Optimizing the utilization of interregional input-output table in measuring the distribution of value-added exports in the regional value chain scheme: application to the food and beverage industry

Abstract

The production process of an industry is no longer within a single area but comprises a synergy of multiple countries, a phenomenon measured by the Global Value Chain (GVC). The GVC enables the assessment of the distribution of value-added across various industries in different countries at a macro level with a focus on those with unimplemented regional-scale assessments (Regional Value Chain/RVC). The importance of RVC, particularly in supporting and strengthening GVC, can be emphasized using the Interregional Input-Output Table (IRIO). The RVC approach is used to understand the distribution of value-added generated by the industrial sector in Indonesia. Therefore, this study examines the relationship between the food and beverage industry in Indonesia's mainstay industry for export activities. By looking backward and forward participation using the 2016 Indonesian IRIO Table, it's possible to trace the origin and destination of value-added in the food and beverage industry across different regions. The results show that provinces with high export Foreign Value-Added (FVA) also have significant Domestic Value-Added (DVA). The food and beverage industry is instrumental in creating value-added in these provinces due to the dominant role in backward and forward participation. Furthermore, two provinces, Jawa Timur and Sulawesi Selatan, are the central hubs for the food and beverage industry in the Western and Eastern Regions of Indonesia, respectively.

Keywords

Regional value chain IRIO Indonesia backward participation forward participation

1 Introduction

Input-Output Table is an effective tool used by the national statistical system to analyze economic activities. This tool provides information on transactions carried out between diverse regional sectors within a specific period. The Input-Output Table is used for several purposes, including analyzing value-added components based on production factor services in each economic sector and examining patterns of intermediate and final demand for consumption, investment, and exports. This is in addition to the identification of the industry with the most dominant influence on economic growth, estimating the impact of final demand on output, value-added, imports, tax revenues, and labor absorption across various production sectors.¹ However, due to the complexity of including all commodities domestic and imported economic activities, accounting for variations in production by multiple sectors, producing an Input-Output Table annually becomes impractical.

Although this tool is effective for analyzing economic interrelationships within a region, it is unable to assess similar interactions from the demand and supply sides concerning the production of goods and services across diverse regions. This is because economic activities are not confined to a particular area, and regional economies often differ from national ones in terms of characteristics. Therefore, there is a need for more effective analytical tools to understand regional interconnectivity, which was achieved towards the end of 2021, with the release of 2016 Interregional Input-Output (IRIO) Table. The IRIO Table was designed to support regional economic development planning in accordance with national priorities. The table was also used to describe important indicators such as output multiplier figures, income, and value-added, as well as forward and backward linkages for each economic activity and region. Similarly, the IRIO Table cannot be produced annually due to the complexity encountered during preparation.

The IRIO Table has not been used to conduct Regional Value Chain (RVC) studies, a regional adaptation of the Global Value Chain (GVC), which acts as an important international trade development connecting manufacturing sector processes across various countries.^2,3 GVC facilitated the generation of value-added from goods or services through collaborative efforts among diverse countries, deviating from a model exclusively established by one country. These integrated production processes positively affected the economic performances of the various countries, fostering increased labor productivity and promoting growth in both the manufacturing and services sectors.⁴ The high and low participation levels of a country are assessed to determine whether the industry has integrated with others.

Indonesia, which is an archipelagic country, possesses unique natural and human resources in various regions. The adoption of the GVC scheme allows for a comprehensive understanding of how value-added is distributed through the interlinking of industries across different parts of Indonesia. According to Kaplinsky and Morris,⁵ a value chain comprises a series of complex collaborative activities in producing goods and services, through the provision of raw materials, production stages, and delivery to final consumption. The value chain method offers numerous benefits by providing additional value for relevant economic actors. Generally, companies that are part of a value chain show high levels of innovation, greater efficiency, and increased productivity. Several studies have reported that participation in the value chain benefits companies of various scales and sizes, contributing to national economic growth.⁶ The evaluation process enables the identification of beneficiaries and which actors need more support or organization.⁷ Several factors contribute to the development of product value chains, including limited land size in specific areas to meet production volumes, insufficient technology and human resource capabilities requiring processing in other regions, the superior packaging quality achievable in certain areas, etc. In addition, production processes in the various areas can promote exports to other countries.

The industrial sector is the primary driver of the Indonesian economy, consistently contributing the largest share to the Gross Domestic Product (GDP), with an average of 19.67% from 2018 to 2021. The significant role of this sector in national economic development is evident through substantial contributions to increased value-added, employment, and foreign exchange. In line with the National Industrial Development Master Plan 2015 to 2035, Indonesia has strategically established priority industries to improve economic independence, catch up with developed countries, promote more equitable distribution of economic and industrial activities throughout the country.⁸ The criteria for prioritizing industries include meeting domestic needs and import substitution, showing rapid indigenous market growth, international competitiveness, comparative advantages, control of raw materials and technology, increased quantity and quality of labor absorption, and the potential to create productive employment opportunities. Additionally, these industries are expected to provide value-added that progressively grows within the country or has the potential for rapid development in independence. In the Indonesia Roadmap 4.0, five major sectors, namely food and beverage, textile and clothing, automotive, chemical, and electronic industries, were among the ten mainstay industries in the priority category.

