Dampak Indonesian Export Promotion Agencies (Epas) Pada Ekspor Indonesia, Studi Kasus Pada Ekspor Alas Kaki Indonesia

THE IMPACT OF INDONESIAN EXPORT PROMOTION AGENCIES (EPAs)
ON INDONESIAN EXPORT
CASE STUDY FROM INDONESIAN FOOTWEAR EXPORT

HELGANITA DEVIYANTI SINAGA

POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016

STATUTORY DECLARATION
I, Helganita Deviyanti Sinaga, hereby declare that the master thesis entitled ”The
Impact of Indonesian Export Promotion Agencies (EPAs) on Indonesian Export, Study
Case from Indonesian Footwear Export” is my original work under the supervision of
Advisory Committee and has not been submitted in any form and to another higher
education institution. This thesis is submitted independently without having used any other
source or means states therein. Any source of information originated from published and
unpublished work already stated in the part of references of this thesis. Herewith I passed
the thesis copyright to Bogor Agricultural University.
Bogor, February 2016

Helganita Deviyanti Sinaga
H151137164

RINGKASAN
HELGANITA DEVIYANTI SINAGA, Dampak Indonesian Export Promotion Agencies
(EPAs) pada Ekspor Indonesia, Studi Kasus pada Ekspor Alas Kaki Indonesia. Dibimbing
oleh PARULIAN HUTAGAOL dan FLORIAN PLOECKL.
Export Promotion Agency (EPA) telah banyak diterapkan oleh banyak negara di
dunia guna mendukung pertumbuhan ekspor melalui promosi. Hal ini juga diterapkan oleh
Indonesia pada lebih dari 20 tahun. Namun, terkait dengan dampak dari EPA Indonesia,
hal tersebut masih mengundang banyak pertanyaan akan dampaknya pada total ekspor
Indonesia maupun dampaknya pada produk yang spesifik seperti alas kaki. Untuk itu,
penelitian ini bertujuan untuk mengetahui dampak EPA pada ekspor Indonesia.
Saat ini banyak penelitian telah dilakukan untuk mengestimasi dampak EPA pada
total ekspor suatu negara. Namun demikian, masih sangat jarang ditemukan penelitian
yang mempelajari dampak EPA pada produk tertentu. Untuk itu penelitian ini dapat
berguna untuk menjawab beberapa pertanyaan. Pertama, penelitian ini bertujuan untuk
mempelajari dampak EPA Indonesia pada total ekspor Indonesia. Yang kedua, penelitian
ini juga bertujuan untuk mempelajari dampak EPA Indonesia pada ekspor alas kaki

Indonesia.
Produk alas kaki ini dipilih karena produk tersebut merupakan salah satu dari
produk utama dalam klasifikasi Kementerian Perdagangan RI. Terlebih lagi, tren
perdagangan produk tersebut meningkat pada lima belas tahun belakangan. Alas kaki juga
berkontribusi sekitar 2% pada ekspor Indonesia. Sehingga, dengan melihat tren yang ada,
penelitian ini ingin mempelajari apakah ada keterkaitan antara EPA Indonesia terhadap
ekspor alas kaki Indonesia.
Untuk memperoleh hasil yang valid, data yang digunakan adalah sepuluh tahun
observasi. Periode yang digunakan adalah antara tahun 2004 sampai 2013, pemilihan tahun
berdasarkan pada tahun re-opening EPA Indonesia setelah penutupan beberapa tahun
sebelumnya akibat krisis moneter. Analisa juga mencakup 30 negara yang dibagi atas 18
negara yang telah memiliki EPA Indonesia dan 12 negara yang tidak memiliki EPA
Indonesia.
Penelitian ini menggunakan pendekatan gravity model dengan menambahkan
beberapa variabel yang terkait EPA dan FTA. Data yang digunakan adalah data panel yang
terdiri atas 30 negara untuk periode sepuluh tahun. Estimasi model dilakukan dengan
mempertimbangkan tiga pendekatan, yakni pooled least square (PLS), fixed effect (FE)
danrandom effect (RE) model.
Terkait dengan variabel yang digunakan, EPA pada gravity model akan diwakili
oleh 2 dummy. Dummy yang pertama adalah dummy Opening EPA yaitu tahun pembukaan

sebuah kantor EPA. Sedangkan dummy yang kedua adalah tahun-tahun setelah sebuah
kantor EPA dibuka di suatu Negara. Dummy akan sama dengan 1 ketika EPA dibuka di
suatu negara, dan akan 0 di luar tahun pembukaan tersebut. Selain itu, dummy free trade
agreement (FTA) juga digunakan untuk melihat keterkaitannya dengan potensi
perdagangan. Dummy FTA akan bernilai sama dengan 1 ketika FTA Indonesia dengan
negara terkait telah ditandatangani pada tahun tersebut, selanjutnya dummy pada tahun

berikutnya setelah penandatanganan FTA juga sama dengan 1. Variabel-variabel lainnya
yang digunakan dalam penelitian adalah variabel terkait gravity model seperti border,
language, dan landlocked.
Hasil analisa menunjukkan bahwa EPA Indonesia memberikan dampak yang
positif ketika dianalisa menggunakan pooled least square (PLS). Namun dengan
menggunakan random effect (RE) dan fixed effect (FE), pengaruh positif EPA tidak
terkonfirmasi. Selanjutnya, tidak ditemukan pula bukti adanya pengaruh EPA juga terjadi
pada analisa dampak EPA Indonesia pada ekspor alas kaki. Hal ini dapat terlihat pada tiga
pengujian dengan PLS, RE dan FE. Sehingga kita dapat menyimpulkan bahwa dampak
Indonesia EPA tidak terdapat pada ekspor produk tertentu (pada studi ini digunakan
komoditas alas kaki). Hal tersebut dapat terjadi dikarenakan produk alas kaki mayoritas
berasal dari produk berbasis luar negeri seperti Adidas dan Nike. Sehingga terkadang
dukungan dari EPA tidak diperlukan.

