Abstract: How do state-business relationships shape competition? Using plant-level Indonesian manufacturing census data, in which firms with political connections to President Suharto are identified, we documents a pro-competitive effect of Suharto’s fall on Indonesian manufacturing sector. We find that greater crony presence during the Suharto era, at the five-digit industry, is associated with greater entry and exit, faster employment growth and more re-allocation during the post Suharto period. Despite higher dynamism, however, we do not find significant decrease in markups and concentration ratios, and increase in output growth. This implies that although the regime change has led to the reduction of entry and exit barriers, it has not translated immediately to the improvement of efficiency. Our results are robust to controlling for potential confounding explanations, including pre-crisis credit conditions, deregulation policies and industry-specific shocks.

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