Does Economic Scale Strengthen Export Competitiveness? Evidence from Eastern Indonesia

In the vast archipelago of Indonesia, the islands of the east—Sulawesi, Nusa Tenggara, Maluku, and Papua—hold a promise that has long remained unfulfilled. These regions are rich in natural resources, from fisheries and forests to agriculture, yet they contribute far less to the nation's export earnings than the more developed islands of Java and Sumatra. The question facing economists and policymakers is not just why this gap exists, but what actually drives a region to succeed in global trade. It is a puzzle that goes beyond simply having raw materials. Success depends on how efficiently a region can turn those materials into goods, the skill of its workers, and the sophistication of its industries. Two concepts are central to this story: the size of a region's economic engine, measured by how much output a worker can produce, and the ability of that region to compete in international markets. While it seems logical that a bigger, more productive economy would naturally sell more abroad, the reality of how these two forces interact is far more complex, especially in a place where logistics are difficult and industrial capacity is still growing.

A team of researchers set out to untangle this relationship specifically for Eastern Indonesia, looking at data spanning from the year 2000 to 2025. They wanted to know if simply making the economy bigger—by producing more with the same number of workers—would automatically make exports more competitive. To do this, they examined a wide range of factors, including how much money was being invested in machinery and infrastructure, the education levels of the population, the proportion of skilled workers, and the diversity of the products the region could make. They treated the relationship between economic size and export success as a two-way street, asking if one pulls the other along or if they move independently. By analyzing data from multiple provinces over decades, they built a picture of how these elements influence one another in the real world, rather than just in theory.

The study revealed a one-way street rather than a two-way exchange. The researchers found that when a region increases its economic scale—meaning its workers become more productive and generate more value—the region's ability to compete in non-oil exports improves significantly. In simple terms, if a province can produce more goods with the same amount of labor, it becomes a stronger player in the global market. However, the reverse was not true. Simply having strong export numbers did not automatically make the local economy bigger or more productive. This suggests that for Eastern Indonesia, the path to success starts with efficiency and capacity at home, not just by chasing foreign sales. The data showed that labor productivity is the foundation; without it, expanding exports does not necessarily lead to broader economic growth.

The role of money and investment, however, told a more complicated story. The study confirmed that pouring capital into a region—building factories, upgrading infrastructure, and buying new technology—does make the local economy larger and more productive. Yet, this same investment did not immediately translate into better export competitiveness. In fact, the data showed a negative link between capital accumulation and export success. This does not mean that investment is bad, but rather that where the money goes matters immensely. The researchers suggest that much of the investment in Eastern Indonesia has flowed into extractive industries or activities focused on the domestic market, rather than into value-added processing or export-oriented manufacturing. Consequently, while the economy grows in size, it does not necessarily become more competitive globally because the new capacity is not being directed toward the right kinds of products.

The quality of the workforce also played a nuanced role. Having a higher share of skilled or educated workers helped increase the overall economic scale, making the region more productive. However, this improvement in labor quality did not directly boost export competitiveness on its own. The skilled workers were making the local economy more efficient, but the export sector remained stuck in low-value activities that did not fully utilize these skills. Similarly, the study looked at human capital, which includes education and health levels. Surprisingly, higher human capital scores were linked to a smaller economic scale in this specific context. This indicates a mismatch: the region is producing more educated and healthy people, but its industries are not sophisticated enough to absorb them or put them to work in high-productivity roles. The skills are there, but the local economy has not yet evolved to meet them.

The most encouraging finding for the future of the region came from the concept of economic complexity. This term refers to the depth and diversity of a region's productive knowledge—how many different things it can make and how sophisticated those products are. The study found that regions with higher economic complexity were significantly more competitive in non-oil exports. This suggests that the secret to success in Eastern Indonesia lies not just in having more workers or more machines, but in building a more diverse and sophisticated industrial base. When a region can produce a wider variety of complex goods, it gains a stronger foothold in international trade. The researchers concluded that the region's potential is real, but it requires a shift in strategy. Investment must be steered toward industries that add value to raw materials, such as processing food or manufacturing goods, rather than just extracting resources.

Ultimately, the research paints a clear picture for Eastern Indonesia. The path to becoming a global export powerhouse does not begin with simply selling more goods abroad. It begins with making the local economy more efficient and diverse. By focusing on labor productivity, directing investment toward value-added industries, and aligning education with the needs of a modern, complex economy, the region can unlock its potential. The data suggests that once the local economy becomes sophisticated enough to produce high-quality, diverse goods, export competitiveness will follow naturally. Until then, simply expanding the volume of exports or increasing investment without a clear direction will not be enough to close the gap with the more developed parts of the country. The key is to build the capacity to make better things, and the ability to sell them will grow from there.