Kata kunci: EPA, EPAs, Agen Promosi Ekspor, Promosi Ekspor, Alas kaki.

2

SUMMARY
HELGANITA DEVIYANTI SINAGA, The Impact of Indonesian Export Promotion
Agencies (EPAs) on Indonesian Export, Case Study from Indonesian Footwear Export.
Under Supervision of PARULIAN HUTAGAOL and FLORIAN PLOECKL.
Export promotion agencies (EPAs) have been used by many countries as a
support for export led growth, including Indonesia. However, in regards to Indonesian
EPAs, there are still many questions regarding the impact of Indonesian EPAs on
Indonesian export performance.
Recently, there were many studies analyzing the impact of EPAs on aggregate
export. However, there have never been any studies analyzing the EPAs impact on
specific product. Therefore, in order to fill the gap in the literature, this study has two
main objectives. Firstly, this study examines the impact of Indonesian EPAs on
Indonesian total export. Secondly, this study also examines the impact of Indonesian
EPAs on specific product which is footwear.
Footwear as a specific product was chosen because its category as one of the ten
main export products based on the Ministry of Trade classification. Its trends have been

increasing on the last fifteen years. Footwear also contributes to around 2% of
Indonesian export. Therefore, looking to the potency and achievement of the product,
we would like to study whether the increasing export was influenced by the existence
of EPAs.
In regards to the model, the estimated models considered three approaching
panel data methods, namely, pooled least square (PLS), fixed effect (FE) and random
effect (RE). To obtain the valid result, ten year observations are used. The years were
taken from 2004 to 2013 which were the re-opening year after the closing of
Indonesian EPAs because of monetary crisis era. Analysis also used 30 countries
observations which are divided as 18 countries that have an EPA or more, and 12
countries that have no EPA.
This study uses gravity model, and it also uses the dummy variables related,
which are FTA and EPA added to the equations. In regards to the variables, EPA on the
gravity model is represented by two dummies. The first dummy is given for the
opening year of EPA on a country, while, the second dummy is given for the following
years after an EPA opened. The dummy is equal to 1 when a year is on the criteria.
Trade is also related to the existence of free trade agreement (FTA). Therefore, beside
the EPA dummies, the dummy of FTA is used. The other controlling variables are the
standard gravity variables such as border, language, and landlocked. These variables
usually have a strong relation to the trade impact.

The estimation result shows that Indonesian EPAs have an impact on total
exports as estimated by a pooled least square (PLS) model. However, by further
research using FE and RE, the significance and positive coefficient is not found. The
insignificance impact is also found in analyzing the impact of EPAs on footwear export
which can be seen on the three tests using PLS, FE and RE. Therefore, we can consider
that the EPA does not have an impact on footwear export and EPAs services are not
needed.
Keyword: Export Promotion Agency, EPAs, EPA, export promotion, footwear.

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THE IMPACT OF INDONESIAN EXPORT PROMOTION AGENCIES (EPAs)
ON INDONESIAN EXPORT

CASE STUDY FROM INDONESIAN FOOTWEAR EXPORT

HELGANITA DEVIYANTI SINAGA

Master Thesis
As a requirement to obtain a degree
Master of Science in
Economics Program

POSTGRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2016

External Advisory Committee Examiner: Dr. Arief Daryanto, MEc

AKNOWLEDGEMENT
‘Trust in the LORD with all your heart and do not lean on your own understanding’
(proverbs 3: 5). My greatest gratitude goes to God Almighty in Jesus Christ, for the
wisdom, strength and good health in order to accomplish this mini dissertation.

I would like o express my gratitude towards my family for the encouragement
which helped me in completion of this dissertation. My beloved and supportive husband,
Iwan Pandjaitan who is always by my side when times I needed him most and helped me a
lot in making this study, and my lovely daughter, Gracya Laurent, who served as my
inspiration to pursue this undertaking.
I would like to express my special gratitude and thanks to both supervisor,
Prof. Dr. M.Parulian Hutagaol and Dr Florian Ploeckl, for their guidance, outstanding
knowledge, worthwhile suggestions, ideas, constant supervision and encouragement
during the course of this thesis. Their guidance and technical assistance led me to finish my
dissertation.
I highly appreciate all lecturers in the School of Economics Institut Pertanian
Bogor (Bogor Agricultural University) and the University of Adelaide who shared their
valuable knowledge and perspectives in economics.
I would like to thank the Ministry of Trade and Australian Awards Scholarship for
providing sponsorship to undertake my study in Bogor and Adelaide. I also wish to thank
the University of Adelaide and Institut Pertanian Bogor for providing me the chances to
pursue my academic achievement. Special thanks are given to my institution, the
Directorate General for National Export Development-the Ministry of Trade.
I owe more gratitude and honour to my parents, who have supported and
encouraged me throughout this challenging period of study. I am very grateful for having

their spiritual blessing, tender love and patience. I dedicate my dissertation to them.
All errors are, of course, my own.
Bogor, February 2016
Helganita Deviyanti Sinaga

