The Exchange Rate and Exporting: Evidence from the Indonesian Manufacturing Sector
This paper examines the impact of the exchange rate on export performance using plant- and product-level data for the Indonesian manufacturing sector over the period 2008–2012. It addresses both the impacts of the level and volatility of the exchange rate on the value, scope, and composition of exported products. The study finds that the exchange rate affected the export values for the period of analysis, confirming the importance of the exchange rate level and volatility. The findings show that high exchange rate volatility tends to reduce the exporters’ product scope, minimising uncertainty. Meanwhile, the impact on product concentration within firms encourages exporters to specialise, concentrating on exporting only on a few products that, presumably, are the exporters’ core-competence products. This particular finding underlines the importance of product competition in the export market as another factor affecting the scope and concentration of exporter products. That is, tougher competition in the destination market reduces the mark-up across products and induces an exporter to skew its sales toward its best-performing/core-competence products. The study underlines the importance of policy for hedging the volatility of the exchange rate, which means developing the financial markets to provide sufficient resources or mechanisms for this.