The Elusive Pursuit of Import Substitution in 21st Century Indonesia^*

This study evaluates the possible impact of an import substitution strategy recently implemented by the Government of Indonesia on the development of the intermediate inputs industry. Based on descriptive analysis, the study suggests that the implementation of the strategy was a misguided decision. Experiences from several countries confirm the negative impact of an import substitution strategy. The econometric analysis shows that trade protection impedes firms’ performance. Thus, it would be preferable for the government to have an open trade regime and to intensify foreign presence in the industry.