The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian

Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent.
ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

The Impact of Government Support

on The Performance of Indonesia’s
State-Owned Enterprises

Hendro Nugroho
Indonesia Ministry of Finance
 Outline

Motivation of the Research

Background & Data

Empirical Strategy

Empirical Result

Conclusion & Policy Implications

2
 Research Motivation
In order to maximize SOEs’ role in the Indonesia development
economic, the government has a policy to strengthen the SOEs
by providing financial support.

On 2015, the government of Indonesia provides direct capital

injection reached 64.88 trillion Rupiahs ($4.65 billion) for 43 SOEs.

The value of government investment in SOEs has been increased

since 2010. Furthermore, the Indonesian government ownership in
SOEs reached 1,762.87 trillion Rupiahs ($126.22 billion) or
32.31% of total assets in the annual financial statement of the
Indonesian government in 2015.

The increasing of government support led to increased research

on the effectiveness of government policies to support SOEs.

3
 Research Question

This study answers the following question:

“What is the impact of government support on

the performance of Indonesia’s state-owned
enterprises?”

4
 Empirical Evidence
Positive Impact:
Government subsidies have a significant effect on the Chinese
stock market. Subsidies were most significant for high-
performing firms rather than low-performing firms (Lee, Walker,
and Zeng, 2014).

Negative Impact:
Guan and Yam (2015) investigate the effect of Chinese
government financial incentives on firms’ innovation
performance during the nation’s initial economic transition.
They argued that financial incentives have a negative effect on
firm’s innovative economic performance and demonstrated all
financial incentives of government were unrelated to the patent
of either high-tech or general firms.

5
 Trend of Government Support
GOVERNMENT SUPPORT TO INDONESIA'S SOE
70.00 64.88

56.53 58.02
60.00
TRILLIONS Rupiahs

50.13
50.00 47.53 49.85
44.36

40.00

30.00

20.00 15.45
11.54
7.66 12.72
10.00 3.27
1.78 0.90 6.50
0.49 7.60
- 2.00
2010 2011 2012 2013 2014 2015

Direct capital injection Transfer of Government’s Infrastructure Government Assistance

6
 Trend of Government Ownership

Value of Government Ownership

2,000.00

1,800.00 1,762.88

1,600.00
TRILLIONS RUPIAHS

1,400.00

1,200.00

1,000.00
892.36
788.13
800.00
680.77
593.19
600.00 526.86

400.00

200.00

-
2010 2011 2012 2013 2014 2015

7
 Data Description & Methodology

This study will utilize a panel data set of all Indonesia’s SOEs from
2010 through 2015.

The number of Indonesia’s SOEs around 130 per year, hence this
study analyzes 813 observations during 6 years.

This research employ the Ordinary Least Square method (OLS)

with firm fixed-effects model to control the omitted-variable bias
(OVB), because of unobservable factors that vary across firms but
do not change over time.

In order to solve the serial correlation problem that arise in panel

data and to ensure the robustness of the model, clustered
standard errors also employed.

8
 Empirical Strategy
The regression equation to estimate the impact of government support on
the SOEs performance:
𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑖𝑖𝑖𝑖
= 𝛽𝛽0 + 𝛽𝛽1 log_govsupp𝑖𝑖𝑖𝑖 + 𝛽𝛽2 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑖𝑖𝑖𝑖 + 𝛽𝛽3 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑖𝑖𝑖𝑖 + 𝛽𝛽4 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑖𝑖𝑖𝑖 + 𝛽𝛽5 𝑑𝑑𝑑𝑑𝑑𝑑𝑖𝑖𝑖𝑖
+ 𝛽𝛽6 𝑑𝑑𝑑𝑑𝑑𝑑𝑖𝑖𝑖𝑖 + 𝛽𝛽7 𝑔𝑔𝑔𝑔𝑔𝑔_𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑖𝑖𝑖𝑖 + 𝛽𝛽8 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖𝑖𝑖 + 𝛽𝛽9 𝑍𝑍𝑖𝑖 + 𝛽𝛽10 𝑇𝑇𝑡𝑡 + 𝜇𝜇𝑖𝑖𝑖𝑖
Where,
 perf is dependent variables to measure SOEs performance from SOE i at time
t. I use Return on Assets (ROA), Return on Equity (ROE), and Return on Sales
(ROS).
 log_govsupp is the natural logarithm of government support.
 npfm is net profit margin.
 tato is total assets turnover which is measured by dividing total sales by total
of assets.
 wcto is working capital turnover, obtained by dividing total sales by total equity.
 das is the debt-assets ratio.
 der is the debt-equity ratio.
 gvt_perc is the percentage of state ownership.
 size shows firm size.
 Zi : firm fixed-effects
 Ti : year fixed-effects
 µit : error term
9
 Types of Government Support

 Government capital injection is government funds to strengthen

SOE capital.
 Transfer of government’s infrastructure is the transfer of
government’s infrastructure to support SOE assets.
 Government assistance is government’s funds or infrastructure to
assist SOE operations, but excludes from firm assets and will not
increase government’s shares.

Ratio to measure SOEs’ performance

 Return on Assets (ROA) formulated as net comprehensive

income divided by total assets.
 Return on Equity (ROE) measured by net comprehensive income
divided by total equity.
 Return on Sales (ROS) obtained from earning before interest and
tax divided by total sales.