TABLE OF CONTENTS
LIST OF FIGURES
LIST OF TABLES

i
i

1 INTRODUCTION

1

Background
Problem Formulation
Research Objective
Research Benefit

Scope of Research
2 LITERATURE REVIEW
EPAs and asymmetric information
EPAs and Products Differentiation
EPA and export per capita
Previous Studies
The Gravity Model and Its Variables
Research Hypothesis
3 RESEARCH METHODOLOGY
Model Specification
Source of Data
Methodology
4 RESULT AND ANALYSIS
Testing the models
Impact of Indonesian EPAs on Indonesia total export
Discussion
5 CONCLUSION AND SUGGESTION
Conclusion
Suggestion
APPENDICES

REFERENCES

1
3
4
4
5
6
6
7
7
8
11
13
14
14
16
16
21
22
23
25
28
28
29
31
32

LIST OF FIGURES
1 Indonesian total export to 30 countries
2 Footwear export trend compare to other Indonesia main product
3 EPAs based on budget and export per capita
4 Indonesia Total Export to 10 countries
5 Indonesia Footwear Export to 10 countries

3
4
8
21
22

LIST OF TABLES

1 Indonesian EPA offices
2 Source of Databases
3 Summary of results based on PLS, FE and RE

2
16
23

1 INTRODUCTION
Background
All of the countries in the world pursue high economic growth since high
economic growth will lead to new industrialized economies or emerging countries
(Hayakawa 2011). However, to obtain high economic growth, countries should have
effective strategy. Hayakawa and others (2011) assert that for a long time, the high
economic growth was stimulated by an export-led growth strategy. The export-led
growth strategy means a strategy to promote and increase export production for
obtaining a rapid growth development (Shahid 2013).
In targeting the export-led rapid growth, one of the strategy is to establish
representative offices in overseas as the front line in export promotion, termed export
promotion agencies (EPAs) (Hayakawa and others 2011). Meanwhile, Kang (2011)
define an EPA is an institution providing efforts or activities to boosting export or
foreign trade. Therefore, they have found that EPAs have positive impact in helping
local companies gain international access to foreign trade.
Over the last few decades a growing number of EPAs have been established.
Historically, the first appearance of the export promotion agency (EPA) was in
Finland by the Bolivian in 1919. Following this, many countries have established
EPA offices in foreign countries. According to Lederman et al. (2005), there were
national EPAs in 88 of the 116 countries in their survey in 2005, and since then the
number of EPAs has been increasing gradually. Those countries have experienced the
impact of EPAs in helping local export companies gain access to import markets.
Recently, EPAs have become well known tools to boost bilateral trade
between countries. Some of the countries have set up export promotion offices with
different names, for example, Trade Commissioner Office (TCS-Canada), Regional
Export Promotion Offices (REPO-Spain), Korean Trade (KOTRA), Japan External
Trade Organisation (JETRO), Indonesian Trade Promotion Center (ITPC-Indonesia),
Serbia Investment and Export Promotion Agency (SIEPA), International Trade
Center (ITPC-France), Australian Trade (AUSTRADE), International Trade Center
(ITC) and International Promotion Office (IPO).
The composition of EPAs in the world has about 15% is private entities,
around 62% are semi-autonomous companies which report to a president or prime
minister and about 23% of the offices are units in ministries or government
institutions (Lederman et al., 2005). Lederman et al also reveal that all types of EPAs
generally do not have specific differences in terms of function. Moreover, regarding
funding sources, about 52% of EPAs obtain their budget from public funding, around
15% gained funding from the private sector or by selling their services and the
remaining 33% obtain funding from bilateral or multilateral cooperation (Lederman et
al., 2005) .
In order to obtain the export led growth, Indonesia has also opened Indonesian
first EPAs in 1980s, which was established by the cooperation of three ministries,
namely, Indonesian Ministry of Trade, Ministryof Foreign Affairs and Ministry of
Industry. Their establishment was due to the massive expansion of EPAs from other
1

countries. When operating in 1980s there were approximately 20 offices.
Unfortunately, no data has been found to trace their existence. In 1997, their
operations were threatened due to a monetary crisis and budget deficit. Consequently,
all of the EPA offices were closed for several years. After the crises, start from 2004
to 2007, nine previous offices were re-opened. Since 2008 onwards, there are ten new
EPAs opened. Currently, there are 19 EPAs offices at 18 countries. As shown in
Table 1,the EPAs offices are existed on several countries. However, there are some
important trading partner countries such as China and some European countries not
having Indonesian EPA.
Table 1 shows the Indonesian EPA offices in overseas countries. It states the
opening year when an EPA was opened. From the table, it can be seen there are
already 18 countries have Indonesian EPAs, and a country which is USA has two
EPA offices. For operational, they used fully government funding. Due to the
government funding and have been operating for more than 2 decades, the
legislators have questioned about the Indonesian EPAs impact on Indonesian export
performance, including the impact on specific products.
Table 1 Indonesian EPA offices
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

EPA Office

Country

Barcelona
Budapest
Busan
Chennai
Chicago
Dubai
Hamburg
Jeddah
Johannesburg
Lagos
Los Angeles
Lyon
Mexico City
Milan
Osaka
Santiago
Sao Paulo
Sydney
Vancouver

Spain
Hungary
South Korea
India
United States
United Arab Emirates
Germany
Saudi Arabian
South Africa
Nigeria
United States
France
Mexico
Italy
Japan
Chile
Brazil
Australia
Canada