The food and beverage industry is the most substantial contributor to value-added in the non-oil and gas industrial sector, with an average of 37.05% from 2018 to 2021. Despite the challenges brought about by the COVID-19 pandemic, this industry has shown resilience, showing a positive growth trend throughout 2020 to 2021. In addition, the food and beverage industry had attracted substantial investment of IDR 21.9 trillion by the second quarter of 2022 and used a workforce of approximately 1.1 million people. The industry's significant role in the Indonesian economy was also reflected in export activities, which reached USD21.3 billion. This signified a 9% increase compared to the same period in 2021, where exports amounted to USD19.5 billion from January to June 2022.⁹

Preliminary studies on the global use of IRIO Tables are currently limited. These studies generally focused on backward and forward linkages, central sector identification, intraregional impacts, interregional spillover, and feedback effects. Typical examples include the study by Wang, Zhang,¹⁰ which stated the increased value-added of provincial exports in China resulted from both expanded export scale and a multiplier effect between provinces. However, the spillover effect from industrial cooperation between provinces and other economies also increased the value-added of domestic exports. Xie, Niu¹¹ stated that the economies of almost all provinces in China adopted complex entanglements in terms of regional and global fragmentation. Inland provinces in China had more straightforward relationships, while that of the coastal ones were complex. Pan, Yang¹² used IRIO to explore how Chinese provinces actively promoted green innovation in neighboring regions through many channels and mechanisms by participating in GVCs.

The study that specifically measured the use of IRIO in GVC schemes was carried out by Meng and Yamano.¹³ However, the study only focused on analyzing the fragmentation and expansion of global production across domestic regions in China and Japan. This also included how value-added was generated and distributed in both domestic and international GVC segments. The study failed to specifically examine how certain industries were interconnected between regions within a country through a RVC scheme. The analysis of the RVCs were carried out by Wang, Zhang¹⁰ and Xie, Niu.¹¹ These studies did not focus on the participation of provinces within a country to produce goods and services as well as the distribution of value- added.

Prior studies conducted by Nabhani, Daryanto¹⁴ and Neilson and Shonk¹⁵ examined the participation of the Indonesian food and beverage industry in the GVC scheme. However, there remains a significant gap in the exploration of RVCs, specifically within this sector. The absence of related studies is substantial, given the importance of understanding regional dynamics and interactions between provinces in Indonesia. The gap focused on the need to carry out a study that comprehensively assesses the economic benefits of the food and beverage industry both at the national and regional scale. Preliminary studies have been conducted in various countries between value chains and numerous commodities. Studies on value chains between regions in archipelagic nations such as Indonesia have remained scarce. Indonesia can be a representative archipelagic country with a variety of resources that differ between islands. The inability of a region to fulfill raw materials or semi-finished goods in producing goods and services that can be met by other regions in a country is an interesting thing to research. Economic transactions through the creation of added value calculated from export activities between regions can provide information on which regions have high backward and forward participation. Therefore, this study aimed to fill the gap by achieving the following:

(i)
Examining the distribution composition of value-added in the food and beverage industry within the RVC scheme
(ii)
Examining Backward Participation in the Food and Beverage Production Chain
(iii)
Examining Forward Participation in the Food and Beverage Production Chain
(iv)
Identifying which industries are closely related to the food and beverage sector in the RVC scheme

2 Data

This study adopted the 2016 Interregional Input-Output (IRIO) Table compiled by Statistics Indonesia. The preparation of the IRIO Table was preceded by gathering the Supply and Use Tables (SUT) and the IO Table for each of the 34 provinces in Indonesia. The industrial and product classifications were based on the 2015 and 2010 Standard Classifications of Indonesian Business Fields and Commodities, respectively.

3 Methods

3.1 Study area

Located between the Asian and Australian Continents and bordered by the Indian and Pacific Oceans, Indonesia has 34 provinces and 541 districts as shown in Figure 1. The country is divided into two the Western Region, comprising all provinces of Sumatera, Jawa, Kalimantan Islands, and Eastern Indonesia, including Bali and Nusa Tenggara, Sulawesi, Maluku, and Papua Islands.

3.2 IRIO framework

The model comprised 52 industries (as shown in Table 1), five final local demand components, and primary input or value-added data for 34 provinces in Indonesia. Each provincial IOT is structured as a 52 × 52 matrix, contributing to the total IRIO framework with dimensions of 2074 columns and 1870 rows. This extensive model describes domestic economic flow between provinces. In the context of the Interregional Input-Output (IRIO) account in Table 2, suppose Indonesia is composed of N provinces (N = 34), and each contains M industries (M = 52). Where $Z^{AB}$ is an M × M matrix intermediate input flows, produced by industry i in province A and used by industry j in province B. $F^{AB}$ is a M × 5 matrix depicting final product flows produced by industry i in province A and consumed in province B. $X^{A}$ is a 1 × M vector showing gross outputs in province A, and $V_{\;}^{A}$ denotes a 1 × M vector of value-added in province A.

Table 1.
Industry description.

Code Industry Code Industry

I_01 Agriculture of food crops I_27 Other manufacturing, repair and installation of machinery and equipment

I_02 Agriculture of perennial and non perennial horticultural I_28 Electricity supply

I_03 Agriculture of perennial and non perennial plantation I_29 Gas supply and ice production

I_04 Farming I_30 Water supply; sewerage, waste management and remediation activities

I_05 Support activities to agriculture and hunting I_31 Construction

I_06 Forestry and logging I_32 Wholesale and retail trade and repair of motor vehicles and motorcycles

I_07 Fishing I_33 Wholesale and retail trade, except of motor vehicles and motorcycles

