The Impact of Temporary Tariff Protection (Safeguard) on the Heterogeneity of Productivity of Firms That Are Listed as Taxpayers in Indonesia

Abstract

This study will look at the impact of implementation of the safeguard policy on the efficiency/productivity level of the protected industries. The productivity level of the protected industries is measured by total factor productivity (TFP). This study also takes into account the impact of a firm’s heterogeneity factor that explains the assumption of different responses to protectionist policy based on the initial productivity of the firm within an industry. The data structure takes form as unbalanced data panel using analysis unit at firm level. The data are obtained from the Directorate General of Taxes’ (DGT) Database, specifically from the annual tax return. The result of this study empirically indicates a significant evidence to conclude that safeguard policy has a positive impact on the TFP level of the protected firms. The result also considers the factor of firm heterogeneity in an estimation model which provides evidence to support argument that frontier firms—firms with the highest TFP in their industry—receive a weaker impact from the protection policy, compared to the “laggard” firms that receive positive impact of increased productivity from the temporary protection policy.