Services Trade in Indonesia

2. The strengths and potential for growth of Indonesia’s service sectors

Abstract

This chapter presents a statistical overview of Indonesia’s services output and trade. By analysing individual services, it identifies the sectors and partner countries that most contribute to the country’s services trade balance across different modes of services trade.

Key points

• Distribution and construction are the largest services sectors in terms of gross output in Indonesia. The relative shares of gross output have been growing for services that support supply chains and market bridging and supporting services, including transport and logistics.

• Digital network services are small in terms of gross output and their shares of total services output in Indonesia have shrunk over the last decade prior to the COVID-19 pandemic. A similar pattern is observed for professional, scientific, and technical services.

• Cross-border (Mode 1) imports of services provide a crucial channel of access to telecommunication, computer and information services for Indonesian firms and consumers, while imports via a commercial presence (Mode 3) bolster access to distribution and financial services.

• Services exports, as captured by estimates derived from the balance of payments statistical framework, are highly concentrated in travel services, including tourism and other services, that are exported to foreign residents but consumed in Indonesia (Mode 2).

• A broader range of sectors, such as distribution, financial and insurance services, telecommunication, transport, and professional services, are important for Indonesia’s services exports either as sales of Indonesian MNE affiliates abroad (Mode 3 exports) or as sources of value added embedded in Indonesia’s manufacturing exports.

• Asia has the largest footprint of Indonesian services imports and exports across modes of services provision.

2.1. The contribution of services sectors in gross domestic output

The services sector in Indonesia generates gross output of USD 1 129 billion, representing 55% of total gross output in 2019, against 29% by manufacturing and 13% by agriculture and mining.1 Within this large services sector, the size of its sub-sectors varies considerably. Distribution and construction services are the largest sectors in terms of domestic gross output, accounting in 2019 for more than USD 270 billion and USD 240 billion, respectively (Figure 2.1). Domestic gross output of transport services sectors amount to a total value of about USD 100 billion. Accommodation and food services (which include short-stay accommodation for visitors and other travellers, as well as the food and beverage services activities2), financial and insurance, public administration and defence, and real estate activities are also relatively large sectors, with values of domestic gross output ranging from USD 76 billion to USD 60 billion. Education, administrative and support services, telecommunication, health and social work services, and other services generate between USD 49 and USD 20 billion of gross output, followed by publishing and audio-visual services (USD 17 billion), and logistics (USD 15 billion). Professional scientific and technical services, IT and other information services, arts, entertainment and recreation services, core environmental services, and postal and courier activities are the smallest sectors, accounting for volumes of domestic outcome slightly above or below USD 10 billion (Figure 2.1).

Sectoral shares of total services gross output in Indonesia remained constant from 2000 to 2010, reflecting similar positive nominal growth rates of gross output across sectors.3 These growth rates were more heterogeneous during the subsequent decade, which generated very different changes in the relative size of sectoral domestic production. From 2010 to 2019, the air transport services sector nearly tripled its relative size in terms of domestic gross output (190% growth rate of its sectoral share), and the relative size of logistics services grew by almost 100%. Land and pipelines, transport, accommodation and food services, and financial services showed growth rates above 50%. Following closely behind were education services (37%), public administration and defence services (both at 32%), while water transport and construction grew by almost 25%. All other services sectors plotted in Figure 2.1 display negative growth of their relative size, from -15% in arts, entertainment and recreation services to -34% in real estate activities.

The distribution and evolution of gross output across Indonesian services sectors show the importance of services that support supply chains (i.e. transport and logistics services), which are clearly on an expansionary trajectory within total services output. A similar pattern emerges for financial and insurance sectors, which are important market bridging and supporting services. Digital network services, such as telecommunication, information technology (IT) and other information services, which are crucial to support the development and uptake of digital solutions throughout the economy, were much smaller in terms of gross output and decreased over time in relative terms during the last decade prior to the outbreak of the COVID-19 pandemic.

