The services sector in Indonesiaaccounts for more than half of total value added, employsmore than 55 million workers, and provides 35 percent ofoverall inputs to the productive sectors of the economy.Improving quality, increasing diversity and reducing costsin service sectorsproduce is likely to greatly improveIndonesia s competitiveness across all sectors. With a focuson the manufacturing sector, this note argues that relaxingrestrictions on competition and on the participation offoreign firms, in services can be expected to improveservice sector performance, and lead to economy-widebenefits in terms of productivity and competitiveness. Itdoes so by reviewing the international evidence available,and by presenting new evidence for Indonesia on the positivespillovers that easing restrictions has had on theproductivity of domestic manufacturing firms. The economicimpact of these spillovers is sizable. In fact, spilloversfrom service sector reform account for about 8 percent ofthe observed increase in Indonesian manufacturingproductivity over the period 1997-2009.
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