I_08 Extraction of crude petroleum and natural gas I_34 Railways transport

I_09 Mining of coal and lignite I_35 Land transport

I_10 Mining of metal ores I_36 Sea transport

I_11 Other mining and quarrying I_37 Lake river and crossing transportation

I_12 Manufacture of coal, oil and gas refining I_38 Air transport

I_13 Manufacture of food and beverage products I_39 Warehousing and support activities for transportation, postal and courier activities

I_14 Manufacture of tobacco products I_40 Accommodation activities

I_15 Manufacture of textiles and wearing apparel I_41 Food and beverage service activities

I_16 Manufacture of leather, leather products, and footwear I_42 Information and communication activities

I_7 Manufacture of wood and of products of wood and cork, articles of straw and plaiting materials I_43 Financial intermediation service activities, except central bank

I_18 Manufacture of paper, paper products, printing and reproduction of recorded media I_44 Insurance and pension funding

I_19 Manufacture of chemicals, pharmaceuticals and traditional medicine I_45 Other financial service activities

I_20 Manufacture of rubber, rubber products, and plastics products I_46 Activities auxiliary to financial service

I_21 Manufacture of non-metallic mineral products I_47 Real estate activities

I_22 Manufacture of basic metals I_48 Company administrative activities

I_23 Manufacture of fabricated metal products, computer, electronic and optical products, electrical equipment I_49 Public administration and defence; compulsory social security

I_24 Manufacture of machinery and equipment n.e.c I_50 Education activities

I_25 Manufacture of transport equipment I_51 Human health and social work activities

I_26 Manufacture of furniture I_52 Other service activities

Code	Industry	Code	Industry
I_01	Agriculture of food crops	I_27	Other manufacturing, repair and installation of machinery and equipment
I_02	Agriculture of perennial and non perennial horticultural	I_28	Electricity supply
I_03	Agriculture of perennial and non perennial plantation	I_29	Gas supply and ice production
I_04	Farming	I_30	Water supply; sewerage, waste management and remediation activities
I_05	Support activities to agriculture and hunting	I_31	Construction
I_06	Forestry and logging	I_32	Wholesale and retail trade and repair of motor vehicles and motorcycles
I_07	Fishing	I_33	Wholesale and retail trade, except of motor vehicles and motorcycles
I_08	Extraction of crude petroleum and natural gas	I_34	Railways transport
I_09	Mining of coal and lignite	I_35	Land transport
I_10	Mining of metal ores	I_36	Sea transport
I_11	Other mining and quarrying	I_37	Lake river and crossing transportation
I_12	Manufacture of coal, oil and gas refining	I_38	Air transport
I_13	Manufacture of food and beverage products	I_39	Warehousing and support activities for transportation, postal and courier activities
I_14	Manufacture of tobacco products	I_40	Accommodation activities
I_15	Manufacture of textiles and wearing apparel	I_41	Food and beverage service activities
I_16	Manufacture of leather, leather products, and footwear	I_42	Information and communication activities
I_7	Manufacture of wood and of products of wood and cork, articles of straw and plaiting materials	I_43	Financial intermediation service activities, except central bank
I_18	Manufacture of paper, paper products, printing and reproduction of recorded media	I_44	Insurance and pension funding
I_19	Manufacture of chemicals, pharmaceuticals and traditional medicine	I_45	Other financial service activities
I_20	Manufacture of rubber, rubber products, and plastics products	I_46	Activities auxiliary to financial service
I_21	Manufacture of non-metallic mineral products	I_47	Real estate activities
I_22	Manufacture of basic metals	I_48	Company administrative activities
I_23	Manufacture of fabricated metal products, computer, electronic and optical products, electrical equipment	I_49	Public administration and defence; compulsory social security
I_24	Manufacture of machinery and equipment n.e.c	I_50	Education activities
I_25	Manufacture of transport equipment	I_51	Human health and social work activities
I_26	Manufacture of furniture	I_52	Other service activities

Source: [22]

Table 2.

Indonesia's interregional input-output table.

				Intermediate demand							Final demand
				Aceh industry				Papua industry			Aceh component				Papua component
Description				$\begin{array}{l} I_ \\ 01 \end{array}$	$\dots$	$\begin{array}{l} I_ \\ 52 \end{array}$	$\dots$	$\begin{array}{l} I_ \\ 01 \end{array}$	$\dots$	$\begin{array}{l} I_ \\ 52 \end{array}$	1	$\dots$	5	$\dots$	1	$\dots$	5	Export/ROW	Total output
Intermediate input	Aceh	Industry	$\begin{array}{l} I_ \\ 01 \end{array}$
			$⋮$				$Z^{AA}$		$\dots$		$Z^{AB}$			$F^{AA}$		$\dots$		$F^{AB}$		$E^{A}$	$X^{A}$
			$\begin{array}{l} I_ \\ 52 \end{array}$
	$⋮$	$⋮$	$⋮$		$⋮$		$⋮$		$⋮$			$⋮$		$⋮$		$⋮$		$⋮$	$⋮$
	Papua	Industry	$\begin{array}{l} I_ \\ 01 \end{array}$
			$⋮$				$Z^{BA}$		$\dots$		$Z^{BB}$			$F^{BA}$		$\dots$		$F^{BB}$		$E^{B}$	$X^{B}$
			$\begin{array}{l} I_ \\ 52 \end{array}$
Import/ROW					$Z^{MA}$		$\dots$		$Z^{MB}$			$F^{MA}$		$\dots$		$F^{MB}$
Primary input					$V^{A}$		$\dots$		$V^{B}$
Total input					$X^{A}$		$\dots$		$X^{B}$

Source: [22]

Table 3.

Example for FVA and DVX of Aceh's food and beverage industry in value-added export matrix.

