Knowledge Spillovers and Regional Industrial Growth: Evidence from Sumatera Island

Paper Abstract

The Importance of knowledge spillovers for achieving innovation and economic growth has been largely stressed recently by the theoretical and empirical literature on the relationship between industrial development and knowledge spillover. In the development of industrial sector, knowledge spillover is believed to have a significant contribution to improving growth. Knowledge spillover is the pattern of the agglomeration forces, i.e., specialization, competition and diversification.

There are three theories which are applicable to examining the relation of knowledge spillovers and economic growth. The first is MAR theory. According to MAR, knowledge spillovers occurring between firms within industry and local monopoly had positive impact on growth since it was internalized economics externalities. The second is Porter theory. Porter argued that specialization and industrial competition had a positive relation to industrial growth. The third is Jacobs’s theory. According to Jacobs, competition and industrial diversification had impact and pushed economic growth.

This research applies ordinary least square (OLS) to estimate the impact of knowledge spillover on the industrial growth. While Geographic Information System (GIS) applies to present the spatial pattern of industrial dynamic in Sumatera Island. The paper used a dataset of two digits of manufacturing industry of each provincial in Sumatera Island during 1998 and 2001. Estimation result demonstrates that there is no significant role of industrial specialization on the industrial growth. Based on this finding, it can be said that the impact of homogenous inter-firm knowledge spillovers did not have significant contribution to the industrial growth in Sumatera. Industrial specialization played a significant role in determining industrial growth for food products and beverages manufacturing industry (ISIC 31), paper and paper products industry (ISIC 34), basic metals manufacturing industry (ISIC 37) and metal manufacturing industry (ISIC 38). Industrial competition has played an important role in industrial growth in Sumatera Island; higher industrial competition generates higher industrial growth. A significant impact of industrial competition on the industrial growth seems important for basic metals manufacturing industry (ISIC 37) and metal manufacturing industry (ISIC 38).

The research findings point out that industrial diversification in Sumatera has been a constraint to the industrial growth. It was seen by a negative relationship between industrial diversification and its growth. The reasons of findings are many cities and regencies in Sumatera do not have diverse industry. Based on the rate of employment, value added and number of firm during 1998 and 2001, it was concluded that North Sumatera, Riau, Lampung and South Sumatera played important role in developing manufacturing industry in Sumatera. At the regency level, the highest employment and value added has been found in Batam and Deli Serdang. Another major finding shows that food products and beverages manufacturing industry (ISIC 31) is the dominant and important industry in Sumatera since the industry provides a large industrial employment during the estimation period.


Keywords: Knowledge Spillovers – Agglomeration Economies - Industrial Growth