01 final paper(1501 01) a revised
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Long-term Forecasting of Technology andEconomic Growth in Indonesia
Erman Aminullah*1)
Centre for Science and Technology Development Studies
Indonesian Institute of Science (LIPI), Jakarta, Indonesia
Summary
This paper attempts to analyze the importance of technology investment strategy and its effects
in influencing economic growth under the economic complexity of Indonesia. The model of economic
dynamics through innovation is applied to understand the behaviors of economic growth, investment,
and consumption. The results of a computer simulation show: (i) economic growth can occur under
the conditions of investment growth and investment reduction, while it generally occurs under the
condition of consumption growth; (ii) the fluctuation of economic growth can be stabilized by technology
investment; (iii) the initial condition of technology investment determines the stability of economic
growth; and (iv) constant growth of technology investment will secure the stability of economic
growth in the long run.
The model concludes that a commitment to maintain technology investment in the private sector
is important for a stable economic growth in Indonesia. More specifically, the choice of optimum
technology investment strategy for increasing competitiveness of Indonesian companies is a robust
strategy in the long run.
Keywords: technology investment strategy, economic growth, economic complexity, Indonesia, R&D intensity
1. IntroductionAttention centered only on the present will blur the view of the future, while attention centered
on a certain aspect will neglect many interrelated aspects. This becomes a world-view in observing
the importance of technology investment strategy in the long run. Technology investment is
* This paper carries a significant change from its earlier version. The author is indebted to Dr. Kong-Rae Lee forhis suggestion(s) with regard to the clarity of this paper, and I am thankful to two anonymous referees who havealso given their comments and suggestions for the enrichment of this paper.
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a cultivation of technological capability indicated by an overall progress in four components,namely: business efficiency; research and development (R&D) productivity; the efficacy of
government policy; and the quality of higher education. A robust strategy of technology investment
is achieved by balancing between technology investment and physical capital investment to build
up a strong and healthy economy in the long run.
This paper explains the dynamics of Indonesian technology investment in the past, as well
as its possibilities in future scenarios. The reality of past technology investment in Indonesia
is a story of backwardness in technology investment, which results in instability when faced
with economic turbulence and the postponement of economic recovery such as that from the
1997 Asian crisis. The scenarios of future technology investment will generate a desirable andfeasible strategy to achieve a balance between technology investment and physical capital
investment. Some coherent steps including a socio-technical approach, a coherent policy direction,
a supportive institutional set-up, and workable policy instruments for implementing the strategy
will be explained in the last part of the paper.
2. Past Trends of Technology Investment in Indonesia
Technology investment is different from physical capital investment. Technology investment
is a cultivation of technological capability which generally goes through the internal process
of technological learning, while physical capital investment is a formation of capital which mainly
occurs by the external inputs of capital. Technology investment is more than R&D expenditure,
and albeit it can be used as an indicator of technology investment, it would work by simultaneously
investing in people, organization, information, and techniques to create the internal process of
technological learning. Generally, the cultivation of technological capability had moved slowly
in Indonesia in the past. Low technology investment was inspired by a lack of awareness on
the importance of building up technological capability. The dynamics of technological capability
demonstrated a downward fluctuation in Indonesia. This was shown by slightly increasing andthen constantly deteriorating trends in the four objectives of technology investment: technical
capability, knowledge mastery, capacity to govern, and intellectual capital. At the macro level,
this was reflected by deteriorating tendencies in: the business efficiency of the private sector;
R&D productivity of research institutions; the efficacy of government policy on technology
investments; and the quality of higher education (see Figure 1).
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2.1 Building-up Technical Capability
Technical capability, with investments in techniques, is reflected by the ways of producing
goods and rendering services in the economy, starting from buying only, to the combination
of buying with some producing, and then fully producing. The improvement of technical capability
is associated with knowledge mastery, capacity to govern, and intellectual capital. At the macro
level, the higher the technical capability, the more advanced the business efficiency. High efficiency
of business is achieved by the creation of lesser inputs, faster processes, and greater outputs.
The achievement is indicated by the increase in the added value of manufacturing and services.