The IRIO Table shows that industries in a certain province rely on industrial inputs from other region for production output. This depicts that the demand for raw materials, particularly used for export activities, promotes the generation of value-added in industries situated in supplier provinces during the first round. As the raw materials are produced, industries in the supplying provinces also depend on similar items from supplier industries in other regions, marking the second round of this interdependence. The pattern continues, with suppliers using inputs from various provinces, etc.

3.3 Global and regional value chains

On a global scale, the use of Input Output Tables have been developed to capture certain aspects of GVC activities. The aim of GVC analysis is to trace the source of value-added for a good or service, using the Inter-Country Input Output (ICIO) Table, which enabled the identification of a region or business field contribution to the finished product. Participation in GVC refers to indicators related to buying and selling elements within the framework, also categorized as backward and forward participation. In simple terms, backward participation measures the foreign value-added, which is included in the total export value of a country. While, forward participation measures the value-added included in the exports of other countries. The GVC scheme was used to analyze regional linkages on a smaller scale in order to understand production networks, thereby leading to the development of Regional Value Chain (RVC). The analysis, the Interregional Input Output (IRIO) Table was used to measure the participation of a region or business field in the RVC.¹⁶

At the regional scale, Ahmad and Primi¹⁷ stated the importance of establishing a strong RVC for effective global integration. In addition, the study conducted by Yu, Sun,¹⁸ showed that active participation in RVC played an important role in increasing engagement in GVC. The study also stated that a region can explore and use comparative advantages through active engagement in RVC, leading to more productive participation in GVC. The African Union and OECD¹⁶ stated that RVC played a significant role in accelerating productive transformation and fostering the establishment of quality jobs.

3.4 Calculating backward and forward participations

When conducting a value chain study, there are important steps that must be adopted, namely tracking the origin and destination of the value-added. This stage is essential for understanding how an industry in one region contributes to the export of industrial products from other regions. The scheme in Figure 2 shows that the gross export value of an industry in a region comprised both foreign and domestic value-added. The value-added generated by foreign industry, integrated into the exports of domestic industrial products, is termed foreign value-added embodied in domestic exports. The FVA value measures the extent of the backward participation of the industry in the value chain. DVX, or domestic value-added embodied in foreign exports, represents the value-added generated by domestic industries and included in the export value of other regions. The DVX value measures the extent of the forward participation of the industry in the value chain. Example for FVA and DVX of Aceh's food and beverage industry in value-added export matrix is shown in Table 3.

The process of tracking the origin and destination of value-added is carried out by decomposing gross exports in each region. Quast and Kummritz,¹⁹ stated that tracking where the value-added originated from until it returns to the main supplier is mathematically formulated as follows:

\begin{aligned} \hat{V} + \hat{V} A + \hat{V} A A + \hat{V} A A A + \dots = \hat{V} (I + A + A^{2} + A^{3} + \dots) \end{aligned}

(1)

The equation is an infinite geometric series characterized by elements

A < 1

. This condition enables the simplification of the equation into a more concise form as follows:

\begin{aligned} \hat{V} (I + A + A^{2} + A^{3} + \dots) = \hat{V} (I - A)^{- 1} = V B \end{aligned}

(2)

where the diagonal matrix

\hat{V}

is a direct value-added coefficient matrix with dimensions

NM \times NM

A

is a matrix of input output coefficients with dimensions

NM \times NM,

which provides information on direct input flows between industries in one monetary unit, and

B = (I - A)^{- 1}

is the Leontief inverse matrix.

\hat{V} B

is a value-added multipliers matrix, showing the amount of value-added generated by the production of one monetary unit from a particular export produced across all other industries.

By multiplying the matrix $\hat{V} B$ with the diagonal matrix $NM \times NM,$ where the main diagonal corresponds to the total exports for each industry across all provinces, then the resulting value is the export value-added, or VAX.¹⁹ The following equation is used to calculate VAX:

\begin{matrix} V A X = \hat{V} B E \end{matrix}

(3)

\begin{matrix} V A X = \hat{V} (I - A)^{- 1} E \end{matrix}

(4)

4. Results

4.1 Distribution of provincial export value-added of the food and beverage manufacturing industry in Indonesia

The increasing economic integration is characterized by the fragmentation of production processes for various manufactured products in global and regional scale.²⁰ The analysis of inter-regional trade flows, which has traditionally relied on official trade statistics, is no longer capable of measuring the true value-added contribution of a region.²¹ Therefore, it is necessary to decompose and separate the value-added created within and outside the region, excluding the ‘double count’ portion in gross export values. Table 4 shows the decomposition of pure Foreign Value-Added (FVA) and Domestic Value-Added (DVA) contained in the food and beverage industry exports across 34 provinces in Indonesia.

Table 4.
Gross export decomposition of food and beverage industry by province in Indonesia, 2016 (Trillion Rupiah).

