trends speedily.
• Ongoing relationships with others within the
cluster enables learning about evolving
technologies, marketing concept, etc
• Close involvement of cluster members in the
innovation process.
 Stimulates New Business Formation
• Needed assets, skills, and inputs are easily
available in cluster locations.
• Cluster often presents a significant local
market and an entrepreneur may benefit from
established relationship.
• Local financial institutions already familiar
with the cluster may require a lower risk
premium.
 Measuring Firm Strategy, Structure, and Rivalry

Indonesia’s
• Herfindahl Index
Competitiveness • Competitiveness

Demand Condition Factor Condition

• Income per capita • Ports

• Human Development Index • University Enrollment
• Poverty Rate • Productivity
• Unemployment • Population Density
• Economic Change • Regional GDP

Related and Supporting

Industries
• Employment in
industry clusters
• Factor supply in
industry clusters
 Case Study 1
REGIONAL COMPETITIVE ANALYSIS
IN AIR TRANSPORT INDUSTRY IN
INDONESIA
 BACKGROUND

Globalization push the industry to grow Indonesia, the largest archipelagic country
innovatively in order to survive with thousands of islands
FACTOR CONDITIONS

Infrastructure such as airports, runway, and

many more like highway into the airports,
etc

Labor force especially in the air transport

industry such as engineer, technician,
operator, etc
Demand conditions in Indonesia Locally
will represent how competitive the
industry will be globally DEMAND CONDITIONS

Passengers Carried
in Indonesia, 2000-
2015
RELATED & SUPPORTING INDUSTRIES

Two Industries supporting each other will gain a more

advantage through the more efficient communication,
process, and will drive each other into innovation
FIRM STRATEGY, STRUCTURE, AND RIVALRY

Each different Structure and Strategy

will gave a different effect to the
competitive advantage
Fierce Rivalry will trigger the
innovation faster, for example the
pharmaceutical companies in
Switzerland
 • First Started in 1929 by KLM
• Growing Demand
AIR TRANSPORT INDUSTRY
• More than 20 commercial
airlines
 MARKET STRUCTURE

Airlines Marketshare
Lion Air 41.60%
Garuda Indonesia 23.50%
Sriwijaya Air 10.40%
Herfindahl Index Citilink 8.90%
Wings Air 4.70%
Air Asia Indonesia 4.40%
Others (16) 6.50%

HHI 0.318763

Highly Concentrated in the big player

Analysis
Analysis
Analysis
 LQ RESULT

Banten Jawa Barat

0,5
5
4 0,4
3 0,3
2 0,2
1 0,1
0 0
2000 2005 2010 2015 2000 2005 2010 2015
Year Year

Jawa Timur
1,5

0,5

0
2000 2005 2010 2015
Year
 LQ RESULT

Bali Kepulauan Riau

15 2,5
2
10
1,5
5 1
0,5
0 0
2000 2005 2010 2015 2000 2005 2010 2015
Year Year

Kalimantan Timur
2,5
2
1,5
1
0,5
0
2000 2005 2010 2015
Year
 TRIANGULATION

• Overall Strength in the 4 diamond factors of nations

• Minimum Contributions to the total shift share
Banten • High Contributor of GDP in Air Transport Industry
• Grow Slowly

• Factor & Demand Conditions Weakness

• Low Contributor in GDP
Jawa Barat • Highest Regional Effect Shift
• Grow Massively

• Big Demand Conditions

Jawa • Declining Growth of Regional Share

Timur •
•
Low Contributor of GDP
Cease Operations Slowly
 TRIANGULATION

• High Demand Conditions & Related Industries

• High Overall Conditions
Bali • Highest Contributor of GDP in Air Transport Industry
• Declining Growth
• Grow Slowly

• High Factor Conditions & Related Industries

Kepulauan • Low Demand Conditions & Firm Rivalry
• Slow Declining Growth
Riau • Low Contributor of GDP in Air Transport Industry
• Grow Slowly