An increase in the added value per worker in the economy reflects the improvement of technical
capability, mainly in producing high technology goods and services in the economy.
e
Source: Adapted from (Syarif, 1989).
Figure 1: Four Objectives of Technology Investment
The added value per worker in the Indonesian manufacturing sector (1990-2003), in comparison
with several countries, can be explained as follows: (i) before the 1997 crisis, the added value
per worker was still above that of China and the Philippines but below Malaysia; yet, after
the crisis, the added value per worker in Indonesia was surpassed by China and the Philippines;
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(ii) Singapore, South Korea, India, and China were countries with the ability to maintain therise of added value per worker continuously; and (iii) Thailand, Indonesia, the Philippines, Malaysia,
and South Korea were experiencing a drastic fall of added value per worker on account of
the 1997 economic crisis. Then, in 2003, all countries, except Indonesia, succeeded in increasing
their added value per worker, exceeding their positions before the crisis. Indonesia still kept
experiencing a decrease in added value per worker, which was a result of their technical capability
whose main emphasis was on producing low as well as middle technology products in the
economy (IIS, 2006).
The aforementioned reality implies some important points: (i) a high level of technical capability
is reflected by the increase in the added value of high technology goods and services in theeconomy; (ii) a high level of technical capability is associated with the advancement of knowledge
mastery, intellectual capital, and managerial capability, as shown by Singapore and South Korea;
(iii) a low level of technical capability is vulnerable against economic turbulence associated
with backwardness in knowledge mastery, capacity to govern, and intellectual capital, as shown
by Thailand, Indonesia, and the Philippines; and (iv) a continuous increase in technical capability
can be the source of economic resilience in resisting economic turbulence, as reflected by China
and India, and then become the source of economic strength in coping with the crisis, as shown
by South Korea and Malaysia (see Table 1).
2.2 Knowledge Mastery
Knowledge mastery, or the investment in information acquisition, is performed by accumulating
scientific knowledge acquired from learning and R&D activities. Formally, these activities are
carried out by academic institutions, R&D institutions, and business organizations. Commonly,
investment in knowledge mastery is measured by R&D expenditure (input) and patent (output).
The past reality showed that the government R&D budget in Indonesia once did not differ
much from that of South Korea, around 0.4% of GDP in the early 1970s. Then, since the
1970s and until now, the Indonesian R&D expenditure has been mainly financed from the
government budget and has constantly decreased, down to 0.1% of GDP in 2004, while South
Korean R&D expenditure sharply rose to 2.85% of GDP in the same year, which was mostly
financed by the private sector. Among five ASEAN countries (Indonesia, Malaysia, Thailand,
Vietnam, and the Philippines), only Indonesia failed to experience any increase in acquiring
scientific knowledge through R&D, plus it constantly deteriorated and has occupied the bottom
position since the year 2000.
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Table 1: Technological Capability in Selected Countries
IndicatorsIndonesia South
KoreaChina India Malaysia Thailand Philippines
Past Recently
Technical capability:
Added value per worker inmanufacturing (US$ 1997price)
Share of high technology inmanufacturing added value
(%)
4.24(1990)
3.50(1990)
4.22(2003)
4.30(2003)
48.19(2003)
21.52(2003)
6.59(2003)
19.00(2003)
14.30(2003)
5.08(2003)
17.97(2003)
32.19(2003)
11.01(2003)
4.20(2003)
8.24(2003)
17.80(2003)
Knowledge mastery:
R&D expenditure as % ofGDP
Patents registered inUSPTO
0.39(1972)
9(1993)
0.10(2004)
36(2005)
2.85(2004)
-
0.44(2004)
-
0.78(2001)
-
0.69(2002)
95(2005)
0.26(2003)
28(2005)
0.11(2002)
18(2005)
Capacity to govern:
Policy direction,institutional set-up, and
policy instruments
- see explanation in text -
Intellectual capital:
Public expenditure oneducation as % of GDP
Population with bachelordegree per labor force (%)
Doctoral graduate inscience and engineering
RS&E per million
population
Researcher with doctoraldegree
1.40(1998)
0.47(1990)
-
181
(1988)
-
0.80(2004)
2.70(2004)
245(2004)
282
(2004)
955**(2004)
3.39(2002)
18.50(2000)
3365(2002)
2636
(1994)
56572(2004)
5.29*(2001)
2.70(2000)
-
537
(1993)
-
4.02(2002)
3.30(2000)
6317(2003)
151
(1990)
-
8.10(2002)
-
87
(1992)
3893(2000)
2.67(2002)
8.60(2000)
180(2003)
173
(1991)
-
3.10(2002)
17.60(2000)
-
90
(1984)
Notes: *: Including private expenditure;
**: Public R&D institution only.Sources: IIS (2006); Seong (2005); UNCTD (2003); Kim (2003); Sigurdson (2002); and WB (1999).