Year operating
until present
End 2008
2005
End 2008
End 2008
End 2008
2005
2006
Mid 2009
2005
End 2008
2005
End 2008
End 2008
Mid 2007
2004
End 2008
2005
2005
End 2008

Status
New-open
Re-open
New-open
New-open
New-open
Re-open
Re-open
New-open
Re-open
New-open
Re-open
New-open
New-open
Re-open
Re-open
New-open
Re-open
Re-open
New-open

Remark

First opening at 1980s

First opening at 1980s
First opening at 1990s
First opening at 1980s
First opening at 1990s

First opening at 1990s
First opening at 1990s
First opening at 1980s
First opening at 1990s

Source: Indonesian Ministry of Trade

EPAs have tasks to promote products from Indonesia. These tasks are implied
on Kepmendag 2011 which is the Indonesia Ministry of Trade guidelines for the
Indonesian EPAs programs. The programs applied by Indonesian EPAs aimed to
improve the trade by the promotional activities, such as, exhibitions, business
matching and commercial diplomacy (Kepmendag 2011). In terms of commercial
diplomacy, the Indonesian EPAs provided government with the ability to increase
international trade and stimulate the national economy. They are also expected to
provide programs in promoting specific product through promotional efforts.
2

Problem Formulation
Indonesian total export to the world has an increasing trend as shown in the
Figure 1, over the last ten years. The increasing trend was also shown in specific
products (Figure 2). The figures showed that the values were increasing significantly.
However, by looking at the Indonesian total export and footwear export to the 30
countries, it raises the question whether the increasing trend have relations to the
role of Indonesian EPAs.

Millions

Indonesia Total Export to 30 countries (USD)
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2002

Indonesia Total Export to 30
countries

2004

2006

2008

2010

2012

2014

Data source : UN Commtrade Database
Figure 1 Indonesian total export to 30 countries
The Ministry of Trade had classified 10 products as the main Indonesian
export products. Those 10 products include coffee, prawn, cacao, TPT, footwear,
CPO, rubber, electronics, vehicle and furniture. Those products classification are
Indonesian main products that have the largest exports. Therefore, in order to measure
the impact of Indonesian EPA on specific product exports, we need to further
research whether the promotional agencies have worked satisfying to increase export
of one of these products.
Footwear is an interesting commodity to be analysed since its trend was
increasing for the last fifteen years. Compare to other products exported to the
worlds, footwear contributes substantially to Indonesia's total commodity exports
more than 1 %. As shown in Figure 2, export of footwear commodities have
contributed to Indonesia's total exports around 2% with the value reaching US $ 2.5
billion approximately (Cotigamus 2009; Ragimun 2011) . This value is higher as
compared to other Indonesian main products such as coffee. The coffee export
performance has amounted to around US $ 1 billion (Figure 2). Nonetheless, the
increase in footwear exports is likely to continue in value and quantity as long as the
product remains competitive.

3

Millions

5000
4000
3000

2000
1000
0
2003

2004

2005

2006

2007

HS 09 Coffee Export

2008

2009

2010

2011

2012

2013

2014

HS 64 Foowear Export

Data source : UN Commtrade Database

Figure 2 Footwear export trend compare to other Indonesia main product
Regarding the footwear exports, Indonesian footwear exports have an
increasing trend for ten years, as shown in Figure2. Even though, in the relation with
EPAs, we need to consider whether this trend came from the impact of Indonesian
EPAs or from other efforts. Another problem in analyzing the impact of EPAs on
footwear is the references, which are very rare. There are none of the literature have
analyzed impact of EPAs on specific product export. Thus, we cannot compare the
result of this study with the previous research.
To sum up, there are two questions raised in this study, namely:
1. Does the Indonesian EPAs have an impact on Indonesian total export?
2. Does the Indonesian EPAs have an impact on Indonesian footwear export?

Research Objective
Based on the problem, this paper has two goals. Firstly, the research aims to
examine the impact of Indonesian EPAs on Indonesian exports. Secondly, the
research aims to study the impact of Indonesian EPAs on footwear export.
Research Benefit
This research is required to have benefits for the government as a
consideration in improving policies. This research is also required to have benefit for
business to use more the Indonesian EPAs services.

4

Scope of Research
This research does not distinguish footwear commodity by its brands, whether
domestic or foreign such as Nike and Adidas. Based on the definition of commodity
by the Indonesian Ministry of Trade, all commodities that are produced in Indonesia,
have value added to Indonesian, will be categorized as Indonesian product. Moreover,
refer to the regulation of Ministry Industry and Trade No. 182/MPP/Kep/4/1998,
implied that every activities to produce and sale product abroad will be counted as
export and remarking Indonesia as the country of origin. Therefore, this research will
include statistic from total footwear export in Indonesia regardless the brand.

5

2

LITERATURE REVIEW

This research has two objectives which are to examine the impact of
Indonesian EPAs on total export and footwear export. Regarding these matters, this
study presents several theories that explain the posible positive impact of EPA on
export performance. EPA function basically is based on the principal of asymmetric
information and externalities theorem. In further, to analyse the impact on trade, we
need to define each factors determine the EPA impact on export. By using gravity
model equation, it can be found that the gravitational variables influencing the total
export and footwear export. In addition, the other variables that closely related to
trade can be defined.

