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Production Externalities in the Wood Furniture Industry in Central Java

This paper exploits micro firm level data to examine the impact of spatial clustering and links to foreign buyer networks on firm performance in the wood furniture industry in Central Java, Indonesia. The analysis is based on an annual manufacturing survey. We identify the impact of specialization of the cluster, diversification, and links to foreign buyer networks. For this purpose, a production function framework is developed. The results lend support to the view that clustering of large and medium scale specialized firms improves firm performance, while clustering of small scale specialized firms and clustering of diverse firms are not conducive to firm performance. We also find a clear positive association between involvement in exporting activities and firm performance.