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Innovation and Dynamic Productivity Growth in the Indonesian Food and Beverage Industry
Innovation and Dynamic Productivity Growth in the Indonesian Food and Beverage Industry
Setiawan, Maman;Effendi, Nury;Indiastuti, Rina;Fahmi, Mohamad;Budiono,
Article Innovation and Dynamic Productivity Growth in the Indonesian Food and Beverage Industry Maman Setiawan *, Nury Effendi, Rina Indiastuti, Mohamad Fahmi and Budiono Faculty of Economics and Business, Universitas Padjadjaran, Jl. Dipati Ukur No. 35, Bandung 40132, Indonesia * Correspondence: firstname.lastname@example.org Abstract: This paper examines the relationship between innovation and dynamic productivity growth in the Indonesian food and beverage industry. Dynamic productivity growth is calculated using a Luenberger indicator, and innovation is represented by a process innovation. This research uses firm-level data for the period 1980–2015 sourced from the Indonesian Central Bureau of Statistics. This research uses a panel data regression model to estimate the relationship between innovation and dynamic productivity growth. This research finds that innovation is relatively low in the Indo- nesian food and beverage industry. Dynamic productivity growth declines steadily during the pe- riod of estimation. This research also found that innovation positively affected dynamic productiv- ity growth only after the introduction of the competition law in Indonesia. Keywords: dynamic productivity growth; innovation; competition law; food and beverage industry JEL Classification: L11; L44; L51; M21; O31 Citation: Setiawan, M.; Effendi, N.; Indiastuti, R.; Fahmi, M.; Budiono. 1. Introduction Innovation and The Indonesian food and beverage industry is a manufacturing sector that proceeds Dynamic Productivity Growth in the raw materials from agriculture, fisheries, and plantations into value-added products. Since Indonesian Food and Beverage 2010, the Indonesian food and beverage industry has contributed almost 20% of the GDP Industry. Resources 2022, 11, 98. annually, making it a significant contributor to the Indonesian economy. In addition, the https://doi.org/10.3390/ Indonesian Central Bureau of Statistics  reported that the food and beverage industry resources11110098 accounts for over half of all household spending. Given the importance of the industry, pro- Academic Editor: Eva Pongrácz duction security should be guaranteed. To secure production performance in the industry, firms should continually innovate in their operations (see ). For example, innovation in Received: 21 August 2022 food production using robots or new improved machines may double production. Regard- Accepted: 19 October 2022 ing innovation activities in the Indonesian manufacturing industry, Setiawan et al.  re- Published: 25 October 2022 ported that only nine subsectors of the food and beverage industry were included in the Publisher’s Note: MDPI stays neu- twenty subsectors of the Indonesian manufacturing industry with the highest R&D expend- tral with regard to jurisdictional itures during the periods 1994–1995 and 2017. Nevertheless, the percentage of R&D expend- claims in published maps and institu- itures for those subsectors was still low, at less than 1% of their output. This indicates that tional affiliations. innovation in the Indonesian food and beverage industry may still be low. Regarding the impact of innovation on production performance, previous research has investigated the relationship between innovation and productivity growth. Geroski , Vivero , Huergo and Jaumandreu , and Mañez et al.  investigated the effects Copyright: © 2022 by the authors. Li- of innovation on productivity growth in the European manufacturing industry. Their re- censee MDPI, Basel, Switzerland. This article is an open access article search concluded that innovation positively affected productivity growth. On the con- distributed under the terms and con- trary, Mansury and Love  found that innovation did not affect productivity growth in ditions of the Creative Commons At- US business service firms. Previous research has suggested that the effect of innovation tribution (CC BY) license (https://cre- on productivity growth could be different between regions or sectors. A factor that may ativecommons.org/licenses/by/4.0/). cause the different effects of innovation on productivity between regions or sectors can be Resources 2022, 11, 98. https://doi.org/10.3390/resources11110098 www.mdpi.com/journal/resources Resources 2022, 11, 98 2 of 13 economic institutional infrastructure (see ). Economic infrastructure institutions can be regulated, such as the competition law suggested by Setiawan et al.. Setiawan et al.  found that the introduction of competition law in Indonesia since 1999 has decreased inefficiency allocative. The latter may suggest that the introduction of competition law, as an economic institution infrastructure can affect productivity growth. Thus, research in- vestigating the effect of innovation on productivity growth in the Indonesian food and beverage industry is still relevant, especially including the effect of the introduction of Indonesian competition law. Moreover, research investigating the effect of innovation on productivity growth is rarely found in the Indonesian food and beverage industry. Additionally, the effect of the introduction of competition law on the way innovation affects dynamic productivity growth, as well as the effect of competition law implementation on dynamic productivity growth, are rarely investigated in Indonesia. Previous research has only investigated the impact of industrial concentration on R&D in the industry (see ). In addition, Setiawan  only investigated productivity growth and its determinants without including the impact of innovation on productivity growth. Setiawan et al.  also investigated only the effect of competition law’s introduction on the price–cost margin. Thus, research in- vestigating the impact of innovation on dynamic productivity growth, including the in- fluence of the implementation of competition law, is important. Previous research investigating the relationship between innovation and productiv- ity growth also applies to static productivity growth. The adjustment costs of investments in quasi-fixed factors of production were not taken into account by static productivity growth. Failure to account for adjustment costs in productivity growth assessment, ac- cording to Kapelko et al. [12–14], Setiawan and Lansink , and Setiawan , may in- correctly ascribe adjustment costs to productivity growth. A cost that is either internally created, such as learning expenses, or externally generated, such as expansion planning fees, is referred to as a transaction or rearrangement cost [12,16,17]. Although adjust- ment costs are not visible, their impacts are expressed as increased input costs and/or re- duced output levels. As a result, a study on the relationship between innovation and productivity growth using dynamic productivity growth is important. Research on the relationship between innovation and dynamic productivity growth with the influence of competition law can generate important policy