EPAs and asymmetric information
How actually the EPAs have roles on exports? The justification for successful
government involvement in EPAs should be based on asymmetric information and
externalities, economies of scale and productivity spillover (Kang 2011; Lederman et
al., 2005). Economies of scale and productivity spillover are related to the cost
advantage that arises with an increase in product output (Kang 2011). Meanwhile,
asymmetric information refers to situations in which some agencies have trade
information while other agencies in a similar trade do not have that information (Do
2013). In other words, when two or more individuals make a trade agreement trade
one has some information but the others do not. In this regard, an EPA has a role in
distributing information to avoid market failure. Akerlof (1970) provides a simple
example to explain the relationship of quality and uncertainty, about a seller who has
information about the quality of a used car. As the buyer cannot compare the quality,
owners of lower quality cars will claim they are selling a quality car to gain the
highest price. Similarly, EPAs have a function to overcome asymmetric information.
There are several ways to manage asymmetric information, such as providing a
media slot that can be used in campaigning products, exclusive information networks
and mass surveys, all of which can contribute to larger industrial sector export
volumes (Auronen 2005).
Another theorem justifying EPAs performance is externalities, defined as the
benefits and costs indicated by changes in the physical environment and costs not
reflected in real transactions on the market (Perman et al., 2011). Externalities appear
when some activities, consumption or production from producers and consumers has
the indirect effect to other producers or consumers and no compensation paid to
people (Sankar 2004). Specifically, EPAs can become intermediaries while private
companies do not provide foreign market studies as research and marketing dollars
spent may also benefit competitors. EPAs services also include the established
exporters who consider investment in research of open overseas markets, providing
contacts database, establishing buyer chains and other costly activities that can be
6

used by other rival companies as free rider information (Hausman et al., 2003).
Therefore, establishing EPAs aims to address those particular issues to increase local
exporters engaging in foreign trade. In this regard, EPA impacts are related to
obtaining foreign market information such as consumer preferences, business
opportunities, quality and technical requirements, which provide positive externalities
to the trader.

EPAs and Products Differentiation
EPAs are expected to have impact on country’s export and able to generate
product differentiation and create specific product export. Martincus and others
(2010) claim a larger margin of EPA impact was obtained in Latin American and
Caribbean countries. They found that EPAs trigger the number of differentiated goods
exported, while diplomatic representatives only improve export of homogeneous
goods.
Similarly, Alvarez and Crespi (2004) also found that product diversification
and the expand of the number of markets were positively affecting expanding Chilean
export promotion programs. This was also revealed in earlier research by Martincus
and Carballo (2008)regarding market and product diversification in Peru. They
indicate that the effectiveness of export promotion programs can be seen on the
various products sold to the other countries. Gil et al. (2008) also assert that as the
number of export agencies is added to the gravity model the coefficient will be
significantly high. This action contributes to the increase of foreign trade products by
74%, respectively (Gil et al., 2008). In this regards, by the existence of an EPA in a
country, the possibility to sell more and various products are greater. Specifically,
EPAs will help to promote mature products or new products on the market. EPAs
have function to find out the trend of a product and disseminating it to domestic
people. Thus, it will provide the new differentiated product.

EPA and export per capita
Lederman et al. (2005) as shown on Figure 3 imply that EPAs have a relation
between budget and economic growth. Export and goods services in per capita
represent GDP, and the change of the GDP represents economic growth, while, EPA
budget per capita represents the EPA contribution. Figure 3 also shows EPAs have
spread over different countries. The figure is based on EPA budget and income per
capita. It depicts the relationship between log of exports goods and services (GDP)
and log of export promotion agency budget per capita. The graph provides evidence
of several EPAs that are under performing in terms of export per capita due to budget.
It is clear that the Hong Kong (HKG) EPA achieved high export per capita, while
Rwanda (RWA) obtain a low export per capita, and that there is a general trend where
increased EPA budget results in greater export per capita.

7

By the advancement of EPAs in the world, we can consider how important
EPAs in supporting export. Therefore, Indonesia has already had EPAs in several
countries and has been operating Indonesian EPAs for more than two decades.

Source: World Bank World Development Indicators cited in Lederman et al. (2009), pp. 45.

Figure 3 EPAs based on budget and export per capita
The positive EPA results were also shown by Hayakawa et al. (2011) when
analyzing Japanese and Korean EPAs. In addition, Martincus et al. (2010) also have
almost the same result, even though, the countries involved on the research were
Latin America and Carribean countries. Both studies had used gravity equation with
different study scope. However, different analysis with Gil and others (2008),
Hayakawa et al. (2011) separates high and low per capita income trading partners in
order to precisely estimate the result and imply that the existence of export promotion
institutions increase the host country’s foreign trade by 49% annually. This result has
a slight smaller amount estimated by Gil et al. (2008). Similarly, Hayakawa et al.
(2011) also claims an increase in trade around 59% while there is at least one EPA
office in a country.
Previous Studies
Many studies reveal positive impacts of EPA by applying a survey method to
measure the impacts. One such study is Lederman et al. (2009) who built a global
8

