Does Firm Size Matter? Evidence from Indonesian Manufacturing Firms

We examine the impact of firm size and international exposure i.e., foreign direct investment (FDI) and imports on firms' technical efficiency in five manufacturing sub-sectors in Indonesia from 2001 to 2015. Firm-level data is used to estimate a stochastic production frontier with the time-variant model. Three indicators proxy the firm size based on the sales (market share), capital, and labour to test whether firm size matters for both domestic and foreign firms, as well as for importer-non-importer firms. Generally, foreign owned firms and companies with higher access to foreign inputs report larger efficiency. Firm size as indicated by market share and the number of labour positively affects efficiency. However, the positive effect of firm size (market share) are mitigated by FDI and import intensity. On the other hand, the effect of firm size as indicated by capital intensity has a positive impact on technical inefficiency. However, the adverse effect from high intensity of capital is lessened when large firms have access to imported materials. The impact of size (capital) on technical efficiency is larger for high technology subsectors e.g., pharmaceutical, as they have high fixed cost, hence larger minimum efficient scale. Among the three size indicators, the proxy related to labour has the largest correlation with technical efficiency, suggesting that it is the most appropriate one. Firms' technical efficiency is divergent over time, driven primarily by capital inputs.