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Economic and Political Networks and Firm Openness: Evidence from Indonesia

Author

Listed:
  • SHIMAMOTO Daichi
  • TODO Yasuyuki
Abstract
Using firm-level dataset from the manufacturing sector in Indonesia, we examine how firms' ties with the government in receiving rents and with other firms and their managers' trust toward foreigners and views of globalization are correlated with each other. We find that firms' strong political ties are associated positively with the level of managers' trust toward domestic citizens and the number of domestic buyers and suppliers and negatively with their level of trust toward foreign nationals. In turn, managers' trust toward foreign nationals and firms' transactions with foreign firms are positively correlated with each other, and trust and business networks within the country also show a positive correlation. When managers are more trusting of domestic citizens or when firms transact more with domestic firms, managers are more likely to have a negative view of globalization, incorporating such factors as the foreign ownership of firms and free trade. The results suggest a vicious cycle between the political ties of local firms and protectionist views and policies against globalization, which leads to economic stagnation due to a lack of diffusion of knowledge from abroad. This mechanism may explain why middle-income countries experience economic stagnation and cannot escape the "middle-income trap."

Suggested Citation

  • SHIMAMOTO Daichi & TODO Yasuyuki, 2015. "Economic and Political Networks and Firm Openness: Evidence from Indonesia," Discussion papers 15084, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:15084
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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