Province Island Value-added export created outside province (FVA) Value-added export created inside province (DVA) Parts of DVA used by direct importer to produce final or intermediate exports to third provinces (DVX) Gross export (FVA + DVA)

Aceh Sumatra 0.55 3.16 0.21 3.71

Sumatera Utara 10.03 53.13 4.20 63.16

Sumatera Barat 0.83 3.43 0.17 4.26

Riau 5.73 63.63 2.36 69.36

Jambi 4.43 12.34 0.49 16.78

Sumatera Selatan 0.69 4.07 0.21 4.76

Bengkulu 0.47 1.45 0.08 1.93

Lampung 2.14 15.69 0.88 17.83

Kep. Bangka Belitung 0.42 2.95 0.32 3.37

Kep. Riau 0.25 0.66 0.05 0.90

DKI Jakarta Jawa 4.26 13.81 1.60 18.07

Jawa Barat 3.08 15.99 1.52 19.07

Jawa Tengah 5.79 32.42 3.01 38.21

DI Yogyakarta 0.47 1.26 0.08 1.73

Jawa Timur 22.39 103.74 4.76 126.14

Banten 3.55 13.07 0.34 16.63

Bali Bali Nusra 0.03 0.11 0.03 0.14

Nusa Tenggara Barat 0.54 2.80 0.13 3.33

Nusa Tenggara Timur 0.18 0.61 0.05 0.79

Kalimantan Barat Kalimantan 1.08 8.99 0.56 10.06

Kalimantan Tengah 7.66 26.63 2.31 34.29

Kalimantan Selatan 0.03 0.16 0.05 0.19

Kalimantan Timur 0.85 6.95 0.45 7.81

Kalimantan Utara 0.46 2.69 0.41 3.15

Sulawesi Utara Sulawesi 0.86 4.33 0.30 5.19

Sulawesi Tengah 0.39 1.20 0.08 1.60

Sulawesi Selatan 3.21 29.00 1.28 32.21

Sulawesi Tenggara 0.21 1.42 0.15 1.62

Gorontalo 0.00 0.01 0.00 0.01

Sulawesi Barat 0.38 1.12 0.04 1.50

Maluku Maluku Papua 0.02 0.11 0.01 0.13

Maluku Utara 0.05 0.30 0.03 0.35

Papua Barat 0.04 0.24 0.03 0.27

Papua 0.18 0.45 0.04 0.63

Province	Island	Value-added export created outside province (FVA)	Value-added export created inside province (DVA)	Parts of DVA used by direct importer to produce final or intermediate exports to third provinces (DVX)	Gross export (FVA + DVA)
Aceh	Sumatra	0.55	3.16	0.21	3.71
Sumatera Utara	10.03	53.13	4.20	63.16
Sumatera Barat	0.83	3.43	0.17	4.26
Riau	5.73	63.63	2.36	69.36
Jambi	4.43	12.34	0.49	16.78
Sumatera Selatan	0.69	4.07	0.21	4.76
Bengkulu	0.47	1.45	0.08	1.93
Lampung	2.14	15.69	0.88	17.83
Kep. Bangka Belitung	0.42	2.95	0.32	3.37
Kep. Riau	0.25	0.66	0.05	0.90
DKI Jakarta	Jawa	4.26	13.81	1.60	18.07
Jawa Barat	3.08	15.99	1.52	19.07
Jawa Tengah	5.79	32.42	3.01	38.21
DI Yogyakarta	0.47	1.26	0.08	1.73
Jawa Timur	22.39	103.74	4.76	126.14
Banten	3.55	13.07	0.34	16.63
Bali	Bali Nusra	0.03	0.11	0.03	0.14
Nusa Tenggara Barat	0.54	2.80	0.13	3.33
Nusa Tenggara Timur	0.18	0.61	0.05	0.79
Kalimantan Barat	Kalimantan	1.08	8.99	0.56	10.06
Kalimantan Tengah	7.66	26.63	2.31	34.29
Kalimantan Selatan	0.03	0.16	0.05	0.19
Kalimantan Timur	0.85	6.95	0.45	7.81
Kalimantan Utara	0.46	2.69	0.41	3.15
Sulawesi Utara	Sulawesi	0.86	4.33	0.30	5.19
Sulawesi Tengah	0.39	1.20	0.08	1.60
Sulawesi Selatan	3.21	29.00	1.28	32.21
Sulawesi Tenggara	0.21	1.42	0.15	1.62
Gorontalo	0.00	0.01	0.00	0.01
Sulawesi Barat	0.38	1.12	0.04	1.50
Maluku	Maluku Papua	0.02	0.11	0.01	0.13
Maluku Utara	0.05	0.30	0.03	0.35
Papua Barat	0.04	0.24	0.03	0.27
Papua	0.18	0.45	0.04	0.63

Note: FVA in gross export refer to backward participation, DVX in gross export refer to forward participation, and FVA + DVX refer to GVC participation.

Source: Authors’ calculation

Jawa Timur and Riau are the two provinces with the highest export values of 126.14 trillion rupiah and 69.36 trillion rupiah, respectively. However, the export value are not entirely generated in the provinces as the food and beverage industries rely on other provinces for raw materials. In terms of trade in value-added in the Regional Value Chain framework, the contribution from other provinces is measured by FVA. Economic integration through production sharing in the food and beverage chain is known as backward participation [shown in Figure 6]. Meanwhile, the value-added created in a province that is used by the economic sector of the partner as input is measured with DVX (DVA re-exported to the third region). The production-sharing flow in the food and beverage chain is known as forward participation [shown in Figure 7].

Based on the data in Table 4, shown as an intensity map in Figures 3 to 5, provinces with high FVA tend to also exhibit high DVA creation. This shows that the use of high-quality and affordable foreign inputs from other provinces stimulates the domestic economy, enhances food production and beverage export. The process indicates a symbiotic relationship between FVA and DVA components.²¹

Figure 3 shows a significant presence of the food and beverage industry in Java Island, depicting a fairly high level of participation in RVC, both in backward and forward aspects. Additionally, several provinces on Sumatra Island, particularly Jawa Timur and Sumatera Utara, play significant roles in the Indonesian food and beverage production chain. The provinces actively participated in RVC on both the backward and forward sides, showing economic linkages with industries in other provinces within the Indonesian food and beverage production chain.