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In terms of patent registration in the US Patent and Trademark Office (USPTO), the numberof patents from Indonesia in the 1990s was relatively comparable with some ASEAN countries
(i.e. Malaysia, Thailand, and the Philippines). Nonetheless, the Indonesian position has fallen
behind Malaysia and Thailand since the year 2000. Moreover, in terms of patent registration
in the Indonesian Patent Office (IPO), the number of patents registered from Indonesia also
lagged far behind those registered by foreign countries (see Table 1).
2.3 Strengthening Capacity to Govern
Capacity to govern, by investing in organization, especially in public administration, is reflected
by the course of actions in the form of various policies put into practice by the government.
The generic pattern of governing the technology investment in Indonesia showed physical capital
investment with limited mastery of technology in production engineering and the production
process. Prior to the 1997 economic crisis, the economy grew more from export-oriented foreign
direct investment (FDI) in consumer goods. In the 1990s, the export of manufacturing goods
shifted toward science-based consumer goods, primarily electronic products (Okamoto, 2001).
This reflects a shift toward a limited mastery of production engineering and the production
process. Then, after the 1997 economic crisis, the economy grew more from the stimulation
of domestic consumption rather than by investment. In the future, the stimulation of economic
growth by investment, primarily FDI, is necessary for the expansion of production. Because
domestic demand is growing at a slow rate, export becomes crucial in absorbing the expansion
of production from FDI. Thus, aggressive FDI policy and export incentives have become the
government target after the economic crisis.
Prior to the 1997 economic crisis, Indonesia implemented two lanes of industrial policies:
(i) a policy for strengthening and deepening the industrial structure, which is under the coordination
of the Ministry of Industry (MI) and (ii) a policy for industrial transformation through high-tech
application in strategic state-owned enterprises (SSOEs), which is coordinated by the Office
of the State Minister for Research and Technology (MRT). The development of private industrial
technology capability was directed toward strengthening and deepening the industrial structure.
Indonesia has been acknowledged for its success in building some of the strongest upstream
and downstream industrial structures, such as an integrated textile industry, an integrated wood
processing industry, and integrated petrochemical and fertilizer industries. Nonetheless, Indonesia
has relatively failed in successfully building a strong industrial structure in the automotive and
electronics industries, which up to the present are still downstream because of the limited assembly
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of automotive and electronics components, and consumer electronics.1)
Moreover, the developmentof a high-tech industry in Indonesia, executed by SSOEs, has relatively failed to become the
vehicle for technology-based industrial transformation.2)
After the 1997 economic crisis, the urgent problem was unemployment. In order to abate
unemployment, investments were needed. The state budget deficit reflected a lack of funding
for investments. Given the circumstances of budget stress and unemployment, investments in
labor-intensive projects were more urgent than R&D projects, while technology investment seemed
relatively less important, as reflected by the decrease in the budget ratio for S&T in the government
development budget and the decreasing trend of R&D expenditure in the industrial sector. 3)
With a very limited budget, the government encouraged the participation of private industriesin public R&D activities by introducing incentives for their research activities. The government
also continued its task of enhancing the quality of public R&D activities through programs
called center of excellence and other various research programs for enhancing technological
mastery.
