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.

After controlling for the influences of plant-level factor usage and technical characteristics, foreign multinational enterprises (MNEs) used fuel and total energy more efficiently than local manufacturing plants in about one-third of Malaysia's large energy using industries. MNE-local or MNE-private differentials were insignificant, however, in most industries for electricity in Malaysia; total energy, electricity and three fuels (diesel, natural gas, and coal) in Indonesia; and total energy in Thailand. In short, MNEs and local or private plants generally used purchased energy with similar efficiency, probably because they faced similar host country policies and used similar energy technologies.