2.2. Sectoral patterns of services imports

Consumers and firms rely on imports to access services beyond those provided by domestic suppliers. The importation of travel services encompasses tourism and business travel; these accounted for the highest volume of sectoral services imports by Indonesia in 2019 (USD 11 billion, representing 30% of total services imports). Other business and transport services were equally large in terms of services imports in the OECD-WTO BATIS database (each around USD 7.5 billion, representing 20% of total services imports in 2019).4 In relative terms, both other business and transport services imports shrunk between the years 2005-10. However, in the subsequent decade, the former grew by 7%, while the latter continued to shrink, decreasing by almost 20% of total services imports when compared to 2010 (Figure 2.2).

The other sectors covered in the services trade data plotted in Figure 2.2 account for smaller import values, but show heterogeneous dynamics in the evolution of their share of total services imports. Construction services, information and communication technology (ICT) services (including telecommunication, computer and information services), as well as maintenance and repair services display a growing relative size, while other sectoral aggregates including charges for the use of intellectual property (IP), financial services, insurance and pension services, and personal, cultural and recreational services all contracted in relative terms during the period 2010-19.

Mode 3 services imports, proxied by the gross output of foreign multinationals in Indonesia, show a significant degree of concentration in distribution and in financial and insurance services. In these two sectors, the 2019 output of foreign multinationals in Indonesia was estimated to have been USD 27 billion and USD 20 billion, respectively. Together, these sectors amounted to more than half of total Mode 3 services imports, but the long run dynamics of their relative importance shows opposite patterns. The share of finance and insurance services in total Mode 3 imports decreased from 2000 to 2010, but grew by almost 20% in the following decade, while that of distribution services expanded between 2000-10 and shrunk during the subsequent decade (Figure 2.3).

Over the decade prior to the COVID-19 pandemic, the share of Mode 3 services imports decreased for postal and courier activities, publishing and audiovisual services, health and social work, IT and other information services, arts, entertainment and recreation services, professional, scientific and technical services, telecommunication services, and administrative and support services. Conversely, the shares of transport services, logistics, accommodation and food services, education, construction, utilities and core environmental services, and real estate activities increased.

Compared to domestic output, services imports show different values and relative dynamics across sectors. For instance, imports of transport services, considering all modes of service provision in 2019, account for about 13% of the value of domestic output in that sector. The share of transport services imported via the establishment of a commercial presence of foreign MNEs in Indonesia (Mode 3) increased between 2010 and 2019 (Figure 2.3), contributing to the relative increase of domestic gross output in the transport sector. Instead, imports of transport services through other modes of provision (Figure 2.2) were shrinking with respect to other sectors in the decade prior to the COVID-19 pandemic. These observations suggest that foreign direct investment (FDI) could become a more important access channel to transport services for Indonesian firms and consumers.

A different pattern emerges when looking at digital network services. It has been noted that telecommunications, IT and other information services (or ICT services) occupy a relatively small and decreasing share of services’ gross domestic output in Indonesia (Figure 2.1). Imports from international markets are therefore an important access channel for these services. ICT services’ share of Mode 3 imports, which in 2019 accounted for 16% of domestic gross output,5 has also been shrinking (Figure 2.3), while ICT services imported via other modes of provision including digitally (worth 6% of the value of gross domestic output in the sector in 20196) increased compared to other sectors. This reveals the strategic importance of digital trade in the ICT sector as an expanding channel to source digital network services from international markets. It also highlights the potential to increase inward FDI in these sectors.

Data from the WTO Trade in Services by Mode of Supply (TiSMoS) database on services imports through the temporary movement of foreign residents (Mode 4) suggests that Mode 4 plays a significant role in several sectors, such as computer services, where estimated Mode 4 imports for 2017 (the latest available year in the TiSMoS database) amounted to USD 456 million; engineering services, USD 213 million; scientific and other technical services, USD 64 million; and architectural services, USD 37 million.

2.3. Sectoral patterns of services exports

Exports are a direct indicator of sectoral performance and competitiveness. With respect to economic development, exports are positively correlated with firm level productivity and represent a channel to scale up production and increase employment.

