International Competitiveness of Indonesia's Cocoa Sector: From the Viewpoint of Product Differentiation

Cocoa beans contribute a significant amount of foreign exchange earnings in Indonesia. However, Indonesia still lags behind other countries in terms of processed cocoa. Therefore, in April 2010, the Indonesian government stipulated a policy to increase the amount of processed cocoa for production and export. Since the introduction of this policy, Indonesia's processed cocoa export volume has increased; on the other hand, its cocoa bean exports have decreased. The objective of this study is to clarify the appropriateness of the policy by analyzing Indonesia's international competitiveness from the viewpoint of product differentiation. The main analysis results are as follows. First, Indonesia's cocoa bean and processed cocoa are both product differentiated from the other exporting countries' products, respectively. Second, the expenditure elasticities of Indonesia's cocoa bean and processed cocoa are the highest among all other export countries' corresponding products. Third, the policy change in 2010 significantly decreased (increased) the expenditure share of Indonesia's cocoa bean (processed cocoa) based on world demand. Fourth, it can be argued that the policy implemented by the Indonesian government is appropriate because Indonesia's processed cocoa shows greater potential for export expansion than cocoa bean.