Electricity infrastructure and the productivity, growth, and entry of Indonesian manufacturing firms

Project Active from to Energy

Evidence shows that firms in developing countries are less productive relative to their counterparts in developed countries. Poor electricity supply is one suggested reason. However, there is little causal empirical evidence to verify this. Two drivers of long run growth have been identified by economists. The first is total factor productivity  (TFP),  or technology growth, and the second is spillovers. This project is concerned with the former, TFP growth.  In developing countries, the lack of access to effective infrastructure can be a constraining factor of TFP growth and incentives for new firm formation. This project aims to provide evidence for the causal effect of electricity access on productivity and growth. Understanding this relationship is necessary to understanding how electricity infrastructure links to industrial growth. This will be achieved by estimating the effects of the electricity grid expansion in Indonesia on the productivity and investment behaviour of manufacturing firms.

Electrification has important aggregate effects on long-run growth. Quantifying the effect of grid access on the growth of the manufacturing sector as well as identifying the channels through which this effect is operating is crucial in assisting sustainable economic growth in developing countries. Governments and international aid agencies invest substantial amount of resources in electrification projects in developing countries. Consequently, research on the relationship between firm productivity and electricity access is highly demanded. Despite the consensus on the fact that access to electricity positively affects firm productivity, there is still no evidence on this issue. More research is needed to guide policy making. Our goal is to help policymakers by publicising findings regarding the social payoffs of enhanced energy access. This will be done through sharing work with the state electricity company in Indonesia and organisations such as the World Bank. In addition, findings will also apply to IGC partner countries.

Data will come from various sources.

  • Firm Level Data: Indonesian Medium and Large Manufacturing Census.
  • Electrification Data: Location and capacity of electrical substations over time collected from the state electricity company in Jakarta
  • Village Level Data: PODES. This is a survey of +/ 65000 villages in Indonesia. It includes information on available infrastructure.

A theoretical model of firm entry and exit will be used to guide the empirical analysis. The model will provide predictions on how electricity affects firm productivity and entry and exit decisions. Infrastructure placement is not random.  To credibly estimate the effect of electrification on firm productivity, a Regression Discontinuity Design will be employed. The idea is to compare firms that gained access to electricity to their geographical neighbours within the same industry that don’t have electricity.