4.2 Examining backward participation in the food and beverage production chain

Based on Figure 4, backward participation in the food and beverage industry is dominated by provinces in the Western Region of Indonesia, specifically the ones on the Sumatera and Java Island. However, provinces in Eastern Indonesia showed lower engagement in the backward participation in RVC for the food and beverage industry. Jawa Timur has the highest FVA value in total export value of approximately 22.39 trillion rupiah. This amount is twice as large as the FVA of the food and beverage industry in Sumatera Utara Province, which holds the second position. The data showed that Jawa Timur contributed a cumulative value-added of 22.39 trillion rupiah from the total exports of the food and beverage industry, originating from other provinces. This high level of backward participation showed that Jawa Timur possessed advanced technology, enabling it to reach a higher production stage compared to the others.

Based on Figure 8(a), the majority of the industry engages in backward participation with various sectors in other provinces on Sumatera Island. This is shown by the origin composition of FVA contained in food and beverage industry exports, where a substantial portion originates from within Sumatera, followed by Java Island. In addition, Lampung Province showed a comparable percentage composition of FVA origin between Sumatera and Java Island, potentially influenced by the close geographical proximity with Java Island, fostering more closely-knit trade relations. The three provinces on Sumatera Island with the highest backward participation rates are Sumatera Utara, Riau and Jambi. Kep. Bangka Belitung Province has the largest composition of FVA from Sulawesi Island. The significant composition is mainly derived from the food crop agriculture sector of Sulawesi Selatan, amounting to 20.87 billion rupiah. This depicts that the food and beverage industry exports from Kep. Bangka Belitung contain significant value-added to Sulawesi Selatan food crops, contributing to a mutually beneficial trade relationship.

Based on Figure 9(a), the food and beverage industry on Java Island mostly engages in backward participation with various sectors in other provinces on the same Island. The supply of raw materials for the food and beverage industry export product in DI Yogyakarta and Jawa Tengah provinces heavily relied on other Java Island provinces. However, the composition of the supply of raw materials for export products from the food and beverage industry in Banten and DKI Jakarta was sourced almost equally from other provinces on Java and Sumatera Island. The backward linkage pattern of the Java Island differs from that observed on Sumatera. The Java Island food and beverage industry appears to obtain raw materials for export products from provinces on Kalimantan Island. Furthermore, the FVA composition in Jawa Timur, generated by similar sector in Kalimantan Island is significantly large, approximately 21.59%. A more in-depth investigation showed that the Kalimantan Tengah seasonal plantation sector benefits considerably from the Jawa Timur food and beverage industry. This is related to the CPO processing industry in Jawa Timur, where a substantial portion of palm oil raw materials were supplied from Kalimantan Tengah the second largest palm oil producer in Indonesia.²¹ The major reason is because almost a third of all cooking oil refinery factories are in Jawa Timur Province. Despite being one of the largest palm oil producers Kalimantan Tengah, only has one cooking oil refinery factory.²² The establishment of the food and beverage industry in Jawa Timur provided value-added for Kalimantan Tengah, reaching approximately 929.54 billion rupiah. The Jawa Timur food and beverage industry also hads backward participation with Bali Nusra Island, even though the percentage is relatively small, compared to other provinces. The backward participation of Jawa Timur in the food and beverage industry takes the lead compared to other provinces throughout Indonesia.

Figure 10(a) shows that the food and beverage industry on Bali and Nusa Tenggara Island gets more than 50% of the raw material from outside Bali Nusra Island, particularly Java. This backward participation pattern differs from similar industries on Sumatera and Java Island, where the dominant supply of raw materials is obtained from other provinces on the same islands. The economic sector in Sulawesi Island also contributed to the exports of food and beverage industry products from Bali (14%) and Nusa Tenggara Timur (12%). Compared to the two other provinces in the Bali Nusra Region, the food industry in Nusa Tenggara Barat Province had the highest backward participation in RVC. However, the food and beverage industry in Bali does not appear to play a significant role in RVC compared to other provinces on the backward side. The FVA value of the Bali food and beverage industry was ranked 32nd out of 34 provinces. When closely examined, the industry in Bali mainly relied on the available raw material supply, namely the food and beverage industry sector, food crop farming, farming, including seasonal and annual plantations. Additionally, the FVA in the export value of Bali food and beverage industry is mostly supplied from Jawa Timur, particularly from the food crop agriculture subsector.

Figure 11(a) shows the sourcing pattern of raw materials for export products in the food and beverage industry on Kalimantan Island, focusing on contributions from Java Island as well. Among the provinces on the Island, Kalimantan Tengah Province had the highest level of backward participation, ranking third nationally. However, Kalimantan Barat had the largest backward participation composition with Sumatera Island, attributed to its geographical proximity to Sumatera provinces, namely Kep. Riau, Riau, Jambi, and Kep. Bangka Belitung. An in-depth analysis showed that the food and beverage industry in Kalimantan Barat had the highest FVA on Sumatera Island, particularly in the coal and oil refining sector in Riau, reaching 10.34 billion rupiah. Kalimantan Timur also had the largest backward participation composition with Sulawesi Island compared to the others. This was attributed to the geographical proximity of the region to the provinces on Sulawesi Island, namely Sulawesi Tengah and Sulawesi Barat. In addition, Kalimantan Timur largest backward participation on Sulawesi Island is in the livestock sector of Sulawesi Tengah.

