Agglomeration and Manufacturing Activities in Indonesia

The importance of the agglomeration process in facilitating growth and productivity increases in Indonesia's manufacturing sector cannot be ignored. The agglomeration process is associated with improved productivity as firms enjoy external benefits from either urbanization or from the sharing of inputs available in certain locations. Evidence suggests that Java remains the main corridor for manufacturing activities, with large cities attracting manufacturers that are looking for externalities from urbanization. However, there are signs that some firms are shifting to new locations in other cities and forming new agglomerations in areas that these firms find more favorable. With regional autonomy, issues relating to local governance, infrastructure, and uncertainties in local regulations are increasingly important and can undermine the process of agglomeration. Some programs promoting certain locations as special economic zones (SEZs) are experiencing difficulties in attracting manufacturing investors. Understanding these challenges should help policymakers to strengthen the underlying factors that facilitate manufacturing agglomeration.