According to the aggregate sectoral categories in the OECD-WTO BATIS database, travel services in Indonesia (including tourism and business travel) represented nearly 60% of the total services exports in 2019, with a value of USD 15 billion, and its relative share grew at increasing rates over the periods 2005-10 and 2010-19 (Figure 2.4). Other business services, and transport services follow with much smaller export values (USD 3.7 billion and USD 3.4 billion, respectively) and their shares of total services exports contracted in the decade leading up to 2019. Exports of construction services were equal to USD 1.4 billion in 2019 and accounted for a stable share of total services exports at around 5%.

Among services sectors with lower exports values, personal, cultural, recreational activities, and maintenance and repair services increased their share of total services exports during the period 2010-19. All others, including ICT, financial, and insurance and pension, shrank in relative terms, with insurance and pensions showing a negative nominal growth rate during the same period. Charges of IP use also contracted in relative terms, though at a slower rate compared to the period from 2005 to 2010 (Figure 2.4).

Distribution, and financial and insurance services were the service sectors with the highest values of Mode 3 services exports in 2019, with values of USD 5.8 billion and USD 3.8 billion, respectively (Figure 2.5). Finance and insurance shares of total Mode 3 services exports grew by almost 20% between 2010-19. IT and other information services, other service activities, accommodation and food services, air transport, professional, scientific and technical services, arts, entertainment and recreation services also expanded their share of total Mode 3 services exports by double digit rates during the last decade prior to the COVID-19 pandemic.

Based on the WTO’s TiSMoS database, Mode 4 services exports play an important role for some services sectors in Indonesia. These include engineering (where the 2017 value of services exported through the temporary movement of Indonesian engineers abroad totaled at USD 439 million), construction (USD 184 million), scientific and other technical services (USD 99 million), and computer services (USD 52 million).

Overall, exports account for a small share of domestic output in many services sectors (e.g. approximately 7% in finance and insurance, 5% in the ICT sector, 4% in transports7) and are larger than imports only for travel services and personal, cultural and recreational services as measured in the BATIS database. However, as highlighted in Chapter 1, services sectors generate 37% of the value added embodied in total gross exports across all sectors of the Indonesian economy. In particular, when looking at value added content of Indonesia’s gross exports across manufacturing sectors, several services sectors stand out as important sources of value added (Figure 2.6). These include distribution (as captured in the value for wholesale and retail trade services), transport, financial and insurance, and telecommunication services, which are all crucial intermediate inputs and key enablers of production and exports in all sectors of the economy.8

2.4. Comparative export performance

Further insights on Indonesia’s services competitiveness is obtained by looking at export performance from a comparative perspective. Figure 2.7 interactively reports the values of a standard indicator of comparative export performance across service sectors and destination markets. A regional aggregate can be selected, e.g. World (all countries covered in the data), APEC and ASEAN, to compare Indonesian exports with other economies. The basic mechanism of the indicator is to take the ratio between the share of a sector in Indonesia’s total services exports and compare that to the same sector’s share of total services exports of the selected regional aggregate. A value larger than 1 shows a higher level of export specialisation by Indonesia in a sector relative to other services, as compared to the selected region. The indicator plotted in Figure 2.7 is computed with export values averaged over the three-year period 2019-21 and its final formula introduces a dynamic component to reflect how the trend compares to the previous 2016-18 period.9

The comparative performance indicators highlight the strength of Indonesia’s exports in construction services and tourism services embedded in the travel sectoral category of the OECD-WTO BATIS database. These patterns are confirmed across destination markets and regions selected for comparison (Figure 2.7). In contrast, Indonesia shows a relatively weaker comparative export performance in the sectors of other business services, ICT and financial, as well as in exports of those services that generate fees, commissions, or royalties for IP use, including patents, trademarks, copyrights, industrial processes and design.

 

Notes: In the non-PDF version of this graph, you can switch between comparison regions “ASEAN”, “APEC” and “World” via the icons in upper left side of the figure. Values above 1 (shades of green) indicate a stronger comparative export performance with respect to comparison regions, towards the destination markets. Comparative export performance indicators are computed using export flows averaged over the three-year period from 2019 to 2021 and account for the trend from 2016 to 2018.

Source: OECD-WTO BATIS Database (balanced flows).