Similar to provinces on other islands, the food and beverage industry on Sulawesi engaged in trade collaborations with various economic sectors on Java as shown in Figure 12(a). Raw material requirements were imported from Sulawesi and Kalimantan Island. Sulawesi Selatan is the province with the highest backward and forward participation on Sulawesi Island and eastern Indonesia. The total backward participation of Sulawesi Selatan reached 3.21 trillion rupiah, with the largest composition from Java and Sulawesi Island. On Java Island, the chemical, pharmaceutical, and traditional medicine industries, as well as the Jawa Timur food crop agriculture sector, contributed the most to backward participation. It showed that the food and beverage industry exports in Sulawesi Selatan, had value-added from these industries, and the agriculture sector in Jawa Timur amounting to 183.42 billion rupiah and 137.01 billion rupiah respectively. Sulawesi Tenggara is a province on Sulawesi Island which has the largest backward participation composition with Sumatera. The largest FVA value was generated by the Sumatera Utara food and beverage industry, reaching 10.66 billion rupiah. The highest backward participation with the islands of Maluku and Papua occurred in Sulawesi Utara Province, where from the total exports of the Sulawesi Utara food and beverage industry, there was value-added in the Maluku Utara fisheries sector of 12.41 billion rupiah. This is because the fisheries production in Maluku Utara is extremely large and the area is closest to Sulawesi Utara.

In Figure 13(a), the food and beverage industry in each province within the Maluku and Papua Regions mainly relied on external sources for raw materials needed in the production of export goods, with Java and Sulawesi Island being the major contributors. Among the provinces in the region, Papua showed the highest level of backward participation. A detailed analysis showed that the backward participation of Papua was mainly influenced by provinces on Sumatera and Maluku Island. The Papua food and beverage industry contributed 29.23 billion rupiah and 29.67 billion rupiah to the seasonal and annual plantation sector in Sumatera Utara, and Papua Barat, respectively. Raw material support for the Papua food and beverage industry was dominated by the seasonal and annual plantation sectors, sourced from these two provinces, including Sulawesi Tengah, Sumatera Selatan, Maluku Utara and Kalimantan Tengah.

4.3 Examining forward participation in the food and beverage production chain

According to Figure 5, the forward participation of the food and beverage industry in RVC is dominated by provinces in the Western Region. Jawa Timur and Sumatera Utara played an important role in RVC through backward and forward participations. This showed that food and beverage industry products in the two provinces were exported as raw materials, contributing 4.76 trillion rupiah and 4.20 trillion rupiah, respectively.

The food and beverage industry, generally showed much greater levels of backward participation compared to that of forward. This depicts the significant role played by the industry in generating value-added across regions. According to Koopman, et.al,²⁰ a higher degree of backward participation showed that the industry occupied a downstream position in the RVC. Industries located downstream tend to receives greater value-added than the upstream counterparts. In addition, downstream industries are typically associated with a higher production stage, depicting the use of more advanced technology. When sorted based on backward and forward participation values, eight provinces consistently had the largest values for both aspects. These included Jawa Timur, Sumatera Utara, Jawa Tengah, Kalimantan Tengah, Riau, DKI Jakarta, Jawa Barat, and Sulawesi Selatan, focusing on the central role of the food and beverage industry in generating value-added across diverse regions.

Based on Figure 8(b), the forward participation in each province on the Sumatera Island, showed significant variations. Kep. Riau, Kep. Bangka Belitung and Lampung send a DVX composition dominated by Java Island, followed by Sumatera Selatan and Riau. Meanwhile, more than 90% of Kep. Bangka Belitung DVX to supply from Java, particularly the food and beverage industry in Jawa Timur, amounting to 173.72 billion rupiah. This implied that the exports of the Jawa Timur food and beverage industry contributed value to Kep. Bangka Belitung food and beverage industry amounted to a total of 173.72 billion rupiah. Therefore, the results of Kep. Bangka Belitung food and beverage industry serves as an input for goods produced by the industry in Jawa Timur. Jambi and Aceh, showed a different pattern, with majority of the forward participation directed towards other provinces on Sumatera Island. When thoroughly examined, the forward participation of Jambi was mainly influenced by Kep. Riau, namely in the food and drink provider sector, air transportation, as well as the food and beverage industry, each amounting to 280.99 billion rupiah, 49.59 billion rupiah, and 48.85 billion rupiah, respectively. This is because the closest access to Kep. Riau is Jambi. Meanwhile, largest forward participation of Aceh is the food and beverage industry from the neighboring provinces, namely Sumatera Utara, Riau and Sumatera Barat, each amounting to 145.81 billion rupiah, 5.1 billion rupiah, and 4.53 billion rupiah, respectively.

In line with the significant backward participation, the food and beverage industry on Java Island also showed pronounced forward participation with other provinces on the same Island (see Figure 9(b)). Jawa Tengah and Jawa Barat are the provinces with the largest forward participation, exceeding 90% compared to other Java Island provinces. A detailed examination showed that the forward participation of Jawa Barat was mainly influenced by Jawa Timur across several sectors, including the food and beverage industry, provision of food and drink, animal husbandry, chemical, pharmaceutical and traditional medicine, as well as the tobacco processing industry. This showed that the food and beverage industry in Jawa Barat served as an important input for the four sectors in Jawa Timur. A similar pattern was observed in Jawa Tengah, where the forward participation was dominated by the economic sector in Jawa Timur, namely the food and beverage industry, provision of food and drink, and animal husbandry. Jawa Timur is the only province with the largest forward participation in Bali and Nusa Tenggara Island. The food and beverage industry in Jawa Timur played a significant role in the accommodation and air transportation sector in Bali Province. This is because Jawa Timur is the closest province to this area, supporting the development of the tourism sector in Bali Province.