Policy instruments in the form of incentives may be categorized into fiscal, financial, and
other incentives. Fiscal incentives are provided in the form of duty drawbacks and exemptions
to attract FDI and to support the development of industries in the infancy stage. Tax deductions
only concern income tax that can be deducted related to certain R&D costs in industry, such
as purchasing costs for R&D materials and training costs for human resources in carrying outR&D. Unfortunately, until now, tax deductions are not yet extended (although often discussed)
as special incentives in carrying out R&D. The government still views the tax incentives for
R&D as a burden as it has a limited budget under low industrial preference toward innovation;
however, a low industrial preference toward innovation is even more detrimental when it lacks
government incentives. This situation explains the deteriorating position of Indonesia in terms
of R&D expenditure (see Table 1). In terms of financial incentives in Indonesia, they are generally
1) For the situation on automotive industries in Indonesia, see Okamoto (1999). Furthermore, for the situation on
electronics industries in Indonesia, see Gammeltoft (2001), p.108.
2) These ten SSOEs were in the areas of: aircrafts; shipbuilding; railroad wagons; electronics; telecommunication;light weapons and ammunition; explosives; engines and machinery; heavy equipment and construction material;and steel. After the 1997 economic crisis, the position of strategic industries which previously received specialtreatment by the Agency for the Management of Strategic Industries under the coordination of MRT, subsequently
became SOEs without special treatment under the authority of the State Minister for State-Owned Enterprises(MSOEs).
3) The ratio of the governments S&T budget to the total development budget has continued to decrease since the1970s: 3.01% (1970); 1.61% (1980); 1.1% (1985); 0.42% (1990); 0.54% (1995); 0.43% (2000); and 0.35% (2004).As for the level of industrial R&D intensity, it was around 0.064% of the GDP in 1994, then it decreased to0.035% of the GDP in 1999, and was approximately 0.027% of the GDP in 2003. Source: IIS (2006).
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more related with the promotion of R&D in public institutions (supply push), and very littleincentives are utilized by industries in conducting industrial R&D (demand pull). In addition,
financial incentives are generally directed to all scales of technology and not yet for the development
of a specific technology. Other incentives are in the form of regulations and services for the
creation of a conducive environment in stimulating R&D activities in order to protect and accelerate
technological innovation.
To sum up, the capacity of governing the purchase of technology embodied in physical capital
investment does not always mean mastering the technology. The physical capital investment
for the economic growth of Indonesia tended to disregard reinvesting the gains from the growth
for the formation of intellectual capital and the accumulation of scientific knowledge, resultingin a lack of capability to digest and absorb the technology embodied in physical capital investment.
This situation has placed Indonesia in a position that is under the capacity to govern the low
industrial preference level toward innovation through R&D. Meanwhile, other Asian countries
have consistently enhanced their capacities to govern becoming the leader of world class innovative
industry (South Korea); intensifying the competitiveness based on R&D and innovation (China);
becoming the home-base of the global high-tech industry (India); and giving strong support
toward advancing technology intensive industries (Malaysia).
2.4 Increasing Intellectual Capital
The formation of intellectual capital, by investing in people, is indicated by the capacity
of providing a supply of educated people, which can be measured by: education expenditure;
higher educational attainment; science and engineering graduates; doctoral graduates in science
and engineering; research scientists and engineers (RS&E); and researchers with doctoral degrees.
Based on these indicators, the reality of investment in intellectual capital in Indonesia, in comparison
to several countries, still occupied the bottom position.
Public expenditure on education in Indonesia was around 0.8% of GDP in 2004. Some developing
nations (India, Malaysia, the Philippines, and Thailand) have a strong commitment to invest
in intellectual capital, with an education expenditure of over 4% of GDP. Among the ASEAN
countries, the Philippines has the largest portion of the population with a higher educational
attainment, but it still lacks the capacity to supply doctoral graduates in science and engineering.
Just by looking at the number of researchers with doctoral degrees, it is evident that Malaysia
has twice that of Indonesia (see Table 1).
