Local economic structure, productivity growth, and industry life cycle: evidence from Indonesia

This paper examines the effects of dynamic agglomeration economies on the productivity growth of the industries in Indonesia’s regions. The study introduces employment market potential into the city-industry growth estimation for controlling local size and preventing overestimation of the agglomeration effects. The results suggest that both specialization and diversity are important for city-industry growth and that some externalities are stronger in different time periods. The effects of specialization and diversity on medium-term growth (2000–2010) are stronger than on long-term growth (1990–2010), in addition to new positive effects of competition. A detailed analysis across industries reveals a strong relationship between local industrial structure and performance—productivity and employment growth—which is associated with industry maturity within its lifecycle stages. © 2018, The Japan Section of the Regional Science Association International.