Small local firms struggles: insertion process and entry barriers as lowest-tier automotive suppliers in Indonesia

Abstract

This paper examines how small local firms integrate into the automotive value chains and what entry barriers they face during this process. Using primary data from surveys on domestic suppliers and interviews with subsidiaries of Japanese automotive producers operating in Indonesia, the study found that apart from the initial condition of local firms that were mostly less capable and inexperienced in the modern manufacturing system, the subsidiaries also purposively created various entry barriers and provided limited assistance. Consequently, the linkages opportunities available for local firms were confined to lowest-tier suppliers and the integration process as new suppliers was arduous, costly and time consuming. Given such a situation, the paper proposes the insertion process as a new industrial upgrading trajectory and labels it as entry upgrading. Moreover, the research also suggests that workers’ mobility and demonstration are pivotal channels for local firms to acquire advanced knowledge necessary for their entry upgrading.