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3. A Model for Technology Investment and Economic Growth
3.1. Economic Dynamics through Innovation
The basic concept of economic dynamics through innovation is the ability of a complex economic
system to evolve in the rapidly changing free market environment; it is a life of surfing at
the edge of competitive waves and cooperation. The secret of surfing on free market waves,
closer to reality, is the adaptive ability for competition and, simultaneously, cooperation (Beinhocker,
1997; Pascale, 2000). In a free market, the competition is a matter of managing the power
to gain self benefit, and at the same time, cooperation is a matter of having the power to manage
the gains for mutual benefit (Davis, 2004). Competitiveness is revealed by the strength of thegenetic seed in the body of the economy as a living system. It would flourish into a strong
and healthy economy by interconnecting elements: (i) the power of investment financing; (ii)
the activities of the economy; (iii) the nutrition of technological innovation; and (iv) the struggle
to evolve in the economic competition (Witt, 1999; Bar-Yam, 1997).
The interaction of those elements is called the model of adaptive innovation policy for
building a strong and healthy economy (Aminullah, 2005). Adaptive innovation is the continuous
enrichment of technology as nutrition for the living economic system to evolve into gaining
the benefit of free market competition. This model explains that a strong economy which lacks
the nutrition of technology may become a sick economy because of vulnerability against shockcoming from the environment of free market competition, such as the one experienced by Indonesia
during the 1997 economic crisis (Keller, 2002). Thus, innovation policy should be developed
and formulated adaptively to soften the pressure of free market competition.
Putting the model to work through a strong economy will be achieved by the sufficient power
of financing to increase the activities of the economic actor, again increasing the economic
activities, which will generate additional financing power (Arthur, 1990). However, such a positive
feedback loop is balanced by the following negative feedback loop: the more expansive the
economic activities, the fiercer the economic competition to evolve in the free market, and the
bigger the drain of financing power; and (ii) a healthy economy is achieved by the sufficient
nutrition of technological innovation in line with a strong economic body. The stronger the
economy, the bigger the funds needed to finance the nutrition of technology, and the more
competitive the economy; again, the bigger the financing power for enhancing economic activities
(see Figure 2).
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Source: Developed by author from the metaphor of a living system (Bar-Yam, 1997).
Figure 2: Model of Economic Dynamics through Innovation
3.2 Model Structure
The interaction between economic activities and economic competition is the race of producers
to capture consumers in the market, which is creating an expected demand. The competing
producers always feel insecure, leading them to strengthen their competitive position by increasingproduction, which creates a market pressure. The bigger the unabsorbed production in the market,
the heavier the market pressure is. This is indicated by the production-consumption ratio. The
bigger the production-consumption ratio the lower the production rate; on the other hand, the
bigger the ratio the higher the consumption rate (B1, B2). Furthermore, the bigger the
production-consumption ratio the heavier the market pressure leading to the lower expected demand.
On the other hand, the higher the expected demand the higher the production rate as well as
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consumption rate (R2, R3). The level of production is determined by production rate, whichis influenced by expected demand and capital efficiency, where capital efficiency is determined
by capital-output ratio and influenced by technological innovation. The higher the capital-output
ratio the lower the production rate, it is reinforced by the lower capital efficiency (R4, R5).
On the other hand, the level of production is also pulled by expected demand leading to an
increase of consumption rate and an increase in the level of consumption (R1, R2).4)
The interconnection among investment financing, economic activities, and economic competition
puts the fund for growth under uncertain circumstances, which can produce unexpected outcomes
in the economy. The uncertain circumstances characterized by the five paradoxes of free market
competition tend to be ignored by producers (Aminullah, 2005). An expected gain coming froman ever increasing expected demand leads to a continuous increase in the production rate (R3,
R4). The production rate is influenced by capital efficiency, which is determined by the capital-
output ratio (R5). Furthermore, the capital-output ratio is determined by the investment flow,
and the ratio will further influence an investment program. The higher the capital-output ratio,
the bigger the pressure to reduce the investment program, leading to a decrease in investment
flow (B3). Unmanageably high capital-output ratio may end with a crisis, as what occurred
in 1997. An increase of the present level of production is determined by investment flow in
the past. The delay effect of investment on production can create the current situation of under
investment, coinciding with a high level of production coming from the previous investment.This was the situation of Indonesia after the 1997 economic crisis. A prolonged situation of
current under-investment will create an extendedly low level of production in the future (R4,
B3). Consequently, the moment of increase in investment will coincide with a lack of production;
thus, an increase of consumers preference to consume will be met by an increase in imported
consumer goods (R3).