implications. Policy- makers such as the Ministry of Economics, the Ministry of Industry, and the Ministry of Trade can facilitate firms’ innovation if the innovation can secure the productivity growth of the industry. With this information, policymakers can design regulations and incen- tives to support firms’ innovation in the industry and to improve their productivity growth. Additionally, the positive effect of competition law on dynamic productivity growth as well as on the way innovation affects dynamic productivity growth may sug- gest that policymakers, such as the Indonesian Competition Commission, strengthen the effectiveness of competition law in Indonesia. Based on the previous background, this research freshly investigates the relationship between innovation and dynamic productivity growth in the Indonesian food and bever- age industry. This research also has novelty with respect to the application of dynamic productivity growth in relating innovation to productivity growth. Moreover, this re- search also includes the influence of competition law on the effect of innovation on productivity growth. Both novelties can be useful for firms and policymakers. The following is a breakdown of the paper’s structure. The second section is devoted to a review of the literature. The modeling approach is described in Section 3. Section 4 presents the data description, and Section 5 contains the presentation of the empirical model and outcomes. The final section summarizes and draws conclusions from the find- ings. Resources 2022, 11, 98 3 of 13 2. Literature Review Research investigating the relationship between innovation and productivity growth has been conducted previously among countries and sectors. The innovation measures are mostly sourced from the survey. According to OECD-EUROSTAT , a firm is said to implement product innovation if a new and improved product has been introduced in the market. A firm is said to implement process innovation if a new and improved man- ufacturing process is used within the production process. Due to data unavailability, most of the previous research defined innovation as the process of innovation. For example, Geroski  investigated the relationship between firm entry, innovation, and productivity growth in 79 industries in the UK during the period 1976–1979. Innovation was measured by the annual count of major innovations constructed by SPRU at Sussex. The research found that innovation activity increased productivity growth. Vivero  also investigated the relationship between innovation and productivity growth of firms in Spain. The re- search used two measures of innovation, i.e., R&D intensity and the number of process innovations that a firm obtained in a year. The research found that innovation positively affected static productivity growth. Mañez et al.  investigated the effect of process in- novation on the total factor productivity growth of small and medium enterprises in Span- ish manufacturing during the period 1991–2002. Process innovation was defined as a modification of the productive process using a question in the survey. The research con- cluded that the introduction of process innovation increased productivity growth. Huergo and Jaumandreu  investigated the impact of (process) innovations on productivity growth. The research used 2300 Spanish firms surveyed during the period 1990–1998. They defined process innovation as activities related to the modification of the productive process (affecting machines, organization, or both). The research concluded that process innovation affected productivity growth. Rochina-Barrachina et al.  investigated the ef- fect of process innovation using a sample of Spanish manufacturing firms during the pe- riod 1991–1998. The data on the process of innovation was sourced from the survey, where the process of innovation was assumed to occur if the firms answered positively to the question on whether the firms introduced some important modifications to the productive process. The research concluded that process innovation increased the total factor produc- tivity growth. In contrast to other previous research, Mansury and Love  concluded that innovation did not affect productivity growth. They investigated the impact of inno- vation on the productivity and growth of US business service firms. They used a ques- tionnaire to collect data on innovative firm activities. Later research may suggest that an investigation of the relationship between innovation and productivity growth may still be relevant. Regarding the ambiguous effect of innovation activity on productivity growth, pre- vious research suggested that the ambiguous effect could be caused by a poor economic institution in the country that might affect the effectiveness of innovation in improving productivity growth (see ). Poor economic institutions, i.e., monopolization and cartel- ization, may significantly create higher uncertainty about the benefits of having more in- novation since innovation activity may increase the costs of developing new products and services. Thus, innovation may inversely affect productivity growth in countries with poor economic institutions. For example, the monopolization or cartelization of a sector by a few companies may negatively affect the productivity growth of other companies with more innovation in the same sector since market power is still owned by the monop- olists. Thus, the implementation of competition law in Indonesia in 1999 is hypothesized to turn the effect of innovation into a positive effect on productivity growth. Regarding the effect of the competition law on productivity growth, Setiawan et al.  found that the introduction of competition might lower the inefficiency allocative, i.e., lower the price–cost margin. The lower inefficiency allocative may increase productivity growth since firms will increase capacity utilization to get higher returns. Dynamic productivity growth can also be affected by other variables, such as foreign ownership and export activity. For example, Setiawan  suggested that foreign Resources 2022, 11, 98 4 of 13 ownership had a positive effect on dynamic productivity growth. Additionally, Kimura and Kiyota  also found that exports could increase the productivity growth of firms. This research still applies the measure of innovation as a modification of the produc- tive process because of data unavailability of product innovation. This research does not use R&D to measure innovation since the R&D data were only available for a few years (less than 5 years with no consecutive years). In addition, the adjustment cost from the investment in quasi-fixed input, which is attributed to the productivity growth measure, is taken into account in this study, which was not taken into account in earlier similar research. Regarding previous research, this research hypothesizes that the effect of innovation and other variables on dynamic productivity growth can be written in the equation (1). The trend variable is included in the equation (1) following the research of Setiawan  to reconfirm the trend of dynamic productivity growth. DTFPG = f(Innov, Foreign, Export, Law, InnovLaw, Trend) (1) where > 0 or < 0 , > 0 , > 0 , > 0 , > ¶