When replicating the exercise using data on Mode 3 services exports, a few Indonesian services sectors show a slightly higher relative performance in exports to the world compared to global export patterns, as well as to APEC and ASEAN patterns (Figure 2.8). This is the case notably for construction services, telecommunications, utilities and core environmental services, publishing and audiovisual services, and health and social services. Indonesia appears relatively less competitive in the export of professional, scientific, and technical services, and IT and other information services. This pattern changes when Indonesia’s comparative export performance is assessed against total export performance of ASEAN economies, in which case Indonesia shows higher comparative export performance in the aforementioned sectors, especially towards destination markets that include the APEC and ASEAN regions.

 

Notes: In the non-PDF version of this graph, you can switch between comparison regions “ASEAN”, “APEC” and “World” via the icons in upper left side of the figure. Values above 1 (shades of green) indicate a stronger comparative export performance with respect to comparison regions, towards the destination markets. Comparative export performance indicators are computed using export flows averaged over the three-year period 2017-2019 and account for the trend from the 2014 to 2016 period.

Source: OECD Analytical AMNE Database.

Overall, while Indonesia’s comparative export performance remains relatively weak in many services sectors other than construction, the relative competitiveness of exports via the establishment of a commercial presence seems to be stronger for a larger set of services sectors, especially when compared to ASEAN regional patterns.

2.5. Major trade partners

Notwithstanding the decline in the role geographic proximity plays as a determinant of cross-border (or Mode 1) trade in communication, financial and business services (Benz, Jaax and Yotov, 2022[1]), the Asian region continues to account for the highest share of Indonesia’s imports and exports across those and other services sectors (Figure 2.9, Panel 1). Six of the top 10 economies that Indonesia imports services from are in Asia: Singapore is first in the ranking, followed by the People’s Republic of China (hereafter “China”), Japan, India, Hong Kong China, and Malaysia. Amongst the ten largest destination markets for Indonesia’s services exports, six are Asian economies ― China, Singapore, Japan, Malaysia, India, and Korea. European countries rank second most important for Indonesia’s services trade, with France, the United Kingdom, and Ireland among the top 10 service exporters to Indonesia, and Germany and Switzerland among the top 10 importers of Indonesian services. The United States is also a key trading partner, accounting for the second largest share of Indonesia’s services imports and the fourth largest share of services exports. Finally, Australia is among the top 10 destination markets for Indonesian services exports, with an import profile highly concentrated in the travel sector (Figure 2.9, Panel 2).

 

Note: In the non-PDF version of this graph, you can switch between "Geographical regions" and "Top 10 trading partners" view via the icons in upper left side of the figure. Geographical regions are based on U.N. classification. Values in USD millions, nominal. Plotted values are averages of yearly observations over the three-year period from 2019 to 2021.

Source: OECD-WTO BATIS Database (balanced flows).

Asia and Europe, as Indonesia’s first and second major partners, play a similar role when exploring Mode 3 services trade flows (Figure 2.10). The output of Asian MNEs controlled affiliates in Indonesia is concentrated in distribution services, with almost half of these services provided by Chinese firms. The primary output of European MNEs’ affiliates is in financial and insurance activities, driven by affiliates controlled by United Kingdom’s MNEs. Africa is the only region where Indonesian’s Mode 3 exports are larger than imports, with distribution services, and finance and insurance activities being the most relevant sectors for both trade flows. Australia is the top market in terms of services output by affiliates controlled by Indonesian MNEs, followed by Malaysia, Korea, India, United Kingdom, Hong Kong China, Canada, Singapore, the Philippines, and Nigeria.

 

Note: In the non-PDF version of this graph, you can switch between "Geographical regions" and "Top 10 trading partners" view via the icons in upper left side of the figure. Geographical regions are based on U.N. classification. Values in USD millions, nominal. Plotted values are averages of yearly observations over the three-year period from 2017 to 2019.

Source: OECD Analytical AMNE Database.