The interconnection among investment financing, technological innovation, and economic
competition is the process of managing efficiency and expected demand in the economy, which
can produce a stable growth in the long run. Capital efficiency is determined by capital-output
ratio and is influenced by technological innovation. The higher the capital-output ratio, the lowerthe capital efficiency, but the more intensive the technological innovation, the higher the capital
efficiency. The intensity of technological innovation is determined by the amount of technology
investment in an investment program. The larger the portion of technology investment in the
investment program, the higher the capital efficiency, as well as the higher the consumption
4) The notation of B means the balancing loop indicating the process of negative feedback, while the notationof R means the reinforcing loop indicating the process of positive feedback. For more details see Sterman (2000).
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rate for a high quality of product in the economy (R6, R7).5)
Production growth driven onlyby physical capital investment because of ignoring technology investment will be depressing
due to a lower capital efficiency, while production growth driven by a balance of technology
investment and physical capital investment will advance because of a stable high capital efficiency
that will create a stable growth in the economy (B3, R6)
The whole structure has the following generic behaviors, namely: (i) a strong economy with
the power of investment financing. By focusing on physical capital investment, the feedback
will create a weak economy due to low capital efficiency, which will then result in producing
an unstable economic growth while facing the pressure of economic competition. (ii) a strong
and healthy economy with the power of investment financing and the nutrition of technologicalinnovation. By maintaining a balance between physical investment and technology investment,
there will be multiple feedbacks producing stable and high capital efficiency, which will then
result in producing a stable economic growth even under the pressure of economic competition.
The key is technology investment initiated by the actors in the economy. And while this may
be difficult, it should be activated quickly and immediately in Indonesia.
4. Long-term Forecasting of Technology Investment and Economic Growth in
Indonesia
4.1 Long-term Forecasting of Technology Investment
The past trends of low technology investment have created the present situation of low
technological capability as described in Section 2. How this happened may be seen from the
model structure in Figure 2. The positive feedback between the economy and technology did
not work well. The economic growth was driven less by technology investment, and building
up technological capability was inspired less by economic efficiency and productivity. A small
share of industrial R&D expenditure (around 30% of total R&D expenditure in 2005) was mostly
dominated by less efficient publicly owned industries. The very small share of private R&Dexpenditure is due to the lack of research scientists and engineers working in R&D units and
governments reluctance to provide incentives for innovation in private industries. The situation
5) In the detailed model structure, the indirect link between technological innovation and consumption is bridgedby: (i) consumption augmentation or preferences to consume for high quality of products; and (ii) an adjustmentprocess which needs a two-year time delay to bring the innovative product accepted by the market. In the modelequations, it is represented by CONSMAUGM = Consumption augmentation. For details, see Appendix.
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reflects a weak interconnection among business efficiency, R&D productivity, efficacy ofgovernment policy, and quality R&D personnel produced by higher education.
The possibilities of future technology investment in Indonesia are developed based on the
following assumptions: (i) the positive feedback between economy and technology will work
well where the gains resulting from economic growth are reinvested for cultivating technological
capability, and where the technology investment will affect economic growth in the long run;
(ii) industrys ignorance to innovate through R&D is shifting toward the industrys preference
to invest in innovation for long term business survival; and (iii) the past wishful thinking for
incentives will be a cost for the governments limited budget, which should be shifted toward
positive thinking in the future, that is, incentives should be an investment to create future governmentincome.
