Logistics Services and Firm Performance: Evidence from Indonesia, Malaysia and Thailand.

• Author: Kohpaiboon, Archanun

1. Introduction

   Logistics services have gained considerable global policy attention in recent years in light of their increasing importance in determining the overall competitiveness of firms (Lakshman et al. 2001; Devlin and Yee 2005; OECD/WTO 2013; Song and Yeo 2017). In general, logistics involves efficiently managing how resources are acquired, stored and transported--from the origin of raw materials to the destination where the final product is consumed. The better the logistics management, the better the firms' performance (Pasadilla and Shepherd 2012; OECD/WTO 2013). Logistics services become even more important in the context of global value chains (GVCs), (1) as indicated by the so-called magnification effect of tariffs in GVC (Yi 2003).

   Firms can enhance their logistics capabilities in a wide range of activities, such as material handling, warehouse management, accounting systems and procurement procedures (Coyle et al. 2008; Liang, Chaovalitwongse, and Shi 2016). However, the extent to which enterprises can benefit from improving these capabilities also depends on the logistics infrastructure quality at the national level (Gimenez and Ventura 2005; Morrissey and O'Donoghul 2013; Doloreux and Shearmur 2018; Viederyte 2013). A high-quality logistics infrastructure involves several aspects, ranging from price and quality of basic infrastructure to rules and regulations governing the related activities. And these regulations vary significantly across countries (Arvis et al. 2012; Tham and Das 2018). Some aspects take time to improve, while in the case of others, progress is difficult to measure and monitor. Occasionally, certain themes of logistics infrastructure can also be politically sensitive. Here, the literature is not clear on what firms can do on their own to compensate for the poor quality of infrastructure at the national level. This is a particularly important issue in developing countries. We find that some form of subsidy or tax incentives might be needed, at least in the short run, to encourage firms to make improvements at their end while waiting for national-level logistics infrastructure development to be completed.

   A systematic multi-country, firm-level survey is needed to analyse this issue. We, therefore, use the World Bank's Enterprises Surveys (ESs) conducted by the Enterprise Analysis Unit, which, by 2021, had accumulated details of more than 174,000 firm-level interviews in 151 countries. (2) Interestingly, among ASEAN members, the surveys from Indonesia (2015), Malaysia (2015) and Thailand (2016) include specific questions about firms' efforts to upgrade their own logistics services. In terms of per capita income, Indonesia (US$3,870), Thailand (US$7,187) and Malaysia (US$10,412) (3) fall in the category of middle-income countries, but the quality of logistics infrastructure services proxied by the World Bank's Logistic Performance Index (LPI) is different across them.

   This paper contributes to the existing literature by adding empirical evidence based on a cross-country, firm-level dataset. To the best of our knowledge, so far, there has not been any systematic comparative analysis of firms in ASEAN member states improving their logistics offerings.

   The structure of this paper is as follows. The next section presents the literature review to highlight knowledge gaps in the field of logistics services. The third section provides a summary of the World Bank's Enterprises Surveys in Indonesia, Thailand and Malaysia, followed by a brief discussion of the key logistics challenges in the three countries. The fourth section focuses on the model specification and description of variables, while the subsequent section explains the results. The final section concludes.

2. Literature Review

   Logistics have gained significant importance as they are now classified among the most important determinants of competitive advantage in businesses (Yorulmaz and Birgun 2017). In general, logistics services involve efficiently managing how resources are acquired, stored and transported--from the origin of raw materials to the destination where the final product is consumed. It is often argued that a combination of attitude, ability, process, knowledge and skill is needed to upgrade a firm's logistics capabilities (Morash, Droge, and Vickery 1996). And even minor supply chain bottlenecks can adversely affect overall logistics competitiveness. This detrimental effect is further magnified when firms are entrenched in GVCs, where goods and intermediates frequently cross borders (Yi 2003).

