Innovation Policy in Indonesia

Schumpeter (1947) defined innovation as simply the doing of new things or the doing of things that are already being done in a new way. To put it more concretely, innovation can take the form of improvements or upgrades in products, processes, technology, methods of production, management, organisational arrangements, or the extent of markets being served. The important role of innovation in achieving better economic performance is well-documented in the economic literature. Among other things, innovation is critical for developing countries, such as Indonesia, to avoid the middle-income trap and achieve much-needed industrial, productivity, and technological upgrading. Attaining sustainable, competitive, and solid economic growth requires accumulating not only more labour and capital but also new technology and innovation – the ‘inspiration’ as opposed to ‘perspiration’ approach to development. Hence, the important role of innovation cannot be overstated. To better understand the Indonesian context for innovation, we first need to provide a brief historical account. Since the 1960s, Indonesia’s economy has undergone a significant transition from being dominated by agriculture (before 1970), to relying on oil revenues and import-substitution industries (from 1970 to the mid-1980s), to being led by labour-intensive and export-oriented industries (from the late 1980s),before moving gradually towards a services-led and knowledge-based economy.Foreign direct investment (FDI) was open at the end of 1960s, and then relatively closed during 1970s, before being opened up again during the massive trade and investment reforms of the 1980s. The reforms triggered a significant amount of technology diffusion from foreign firms that started to enter the country. Evidence has shown that FDI played an important role in increasing productivity in Indonesia, and hence, economic performance, particularly during the boom from the mid-1980s to the early 1990s. However, Indonesia’s economic growth has been driven primarily by natural resources and trade rather than by science and innovation. In other words, Indonesia’s growth owes more to the accumulation of labour and capital than to increases in productivity. This is demonstrated by the declining rate of total factor productivity growth since the 1990s to a level far below that of its regional peers. At the same time, constantly rising labour costs have further eroded competitiveness. Innovation contributes inadequately to Indonesia’s economic growth, and the country’s innovation performance lags that of its regional peers. Only since the mid-2000s has the government started to give greater emphasis to innovation in the formulation of economic policies, and this is expected to continue in the future. Various development planning documents explicitly and indirectly mention efforts to improve innovation and the target of becoming a more competitive, technology-driven, and knowledge-based economy. Section 4.2 discusses the indicators of innovation in Indonesia. Section 4.3 describes the institutional governance of innovation, innovation policies implemented in the past and lessons from them, and lessons from cases of innovation policies in past or ongoing projects. Section 4.4 explores considerations for the future national innovation system. Finally, Section 4.5 concludes and provides a summary of suggestions for future innovation policymaking