The future technology investment in terms of R&D intensity can be reflected by R&D expenditure
as a percentage of GDP. There are three possibilities of the future R&D intensity of Indonesia:
(i) the optimistic scenario would occur under the development of competitive economic growth,
where R&D intensity would reach 1.25% of GDP, with the share of industrial R&D expenditure
reaching 65% in 2025; (ii) the normal scenario would occur under the maintenance of a defensive
economic growth, where R&D intensity would reach 0.6% of GDP, with the share of industrial
R&D expenditure reaching 50% in 2025; and (iii) the pessimistic scenario would occur under
the trap of a moderate economic growth, where R&D intensity would be constant at 0.1% ofGDP, with the share of industrial R&D expenditure standing still at 30% in 2025 (see Figure 3).
4.2 Long-term Forecasting of Economic Growth
Simulation results indicate that whatever economic policies will be adopted by the Indonesian
government to increase the economic growth under a prolonged situation of current under investment,
a delay period is required to achieve a significant effect of investment flow to increase the
level of production in the economy. The economic growth would possibly stay at around at
5-6% in the coming five years. After that time, the economic growth would move in the following
possibilities (see Figure 3).
A scenario of developing a competitive economic growth would be promising if the pattern
of economic growth is driven by a balance of technology investment and physical capital investment.
The technology investment would show its effect on the formation of a strong and healthy
economy with high growth in the next five years. Although economic growth would demonstrate
a slight decrease toward the end of the 2020s, it would still be within normal growth rates.
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High economic growth (approximately 7-9%) would occur under a balance of production andconsumption in the economy. This could happen because an increase in production would be
followed by a rising added value induced by technological innovation, and an increase in labor
productivity and income, which leads to an increase in consumption.
A rising added value occurs not just through an improvement in the management and
organization of a business based on learning and experiences, but is parallel to a significant
increase in R&D expenditure, from approximately 0.1% of GDP in 2004 to 1.25% of GDP
in 2025, with the share of industrial R&D expenditure reaching 65% in 2025. It is expected
in the coming five years that a massively physical capital investment to improve the economic
infrastructure would be in line with the acceleration of technology investment, especially R&Dexpenditure in the industrial sector. The key is to apply the rule of initial condition in a complex
system, that is, an intensive technological innovation by the actors of the economy in the present.
Figure 3: Technology Investment and Economic Growth Scenarios in Indonesia
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The scenario of maintaining a defensive economic growth would likely happen if the patternof economic growth is driven more by physical capital investment than technology investment.
A massively physical capital investment to improve the economic infrastructure would be followed
by moderate technology investment, especially R&D expenditure in the industrial sector. R&D
intensity would rise from approximately 0.1% of GDP in 2004 to 0.5% of GDP in 2025, with
the share of industrial R&D expenditure reaching 50% in 2025. A reasonably normal economic
growth (approximately 5-7%) would create a sufficiently strong but healthy economy in the
long run. Although economic growth would demonstrate a rapid decrease toward the end of
the 2010s, it would still be within a manageable growth. It is because the economy still has
the capacity to defend its stability by easing the pressure of economic fluctuation. This wouldpossibly happen at the end of the 2010s.
The scenario of being trapped in a moderate economic growth would be undesirable but
plausible if the pattern of economic growth is driven only by physical capital investment and
a disregard of technology investment. A massively physical capital investment to improve the
economic infrastructure would not be followed by technology investment, especially R&D
expenditure in industrial sector. R&D intensity would be maintained at 0.1% of GDP and the
share of industrial R&D expenditure would be upheld to 30% until 2025. A low level of capital
efficiency would again occur in the long run, as a result of pushing physical capital investment
with under-investment in technological innovation. The unstably low economic growth(approximately 3-5%) would create a weak and moderate economic growth against the pressure
of economic fluctuation. This would possibly happen at the end of the 2010s.
5. Conclusion and Policy Implications
5.1 Conclusion
The dynamics of past technology investment in Indonesia was on a downward trend (going
up slightly and steadily going down) in the direction of technological backwardness, far behind
neighboring countries formerly on a comparable level, yet some of whom have now acquired
relatively advanced technology.