10
Impact of Government Support (without Firm Fixed Effect)
Regression Analyses
Variables (1) (2) (3)
Dependent variable ROA ROE ROS
Estimation method OLS OLS OLS
Log of Government Support .00404** .36749** -.00324
(.00174) (.14387) (.00804)
Net Profit Margin .00694*** .14179* .96657***
(.00149) (.07788) (.03886)
Total Assets Turn Over .25688*** -.03072 -.01729
(.03816) (.17676) (.01955)
Working Capital Turn Over -.00308 -.99215** -.00008
(.00206) (.41527) (.00138)
Debt-Assets Ratio -.04375*** -.06667 .00479
(.01055) (.04311) (.00409)
Debt-Equity Ratio .00339*** 1.6139*** -.00032
(.00095) (.42479) (.00094)
Percentage of State Ownership -.00137 -.11826** -.00186
(.00088) (.06016) (.00186)
SOE size .01262*** -1.3479*** -.01541*
(.00357) (.37583) (.00816)
-.11381 21.816** .43919*
Constant (.10548) (8.2610) (.25472)
Firm fixed effects No No No
Year Fixed effects Yes Yes Yes
HAC(clustered) SEs (within firm) No No No
n 813 813 813
R2 0.7749 0.7710 0.9732
Note: Robust standard errors in parentheses
*** p <0.01, ** p <0.05, * p < 0.1 11
Impact of Government Support (with Firm Fixed Effect)
Regression Analyses
Variables (1) (2) (3)
Dependent variable ROA ROE ROS
Estimation method FE FE FE
Log of Government Support .00489 -.15735 -.00375
(.00367) (.28972) (.00881)
Net Profit Margin .00513*** .09403 .98684***
(.00130) (.08060) (.02838)
Total Assets Turn Over .26409*** -.26791 .00269
(.03317) (.26525) (.00307)
Working Capital Turn Over -.00189** -1.0498** -.00303
(.00079) (.42604) (.00333)
Debt-Assets Ratio -.04904*** -.06748 -.00011
(.00908) (.05654) (.00130)
Debt-Equity Ratio .00309*** 1.7294*** .00218
(.00054) (.38690) (.00250)
Percentage of State Ownership .00028 -.10317 .00117
(.00345) (.08937) (.00128)
SOE size -.09407 -3.4435 -.00587
(.09549) (3.3020) (.05199)
.71495 40.745 .03923
Constant (1.1369) (36.665) (.46731)
Firm fixed effects Yes Yes Yes
Year Fixed effects Yes Yes Yes
HAC(clustered) SEs (within firm) Yes Yes Yes
n 813 813 813
R2 0.8710 0.8595 0.9821
Note: Robust standard errors in parentheses
*** p <0.01, ** p <0.05, * p < 0.1 12
Impact of Government Support on SOEs’ Performance-with lagged effect
Regression Analyses
Variables (1) (2) (3)
Dependent variable ROA ROE ROS
Estimation method FE FE FE
L.Log of Government Support .00327 .15523 .00141
(.00359) (.20557) (.00465)
Net Profit Margin .00470*** .05197 .99266***
(.00118) (.04513) (.02588)
Total Assets Turn Over .26129*** -.31875 .00047
(.03545) (.30874) (.00393)
Working Capital Turn Over -.00205** -1.0821** -.00084
(.00078) (.45278) (.00121)
Debt-Assets Ratio -.04966*** -.06768 -.00031
(.00891) (.06188) (.00108)
Debt-Equity Ratio .00337*** 1.7648*** .00066
(.00054) (.37779) (.00085)
Percentage of State Ownership -.00050 -.11488 .00078
(.00457) (.10508) (.00189)
SOE size -.13674 -3.9177 -.02472
(.13006) (3.8375) (.05301)
1.3897 49.537 .26746
Constant (1.6181) (46.977) (.76528)
Firm fixed effects Yes Yes Yes
Year Fixed effects Yes Yes Yes
HAC(clustered) SEs (within firm) Yes Yes Yes
n 669 669 669
R2 0.8833 0.8778 0.9884
Note: Robust standard errors in parentheses
*** p <0.01, ** p <0.05, * p < 0.1
13
 Summary of the Result

Without firm fixed-effects and clustered standard error,

government support has a positive and significant correlation
with SOEs’ performance measured by ROA and ROE.

However, by applying the firm fixed-effects model and HAC-

clustered standard errors, the findings show that government
support to the SOEs did not have a significant effects on SOEs’
financial performance.

Government support did not have a significant impact to ROS

both for simple OLS model and fixed-effects model.

By applying the lagged effect, the empirical findings are broadly

consistent that government support did not have significant
impact to the SOEs’ performance.

14
 Policy Recommendation

The government should take into account its support to the SOEs
implying that the government needs to consider alternative
solutions to design proper government support policy in order to
generate a higher financial performance.

In order to design government support policy, a clear

communication between the government and SOEs is needed,
especially in determining the policy direction of government
support and the government's objectives.

The government also needs to examine precisely whether it

encourages SOEs by increasing their investment in them in the
future with the aim of boosting their performance to provide
government’s service obligations.

15
THANK YOU