survey of country’s national EPAs covering 104 countries by obtaining cross-section
data. The results generated a plot that suggests EPAs have a strong positive effect on
exports, where for one dollar budget spent on trade promotion trade increases by
approximately 200 dollars (Lederman et al., 2009, pp. 16). However, there is still a
heterogeneity in the effective EPAs which depends on geography, demography
development and types of measurements. The results also suggest that on average
EPA offices have to apply budgeting of around 0.11% of their export value Lederman
et al. (2009).
In addition, Hogan et al. (1991) argue that the limitation of EPAs is their
shortage of budget source and bad policy circumstances which could be overcome if
well-funded. However, the Lederman et al. (2009) study reveals significant EPA
impacts where for every 1 US$ EPA budget there will be an additional export
increase of approximately 100 US$ in Eastern Europe and Asia, 70 US$ in Latin
America and Caribbean, 38 US$ in Sub Saharan region, 5US$ in developing
countries and 53 US$ in Middle East and North Africa (Lederman et al., 2009, pp.
20). Lederman et al also argue from an economic perspective that EPAs have to be
based on social cost assessment and advantages and should be related to their
activities. Moreover, evaluation of EPA performance should be based on basic
welfare and be concentrated on the aims of accessing export growth and opening new
markets. Lederman et al. (2005) also reveal the effect and strategies of EPA where,
on average, EPAs have a strong effect on markets and a statistically significant
impact on exports. According to these authors, every 1 US$ budget in export
promotion will increase exports by 40 US$ suggesting that EPAs have a significant
and cost-effective role in developing exports.
Another empirical method was applied by Biesbroeck et al. (2011) using
random sampling survey with Average Treatment Effect (ATE) analysis. Different
with Lederman et al. (2009) which surveyed 104 countries, this research surveyed the
impact on a company that uses Trade Commissioner Services (TCS) Canada services.
The study found consistent positive effects of TCS services on export growth where
exporters who use TCS services can increase exports by 17.9% (Biesbroeck et al.,
2011). Consequently, TCS have played an important role in market and product
diversification in Canada. Recently, TCS had 140 offices around the world and
provided six main services: information about market opportunities, help to find
contacts, generation of local company information, company visits, problem solving
and dispute handling, which are similar activities to those discussed by Lederman et
al. (2009).
Other literature also reveals non-empirical impacts. Based on case studies,
many findings assert that EPAs can provide trade services to support exporters, such
as training, technical assistance, capacity building, marketing, product or market
research publications and by providing a buyer and seller database (Biesbroeck et al.,
2011; Lederman et al., 2005; Schlaeppi 2012). EPAs can organises promotional
activities, such as exhibitions, which aim to introduce local products in overseas
countries (Lederman et al., 2009; Schlaeppi 2012). Further evidence for strong impact
of EPAs is that they trigger product diversification and market differentiation
significantly by expanding the number of products exported (Biesbroeck et al., 2011;
Martincus&Carballo 2008). In addition, small medium enterprises or SMEs obtain
benefit from export promotion agencies because the function of EPAs is to work
9

effectively with SMEs (Alvarez &Crespi 2004; Yu&Chen 2008; Martincus et al.,
2010). A study of Australian Trade (AUSTRADE) also states the view that EPA
activities can be used to grant SMEs in relation to trade finance and financial
assistance (Lederman et al., 2009; Marcelin& Malokele 2013).
In addition to non-empirical results, Gil et al., (2008) reveal point evaluation
of Spain EPAs (REPO) to analyse product export numbers, transactions, average of
export transaction and EPA effect to the country and the effect to product
differentiation on regional industry. The REPO itself was claimed have positive
effects on the total exports number in Spain using the OLS model. Furthermore,
REPO also has significant impact on the increase of trade transactions per product.
The impact was estimated by conventional OLS and the coefficients were statistically
and economically significant which indicates that Spanish REPOs have had a positive
impact on Spanish bilateral trade showing the impact is bigger for more product
differentiation. In further research, EPAs also contribute to build a good country’s
image which indirectly promotes other products from its country (Schlaeppi 2012).
On the other hand, there are many reports against positive benefit of EPAs
which suggest no impact of EPA on exports. Hogan et al. (1991) imply that until the
past decade the empirical literature has failed to find positive impact of EPAs on
exports. These authors consider export agencies fail to provide positive impacts to
export growth due to the programs of EPAs not supporting exporters to enhance their
business in a new country. Moreover, excessive involvement by government play a
role in hindering EPA activities designed to help exporters or businesses. Therefore,
exporters do not rely on EPAs or fewer exporters use their services. This study also
supports Bernard and Jensen’s (2001) finding that U.S. state-level export promotion
expenditure had no significant effect on the probability of local firms exporting
products because the EPA did not engage with local exporters.
Another analysis shows that EPAs work inefficiently. Keesing et al. (1991)
found that EPAs has failed to achieve targets and suggest the agencies had a negative
impact on exports. The problem was due to poor service by civil servants or staff
involved in the agencies. EPA staff did not consider marketing oriented and low
capabilities in marketing products, although not all EPAs showed this problem.
Moreover, EPAs were not directing new enterprises to open a new market and
providing the best service. Consequently, weak leadership, inadequate funding and
bureaucratic problems resulted in EPA inefficiency. However, further analysis is
required to undertake external evaluation, as agencies will work effective only when
they are subject to serve private and public sectors.
Evidence suggests that EPAs have positive impacts as revealed in research
using the gravity equation and research using a survey method. The results have
shown an increase of trade value as a result of EPAs in several countries such as
Chile, Japan, Korea, Spain, US, Australia and other countries. The range of exports
increased between 10% and 153%. The lowest of 10% was reported by Rose (2005)
which asserting the consulates acting as trade representatives can provide positive
impacts to US trade. Rose (2005) support this result which implies that adding
consulate representation functioning on trade has a positive effect on export although
the impacts are relatively small, accounting for only 10% for each additional office in
a foreign market. However, Rose (2005) argues that communication is the factor
10