Figure 2.11 highlights the importance of Asia as a source of greenfield investments into Indonesia’s service sectors and as a destination market for greenfield investment by Indonesian services MNEs. Singapore, Japan, India, Malaysia, China, and Thailand are among the top 10 economies that have engaged in greenfield FDI projects in Indonesia. All with the exception of Japan are among the top 10 economies where Indonesian greenfield FDI projects were executed, together with the Philippines, and Viet Nam. Beyond the Asian region, the United States, the United Kingdom, Germany, and Australia are important origin countries, while the United Arab Emirates, Saudi Arabia, and Australia are the only non-Asian economies among the top 10 destination markets. Based on the number of inward and outward greenfield FDI projects from 2003 to 2023, the software & IT services sector stands out as the most dynamic for Indonesia among those included in The Financial Times fDi markets database.

 

Note: In the non-PDF version of this graph, you can switch between "Geographical regions" and "Top 10 trading partners" view via the icons in upper left side of the figure. Geographical regions are based on UN classification. Plotted values are the total number of projects from 2003 to 2023.

Source: fDi Markets, a service from The Financial Times Limited 2022. All Rights Reserved.

2.6. Concluding remarks

This chapter has shown that Indonesian services sectors differ considerably in size and display heterogeneous dynamics. Distribution and construction are the largest services sectors in terms of domestic gross output. The relative shares of domestic gross output have been growing for services that support supply chains and market bridging services, including transport, logistics, financial and insurance services. In contrast, digital network services are relatively small in terms of gross output and their share of total services output decreased over the decade prior to the COVID-19 pandemic. A similar pattern is observed for professional, scientific and technical services.

For imports, services trade acts as an access channel for some services sectors whose domestic footprint is relatively small and contracting. This is the case for cross-border (Mode 1) imports that provide a growing fairway for telecommunication, computer and information services, as well as for other business services which include, among others, research and development services; professional services such as legal, accounting, and management consulting; scientific and technical services. The number of greenfield FDI projects in Indonesia is concentrated in IT and business services. The output of foreign MNEs in Indonesia (Mode 3 services imports) bolsters the sectors of distribution and financial services.

Indonesian services exports in the OECD-WTO BATIS database are highly concentrated in travel services, including tourism and other services, which are exported to foreign residents that consume these in Indonesia (Mode 2). Construction, personal, cultural and recreational, and maintenance and repair services increased their relative share of total services exports over the decade prior to the COVID-19 pandemic. These are also the sectors where Indonesia has systematically shown higher relative export performance in comparison to ASEAN, APEC and World aggregate trading regions. Other sectors have displayed significant export values or increasing relative shares either through exports via commercial presence or Mode 3 (such as distribution, financial and insurance but also IT and other information services, and professional, scientific and technical services) or indirectly, as value added embedded in manufacturing exports (e.g. distribution, financial and insurance, transport and telecommunication).

Looking at the geographic distribution of Indonesia’s services trade, while Asia remains the region with the largest footprint of Indonesian services imports and exports, the United States, Australia, the United Kingdom, and a few European countries are often among Indonesia’s top 10 trading partners across sectors and modes of provision.

References

[4] Balassa, B. (1965), “Trade Liberalisation and “Revealed” Comparative Advantage”, The Manchester School, Vol. 33/2, pp. 99-123, https://doi.org/10.1111/j.1467-9957.1965.tb00050.x.

[1] Benz, S., A. Jaax and Y. Yotov (2022), “Shedding light on the drivers of services tradability over two decades”, OECD Trade Policy Papers, No. 264, OECD Publishing, Paris, https://doi.org/10.1787/d5f3c149-en.

[2] Benz, S., A. Khanna and H. Nordås (2017), “Services and Performance of the Indian Economy: Analysis and Policy Options”, OECD Trade Policy Papers, No. 196, OECD Publishing, Paris, https://doi.org/10.1787/9259fd54-en.

[5] Leromain, E. and G. Orefice (2014), “New revealed comparative advantage index: Dataset and empirical distribution”, International Economics, Vol. 139, pp. 48-70, https://doi.org/10.1016/j.inteco.2014.03.003.

[6] Shepherd, B. (2022), “How Misleading is Revealed Comparative Advantage?”, Working Paper DTC-2022-1, https://developing-trade.com/wp-content/uploads/2022/03/Working-paper-DTC-2022-1.pdf.

