Assessing Technical Efficiency in Indonesia’s Manufacturing Sector: A Two-Stage Analysis of Large- and Medium-Sized Industries

This study evaluates the technical efficiency of large- and medium-sized manufacturing industries (LMMIs) across Indonesian provinces and examines the factors influencing this efficiency. The uneven growth of LMMIs in terms of production levels and labor productivity highlights the need to determine whether variations in output growth stem from technological factors or input utilization. Although prior studies have analyzed the technical efficiency of Indonesia’s manufacturing sector, limited research focuses specifically on LMMIs. This study fills that gap by employing a two-stage analysis. First, data envelopment analysis (DEA) with an output-oriented model evaluates efficiency across provinces. Second, bootstrapped linear regression identifies determinants of efficiency. The findings reveal that 16 provinces are technically efficient. Further analysis indicates that efficiency is significantly influenced by the proportion of state- (or regionally) owned firms and the percentage of unpaid labor, including internships and student practical work. This study underscores the importance of improving technical efficiency to enhance industrial performance. Efficient industries can achieve higher outputs with fewer inputs, providing a model for less efficient counterparts to adopt best practices. Additionally, results highlight the role of infrastructure, government administration, and business environments in fostering efficiency, offering insights for policy reforms to boost industrial competitiveness.