causing foreign representatives to fail in their role of gathering information and
decision making which are very important for local exporters.
The Gravity Model and Its Variables
A considerable number of empirical studies have researched the impact of
EPAs on trade. Most of the studies used the gravity model as the method of empirical
testing. The gravity model, in particular, is used to analyse bilateral trade between
major trading partners, because the model can explain international trade flow which
allows the user to include the geographical, cultural and political variables.
The gravity model was introduced from the law of gravity presented on Jan
Tinbergen’s seminal in 1962. It implemented the equation for international trade flow
studies. On its first use, it was applied for all social interaction such as migration,
tourism, and foreign direct investment. The gravity equation has analogy with the
Newton’s theory of gravitation where planets are attracted in proportion sizes and
proximity by mutually. The theorem basically is mathematical models based on
Newton’s law of gravitational force. Newton law states that: “Every particle of matter
in the universe attracts every other particle with a force that is directly proportional to
the product of masses of the particles and inversely proportional to the square of the
distance between them.” (Khan 2013).
The equation is the most common statistical method for analyzing bilateral
trade flows with different geographical condition. The gravity theorem itself was
founded in 1687, and more famous with the name of theorem Newton’s law of
gravity equation. The basic formulation is given like below:
��
=
�
Where:
is the attractive force or force gravity
� and � are the masses of particles
� is the distance between two objects (square of straight line)
G is gravitational constant, which depends on the unit measurement
The expression of the general gravity law has the same notation:
=G

� �
��

Notation can be defined as follows
• Fij is the trade current from origin i to destination j or Fij represents total
volume of interactions between i and j.
• Mi and Mj are the economic sizes of the two locations. If F is measured as a
trade flow such like export number, then M is usually the gross domestic
product (GDP) or gross national income. For the relation with flows of
people, the unit measure is adjusted with the populations.
• Dij is the distance between the locations.
• G is constant for converting proportionality into equality
11

The research contribution related to the theorem foundation of the gravity
model involves the specifications or variables in the theory of economy by drawing
suitable inferences estimation. For example, Anderson et al. (2003) state that export
is determined by cost of trade (weighted average trade cost). Specifically, the
possibility of a country to import from another country is determined by relative trade
cost, which also determined by the country’s geographical position such as being
surrounded by other large trading economies, or surrounded by oceans, desert or
mountains. Moreover, the trade between countries is also influenced by multilateral
or bilateral trade agreements. Therefore, estimation of a gravity equation requires data
on bilateral trade, GDPs, population, distances (DIST), tariffs and other determinants
of bilateral trade including contiguity (common border), common language, colonial
ties and so on.
Therefore, by using logarithmic, the standard gravity equation is given as:
ln = � + αln �� � + βln �� � + θln��
+ ⋯+ � . In this regard, Y is the value
of export. The GDP and population are controlling variables which have functioned
to the purchasing power of a country. Therefore, these variables should be included in
empirical testing.
Another controlling variable is variable related to multilateral and bilateral
agreement. In this regard, we use dummies of FTA between Indonesian and the other
countries involved in this research. Some researchers had found a positive impact of
EPAs on international trade. Empirical result found that about 153%t of exports will
be added to the regions when they apply dummy free trade agreement (FTA) with a
partner country (Gil et al., 2008, pp. 142). In reality, FTA provided a good impact to
trade. The result of Martincus et al. (2010) and Hayakawa et al. (2011) found that
FTA triggers EPAs in supporting the opening of new markets and product
development. Moreover, Gil et al. (2008) asserts that FTAs generate the number of
transactions and value of export on average. This research also claimed that the use of
common language, not landlocked and common borders between paired countries
increases trade gradually. Furthermore, another research also implied the increase of
153% was achieved by Chilean exports while the country applied trade agreement to
a partner country. Therefore, FTA dummies are needed to use in this research.
Moreover, based on the Spain experience, Gil et al. (2008) address the issue
of bilateral trade by implementing analysis of the effect of Spanish EPA called
Regional Trade Agencies (REPO) on their foreign trade. The REPO itself has
function to support and provide information for regional companies to sell products
abroad. The analysis sampled 188 international markets from 17 Spanish regions. The
result also claims that the gravity equation coefficient is statistically significant where
trade increases as distance decreases. Using the gravity equation, from the remaining
coefficients, export decreases by 55% when trading partners have many islands and
by 66% in terms of landlocked areas. Furthermore, Hayakawa et al. (2011)
recommend that EPA effects are larger for low income partners than high income
partners. However, their results suffer from a series of endogeneity problems and
should be analysed further. Opening a trade promotion increases the effect on
bilateral trade which strengthens impacts on the margin and involving trade
agreements. Being closer in distance, high population, having colonial relations and
not being islands are factors correlated with the increase of trade (Volpe et al., 2010).
12

Research Hypothesis
Based on asymmetric information, product differentiation and previous
studies on the literature, EPAs have shown the positive impacts on country’s exports.
Therefore, we consider the hypothesis that Indonesian EPAs will have a positive
impact either on Indonesian total export or Indonesian footwear export.