Kalimantan • High Rivalry and Demand Conditions

• Worst Declining Growth
Timur • Cease Operations Immediately
 Case Study 2
Impact of Covid19 Pandemic to
Indonesia’s Competitiveness
IMPACT ON THE INDONESIAN ECONOMY
Global Financial Crisis Great Lockdown
Economic Crisis Asian Financial Crisis US, Europe, Asia Globally
Countries affected East Asia and Southeast Asia (depreciation in the subprime (coronavirus pandemic,
(causes) (financial collapse of the Thai mortgage market in the United Russia–Saudi Arabia oil price
baht) States) war)

MER
Widespread infectious disease S
SARS H1N Ebola Covid-19
1

Socio-economic disruption
Health crisis (Pembatasan SosialBerskala Pressures on real sector Pressures on financial sector
Besar)
•Widespread infection •Limitation to public movement •Disruption on business activity •Disruption on bank credit
•Anxiety and Fear (work from home, study from (production, investment, •Stock market declined
•Hunger home, worshiping from home) trading)
•Death •Loosing source of income •Potential bankruptcy
•Lower purchasing power and
consumption ability

Widyasanti, A.A. (April, 2020). Dampak Covid-19 terhadap Perekonomian : Saat Ini dan Masa Datang. Paper presented at Acara Temu Alumni Teknik Kimia – ITB
Existing Policy to cover COVID-19 Crisis

E. The Government of Indonesia have announced Economic Stimulus to

Suppress Turmoil COVID-19
Ref. INPRES No. 04/2020 on March 20,2020 about Refocussing
Kegiatan, Realokasi Anggaran, Serta Pengadaan Barang dan
Jasa dalam rangka Percepatan Penanganan COVID-19 and
PMK No. 23/PMK.03/2020 on March 21, 2020 about Incentive
Pajak untuk Wajib Pajak terdampak Wabah Virus Corona
The priorities of The government is expanding the business sector
receiving tax incentives and economy stimulus in order to minimize
the risk of a wave of layoffs due to a business that has plummeted
or goes bankrupt.
Dukungan Paket Stimulus untuk Pandemi Covid-19

Pe r 27 M ay 2020 Indonesia Vie tn am Filipina Th ailan d Singapura Malaysia

Jumlah Paket 3 2 2 3 4 3
Jumlah (US$ Milyar) 26.4 13.3 30.4 64.8 65.4 63.0
% ke PDB 2.5% 5.1% 8.5% 11.2% 19.0% 20.0%
Pe mb ag ian Untuk Rp trilliun VND trilliun PHP milyar THB milyar SGD milyar MYR milyar
Keamanan Sosial 110.0 - 509.9 600.0 36.1 175.1
Usaha Kecil Menengah 150.0 - 200.0 600.0 2.0 2.9
Perusahaan / Sektor Swasta 145.0 307.0 805.1 917.0 54.4 102.0
100%
90%
80% 36% 36%
43%
70% 52% 59%
60% 1%

50% 100%
37%
40% 13% 28% 2%
30% 63%
20% 39%
27% 33% 28%
10%
0%
Indonesia V ie tnam Fi lipina Thailand Singapura Ma la ysia

Keamanan Sosial Usaha Kecil Menengah Perusahaan / Sektor Swasta

Source: Bloomberg, CNBC, Reuters

 Role Play/Discussion

•The Covid19 pandemic has brought global economic turmoil, including in

Indonesia. In order to make a recovery action, the government has given
economic stimulus worth IDR 405 trillion to provide safety net, helping business,
and supply health equipment. However, it is expected that the number is not
enough. Some prominent figures had suggested BI to issue new money worth
IDR 1,000-4,000 trillion to help the economy recovered.
SOLUTIONS - SOCIAL WELFARE PROGRAM
SOLUTIONS - KEYPOINTS
CONCLUSIONS