5 - Conclusions and Recommendations

Summary

Conclusions

This study investigates the effects of the 1983 financial reform on the financing and investment behaviour of manufacturing establishments in Indonesia during the period 1981–88. The 1983 financial reform was part of an overall structural adjustment programme such as tax reform and trade reform; hence changes in the behaviour of manufacturing establishments may be attributed to other reforms as well as those in the financial sector. However, the study has tried to approach and identify the effects of the financial reform in many different ways.

The full sample of 2,970 manufacturing establishments has at least three years of positive output. Consequently, by the nature of the data, new entrants to the market after 1985 have been excluded. Clearly, as suggested by the literature, these young establishments are likely to face financial difficulties that have not been captured.

Secondly, the study has calculated descriptive statistics of profitability and financial structure for different categories of firms, both before and after liberalization. Those data suggest that smaller firms benefit disproportionately from enhanced access to external fundings after the reform, despite the increase in interest rates. There is a process of convergence of productivity levels among various categories of establishments, a feature that may suggest increasing economy-wide efficiency.

Thirdly, in order to explore analytically the way in which the financial reform may have affected these changes, an appropriate econometric method — the Generalized Method of Moments — is used to capture the dynamic structure of the model and compensate for the presence of general heteroskedasticity across firms over time. Observations with zero-investment level then had to be eliminated, reducing the sample size to 523 establishments. A full explanation of the econometric restrictions is provided in Chapter 3, section 3. However, the analysis of the differences between including and excluding zero-level investment suggests that the findings will be reinforced if an appropriate method is found to employ the full sample.