13

3 RESEARCH METHODOLOGY
Model Specification
There are two objectives that should be examined on this research to answer
the impact of Indonesian EPAs on total export and footwear export. The literature
showed that several variables are involved to examine the two questions. Therefore,
there will be two models to be examined. The first model aims to examine the impact
of Indonesian EPAs on total export, and the second model aims to examine the
impact of Indonesian EPAs on footwear export. Both models use the same
independent variables, while the dependent variables are total export and footwear
export.
Using determinants given on the literature, the variables can be divided into
three groups. Firstly, variables represent the demand from the importers which
describe the total demand. These variables are included GDP per capita and
population. In the model, the GDP of the importing countries are used to represents
the purchasing power from the countries. This means the higher the GDP, the higher
the demand for products. Secondly, variables indicate the potency of the exporters.
These variables represent the ability to offer the product and the value added from the
country. The dummy variables of FTA and EPA are required to increase the potency
to sale products greater. Particularly for EPA, there will be two dummies represent
the year EPA was opened and the following years the EPA was operated in a country.
This separation will easier to know the impact on the two categories. Thirdly,
supporting variables include in gravity determinants, such as, distance, landlocked,
border, language. Krugman (1980) implies that those factors influence the cost of
trade. Therefore, the two equations are given as below.
In regards to the variables, EPA on the gravity model is represented by two
dummies. The first dummy is given for the opening year of EPA on a country, while,
the second dummy is given for the other years other than the opening year. The
dummy is equal to 1 when a year is on the criteria. Trade is also related to the
existence of free trade agreement (FTA). Therefore, beside the EPA dummies, the
dummy of FTA is used. The other controlling variables are the standard gravity
variables such as border, language, and landlocked. These variables usually have a
strong relation to the trade impact.
The first equation is the model to examine the impact of Indonesian EPAs on
total export. The equation as below:
Ln EXPORTij = α0+β0lnPOPULATIONjt+β1lnGDPjt+β2lnDistanceij+ β3Landlockedj+
β4Borderij+ β5Languageij+ β5Languageij+ β6FTAij+ β7OpeningEPAij +
β8NonOpeningEPAijt + β9EUij + ᵞ*b + Ɛt
The second equation is the model to examine the impact of Indonesian EPAs
on footwear export. The equation as below:
14

Ln
FOOTWEARijt
=
α0+β0lnPOPULATIONjt+β1lnGDPjt+β2lnDistanceij+
β3Landlockedj+ β4Borderij+ β5Languageij+ β5Languageij+ β6FTAij+ β7OpeningEPAij
+ β8NonOpeningEPAijt + β9EUij + ᵞ*b + Ɛt
The description of the variables is described as below:
= Export represents the export value of total products from Indonesia
to importing country j in year t, measured at current US$ in period
2004-2013.
Footwear
= Footwear represents the footwear export value from Indonesia to
country j, measured at current US$ in period 2004-2013.
Population = Population represents The large of population in destination country
j in year t.
GDP
= GDP denotes the value of goods and services from the country’s
boundaries in a year with unit in Dollars. GDP per capita is used in
this model since this factor lead to higher purchasing power,
demand and economy size of the importing country which enlarge
market size. Measured in billion US dollars. The data used Gross
Domestic Product (Year based 2005) at country j in period t.
Distance
= Distance denotes the distance between country i and j in kilometer.
Distance is influencing trade respectively.
Landlocked = Landlocked is the number of country-regions in the pair that have no
direct access to the sea. It is given Dummy equal to 1 when a
country has an access to the sea and 0 otherwise.
FTA
= The dummy of FTA represents any bilateral, multilateral or
regional agreement that belong to two countries. Dummy is equal to
1 when there is an FTA signed, and 0 otherwise.
Language
= A binary dummy variable for common language between two
countries. Dummy is equal to 1 when both countries have a
common language, and 0 otherwise.
OpeningEPA = The Opening EPA is the year when an EPA was opened in j country.
A binary dummy variable is equal to 1 for the year when EPA was
opened, and 0 otherwise.
NonOpeningEPA= The Non Opening EPA are the following years after an EPA was
opened in j country. Dummy is equal to 1 for the years intended,
and 0 otherwise.
EU
= A binary dummy EU is dummy for the countries member in
European Union. Dummy is equal to 1 when a country is EU
member, and 0 otherwise.
Yb*
= Time dummies are introduced to capture shocks per year in both
models ranging from 2004 to 2013. The dummy is equal to 1 for
the year indicated, and 0 otherwise.
i
= The exporting country, in this regard is Indonesia.
j
= The destination country or importing countries. The destination
countries are involved 30 countries; which 18 countries are the
countries that have Indonesian EPAs (refer to table 1), and 12
countries that have no Indonesian EPA. The 12 countries are
Export

15

t

randomly taken, which are, Sweden, Denmark, Poland, Czhec
Republic, Austria, Argentina, Colombia, Kenya, China, Malaysia
and Pakistan.
= The year of observation from 2004 to 2013. The complete
description of the variables is described as below.
Source of Data

The model equations contained many variables which need different sources.
Most of the data can be found from online databases. The sources of the data are
described in Table 2.
Table 2 Source of Databases
Data

Source

Value of Indonesian total export and United Nations
footwear export
Database
Statistic of population and GDP

(UN)

Commtrade

World Development Indicator (WDI)

Data for the gravity model such as CPII
Distance, Landlocked, border and
Language
Data for the FTA signed between aric.adb.org
Indonesia and other countries
Data for the Indonesian EPA opening Ministry of Trade
year

Methodology
Panel Data
There are two kind of panel data model, which are, fixed effect model (FEM)
and random effect model (REM). FEM and REM are distinguished based on the
correlation between error and regressors. The basic equation is:
yit = α0 + Xitβ + Ɛit .
Regarding the error term, there are also two kinds of model, which are, one
way error component model and two ways error component model. In one way error
compo