[3] UN; IMF; OECD; Eurostat; UNCTAD; UNWTO; WTO (2012), Manual on Statistics of International Trade in Services 2010, United Nations publication, https://unstats.un.org/unsd/tradeserv/TFSITS/msits2010/docs/MSITS%202010%20M86%20(E)%20web.pdf.

Notes

← 1.  Figures on gross domestic output are computed from the OECD TiVA database.

← 2.  Detailed descriptions of the sectors in the ISIC Rev 4 classification used in Figure 2.1 are available at https://unstats.un.org/unsd/publication/seriesm/seriesm_4rev4e.pdf.

← 3.  For each services sector, its share of total services gross output is defined as the ratio between gross output in the sector and the sum of gross output across all services sectors covered in the analysis.

← 4.  The sectoral aggregate “other business services” in the Extended Balance of Payments (EBOPS) statistical framework and in the OECD-WTO BATIS database covers many diverse activities, including: research and development services; professional services such as legal, accounting, and management consulting; scientific and technical services, e.g. architecture and engineering services; core environmental services; services incidental to agriculture and mining; operating leasing services; trade-related services partly capturing distribution services (the margins of the traders who own the good being sold are usually not captured in trade related services) UN et al. (2012[3]).

← 5.  The figure 16% is obtained as the percentage share of 2019 Mode 3 imports of telecommunication plus IT and other information services (from the OECD Analytical AMNE database as plotted in Figure 2.3) over 2019 gross domestic output of telecommunication plus IT and other information services (from the OECD TiVA database as plotted in Figure 2.2).

← 6.  The figure 6% is obtained as the percentage share of 2019 imports of telecommunication, computer and information (or ICT) services as recorded in the OECD-WTO BATIS Database (Figure 2.2) over 2019 gross domestic output of telecommunication plus IT and other information services (from the OECD TiVA database as plotted in Figure 2.2).

← 7.  These figures are computed as the percentage share of 2019 sectoral exports from the OECD-WTO BATIS database over 2019 sectoral gross domestic output from the OECD TiVA database.

← 8.  The share of value added in gross exports is not a perfect measure of relative importance of a sector. Higher shares of value added can also reflect the cost of relatively more expensive and/or relatively less efficient services inputs, especially when exporters rather than final consumers are more likely to absorb these costs due to high competition in export markets. While this caveat needs to be taken into account when analysing services’ shares of value added (see, for example, the discussion in a similar OECD country study on services competitiveness in India (Benz, Khanna and Nordås, 2017[2]), the importance of services in supporting exports performance of Indonesian manufacturing sectors is beyond doubt.

← 9.  The indicator, originally introduced by Balassa (1965[4]), is computed according to the following formula:

$\frac{1}{2}\left(r_{g,d}^s\left(t_1\right)+r_{g,d}^s\left(t_1\right)\times \frac{r_{g,d}^s\left(t_1\right)}{r_{g,d}^s\left(t_0\right)}\right)$

where $r_{g,d}^s$ is the ratio between: a) the share of sector $s$ in Indonesia’s total services exports to destination market $d$, and b) the share of the same sector in the total services exports to $d$ by all economies in the region or group $g$. Formally, defining exports of sector $s$ by country or group $i$ to destination market $d$ as $X_{i,d}^s$, and total services exports by country or group $i$ to destination market $d$ as $X_{i,d}^{tot}$, the expression of $r_{g,d}^s$ can be written as:

$r_{g,d}^s=\frac{X_{IDN,d}^s}{X_{IDN,d}^{tot}}/\frac{X_{g,d}^s}{X_{g,d}^{tot}}$

Finally, $t_1$ and $t_0$ indicate that the relevant export values are computed as an average over the three-year period 2019-2021 and 2016-2018 respectively. It is not uncommon to further interpret these types of indicators as a measure of revealed comparative advantage, i.e. the ability to produce a good or to perform a service at a lower opportunity cost. However, recent studies have documented how these measures, by reflecting all factors influencing trade flows, can introduce significant biases if used as empirical proxies of comparative advantage which notably only depends on a specific sub-set of these factors (see, for example, Leromain and Orefice (2014[5]) and Shepherd (2022[6]).