Figure 10(b) shows a significant observation is the forward participation of the Bali food and beverage industry, which contributed 1.17 billion rupiah to the air transportation industry in Banten province, was ranked second, after the Jawa Timur food and beverage industry. Therefore, there is value-added from the Bali food and beverage industry in respect to the air transportation industry in Banten. The phenomenon was attributed to the connectivity facilitated by two major Indonesian airports namely Ngurah Rai, and Soekarno-Hatta International Airports in Bali and Banten, respectively.

Forward participation on Kalimantan Island, as shown in Figure 11(b), is mainly driven by provinces on Java Island, with Kalimantan Tengah having the highest level at 95.95%. A closer examination showed that the industry in Kalimantan Tengah significantly contributed input or raw material for industries in Jawa Timur, particularly in the food and beverage industry sector and the provision of food and drink. The value-added obtained by the Kalimantan Tengah food and beverage industry from exports to the provision of food and drink in Jawa Timur amounted to 1.12 trillion rupiah and 194.13 billion rupiah, respectively. Kalimantan Selatan is the only province on Kalimantan Island that had the largest composition asides from Java, Sumatera (10.25%), Kalimantan (20.80%), and Sulawesi (18.12%).

Based on Figure 12(b), the forward participation of Sulawesi Selatan was significantly directed towards Maluku and Papua Islands compared to other provinces on Sulawesi Island. This showed that the Sulawesi Selatan food and beverage industry is an input for other sectors on the islands of Maluku and Papua, particularly the fisheries sector of Maluku and Papua Barat Provinces. An in-depth analysis showed that the exports from the fisheries sectors of Maluku and Papua Barat contributed value-added to the Sulawesi Selatan food and beverage industry, totaling 60.07 billion rupiah and 20.94 billion rupiah, respectively. As the main potential areas for the fisheries sector, mainly characterized by traditional practices, these two provinces need input from the food and beverage industry. The assistance is in the form of supplying essential items such as food and beverages, aimed at aiding local fishermen in improving productivity and overall operational efficiency. Sulawesi Selatan serves as the economic center of Eastern Indonesia, and acts as an entry point for related activities in the Maluku and Papua regions. Additionally, Sulawesi Selatan plays a crucial role in connecting West and East Indonesia, particularly in the tourism sector, as shown in the significant forward participation in the Banten and Bali air transportation sectors, including the Bali accommodation provision.

For forward participation, as shown in Figure 13(b), most provinces in the Maluku and Papua Island had the largest composition with Java, except Maluku Utara. Maluku Utara mainly engaged in forward participation directed towards Kalimantan Island, followed by Sulawesi accounting for 63.83% and 19.82%, respectively. A detailed analysis, showed that the Maluku Utara food and beverage industry had the highest forward participation for the industries in Kalimantan Tengah (13.27 billion rupiah), Sulawesi Utara (2.01 billion rupiah), and Jawa Timur (1.50 billion rupiah). However, the other three provinces had the highest forward participation, in respect to the Jawa Timur food and beverage industry. In the exports of the Jawa Timur food and beverage industry, value-added contributions were realized from the industries in Maluku (5.09 billion rupiah), Papua (22.92 billion rupiah), and Papua Barat (11.97 billion rupiah). This showed that Jawa Timur is also an economic hub for the Eastern Region of Indonesia, specifically for the three provinces.

4.4 Identifying industries that are closely related to the food and beverage industry

Based on Figure 14, the collective supply of raw materials for export products across provinces mainly originated from the food and beverage industry, contributions from perennial and annual plantations including food crop farming in other regions. In general, it was reported that the agricultural sector significantly influences the supply of raw materials for the industry in each province. This includes seasonal and annual plantations, food crop farming, as well as contributions from the fisheries and livestock sectors. The overall trend showed that the food and beverage industry in a province rely on the agricultural sector for raw material needs, such as fisheries and livestock. The dependence is influenced by various factors such as limited land availability, geographical conditions, namely coast, lowland, highland, and variations in the quality standards of required raw materials. However, regions may encounter challenges in processing primary sector raw materials due to limitations in human resources and technology.

Figure 15 shows that the food and beverage industry in each province collectively functions as the main supplier for the corresponding ones in other provinces. This depicts the interconnected nature of the industry across regions, plays a critical role in driving the Indonesian economy. Provinces relied on the products of the food and beverage industry from other regions as essential suppliers of raw materials for manufacturing flagship export products. The mutual reliance resulted in the generation of value-added, totaling 11.93 trillion rupiah. However, the food and beverage industry also acts as an export destination for the food and drink supply sector in other provinces, contributing a value-added of 3.04 trillion rupiah in export activities.

5 Conclusions

Based on decomposition and separating the value-added created within and outside the region, it is found that some provinces with the highest export values with rely on other provinces for raw materials. In conclusion, a high FVA export in a province is followed by an increaese in DVA. Backward participation in the food and beverage industry in Indonesia is much greater than the forward. Java Island served as the epicenter for both backward and forward participation in the country. Backward participation in the provincial food and beverage industry was dominated by the same industry and the agricultural sector. However, forward participation was mainly driven by the food and beverage industry. The active participation of Jawa Timur and Sulawesi Selatan, with provinces in the Eastern Region, showed that these two provinces are hubs of economic growth between the Western and Eastern Regions of Indonesia.

Footnotes

ORCID iD

Siskarossa Ika Oktora

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