   Empirical studies on the effect of logistics capabilities have been carried out in two levels in a mutually exclusive fashion--first in the form of aggregate analysis and second, using a firm-centric approach. In the aggregate-level analysis, the statistical relationship between logistics services and economic performance is examined. A popular proxy of logistics services quality is the Logistic Performance Index (LPI) developed by the World Bank. LPI is a discrete index calculated at the national level, covering 167 countries in the years 2007, 2010, 2012, 2014, 2016 and 2018. (4) A statistical relationship between LPI and aggregate economic indicators such as GDP and external trade is studied using inter-country panel data econometric analyses. (5) Examples of empirical studies in this group include Chu (2012), Lean, Huang, and Hong (2014), Gani (2017), Sezer and Abasiz (2017) and Richard (2020). Not surprisingly, the positive effect is calculated empirically without additional details on how the quality of logistics services affects firms and the overall economy. This makes it difficult for policymakers to draw adequate inferences.

   The other branch of empirical studies focuses on the importance of logistics services on an individual firm's performance. Examples of such studies include Shang and Marlow (2007), Xiaolan (2013), and Yorulmaz and Birgun (2017). The key finding points to the positive correlation between logistics capabilities and firm performance, whose measures vary across studies. Some focus on financial performance, whereas others look for behaviour-based performance exemplified by organizational flexibility and customer service satisfaction (e.g., Shang and Marlow 2005; Yorulmaz and Birgun 2017). All these measures contribute to increased sales and profits, which seem to be the ultimate target of firm operations. Nonetheless, the statistical relationship found in these studies is correlation and not causation because of the use of a structural equation model (SEM) approach. (6) In addition, since the outcome is firmcentric, the role of government is left out of the discussion.

   It is important to note that most logistics cost components can be grouped into five categories: transportation; warehousing; inventory-carrying; logistics administration; and packing (Pohit et al. 2019; Banomyon et al. 2022). Of these, only packaging and inventory-carrying costs are determined solely by firms. Costs related to the other components are determined by the overall quality of the existing logistics infrastructure of the country of operation (e.g., road, maritime, rail freight transport, freight forwarding, etc.).

   The quality of logistics infrastructure is jointly determined by logistics-related physical infrastructure and the governing rules and regulations, or soft infrastructure. For instance, building or improving physical infrastructure (e.g., ports, airports, double-track railway lines) can sometimes also be a politically sensitive issue that can slow down a project. However, to a certain extent, the poor quality of infrastructure at the national level can be mitigated by effective logistics management within firms. These aspects are different from issues such as customs clearance and, streamlining rules and regulations, which largely depend on government commitment. Another important topic that the existing literature highlights is related to monitoring progress. Logistics infrastructure development necessitates a well-designed monitoring system to track progress continuously.

   This is also consistent with a new research agenda within the logistics literature focussing on the role of government in improving firm capabilities. In particular, Coe (2013) highlights the pressing need to incorporate the state in the logistics debate and move beyond firm-centric approaches. Logistics research must adopt a broader political-economic perspective that emphasizes power and recognizes institutional and regulatory contexts, labour issues and social upgrading. So far, these areas have been largely underplayed. However, Morrissey and O'Donoghul (2013), Doloreux and Shearmur (2018) and Viederyte (2013) do highlight the role of the government in logistics services improvements observed in certain firms. However, the extent to which firms can overcome the challenges posed by national-level inefficiencies remains largely unknown.

3. Indonesia, Malaysia and Thailand: Enterprise Surveys and Logistics Challenges

   Figure 1 presents the LPI indices and its sub-indices of the three ASEAN members included in this study--Indonesia, Malaysia and Thailand. Among these, between 2010 and 2016, Malaysia was the best performer, followed by Thailand and Indonesia. Malaysian companies, in particular, perceive logistics development to be a strategic tool for acquiring a competitive advantage. This is especially true for firms that seek cost competitiveness and economies of scale by outsourcing production abroad (MIM 2008).

   Interestingly, in 2018, Thailand overtook Malaysia in the overall performance index. This achievement was a significant milestone for Thailand's National Plan for the Development of Transportation System, initiated in 2017. This resulted in a remarkable increase in all sub-indices of the country, including those related to logistics competence, tracking and tracing, and timeliness.

   From 2010 to 2016, Indonesia...