The model of economic dynamics through innovation reveals the importance of technology
investment strategy and its influences on economic growth. This system dynamics model can
be applied in the understanding of the behaviors of economic growth, technology investment,
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and consumption. The results of computer simulation have shown that: (i) economic growthcan be achieved under conditions of technology investment while it can generally be attained
under the condition of consumption growth; (ii) the fluctuation of economic growth can be
stabilized by technology investment; (iii) the initial condition of technology investment determines
the stability of economic growth; and (iv) constant growth of technology investment will maintain
the stability of economic growth in the long run.
Lastly, the paper concludes that technology investment in the private sector is important for
a stable economic growth in the long run. More specifically, strengthening the R&D investment
of the private sector is a robust strategy to help realize the goal of economic development through
technological innovation. Thus, the strategy of technology investment in Indonesia needs foursimultaneous steps: socio-technical approach, coherent policy directions, supportive institutional
set-up, and workable policy instruments.
5.2 Policy Implications for the Indonesian Government
As stated in section 4.1, the leverage of accelerating technology investment should tackle
the interconnection among four components, namely, business efficiency, R&D productivity,
the efficacy of government policy, and the quality of higher education. A robust technology
investment strategy therefore might be required to obtain a synergy effect among the actors
of technology investment: (i) innovative business enterprises should have strong R&D units
and qualified RS&E supported by effective government innovation policies; (ii) credible national
R&D institution should make inventions and innovations needed by business enterprises with
the support of qualified RS&E and effective government innovation policies; (iii) universities
should produce qualified graduates and advance the development of science, technology, and
innovation in cooperation with business enterprises and national research institutions; and (iv)
effective government policies should be implemented for the promotion of innovative business
enterprises, credible national R&D institutions, and high quality universities. The strategy for
effective government policy thus needs the following integrated actions: approach, framework,
set-up, and instruments.
Applying Socio-technical Approach
The obstacles of technology investment seem to partly have a social dimension in Indonesia.
Technology investment is important for a competitive economy in the long run; however, the
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mainstream of thought tends to disregard the technology investment in Indonesia.6)
A shift inthe mindset is needed by applying a socio-technical approach through continuously advocating
the following ways of thinking in Indonesian society. Strengthening business competitiveness
supported by costly sophisticated marketing is important, but competing based on the value
of advancement in innovation is more important. Productivity improvement by upgrading production
inputs is important, but doing so through the process of technological learning and innovation
is more important. Bearing in mind the cost of public support for S&T activities is an important
consideration, but the public support for S&T activities should increase as an investment for
long term development.
Coherent Policy Directions
Accelerating technology investment needs a policy direction to guide the mechanism of the
interconnection among four components, namely, business efficiency, R&D productivity, the
efficacy of government policy, and the quality of higher education. This interconnection should
work coherently in seeking the goal of economic development through technological innovation,
balanced with economic growth by capital investment. The Indonesian economy urgently needs
to promote technological innovation, particularly in the private sector, by means of transforming
public R&D results into commercial purpose and stimulating the indigenous R&D activitiesinside the firms of private sector. This policy direction should be substantiated by supportive
institutional set-ups and workable policy instruments.
Supportive Institutional Set-up
Indonesia needs a supportive institutional set-up, that is, a set of rules in the game linking
the academia and the business community. With these institutions, R&D policy and innovation
policy may spur the production of knowledge and innovation containing socio-economic relevance.
The institutional settings should facilitate the cooperation among four components, namely, thebusiness community, the R&D institutions, universities, and government policy. An institutional
set-up accelerates the formation of intellectual capital, that is, the rules of cooperation between
6) Some examples of obstacles are the following: business enterprises mostly tend to think technology can be boughtso why take the risk of making the technology; the academic community mostly regards technology as not themain element but a residual factor in productivity improvement; and the government still regards governmentincentives for innovation financing as a cost that should have quick yields for the people, yet do not considerit as an investment for long term benefits.
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research universities and R&D institutions, as well as between research universities and thebusiness community, in increasing the supply of doctoral degrees in science and engineering.
An institutional set-up should also promote techno-entrepreneurship and university entrepreneurship,
namely, the rules of engagement between R&D institutions and the business community, as
well as between research universities and the business community, in increasing the socio-economic
relevance of R&D and innovation activities. Institutional set-ups may bind up protocols to support
the formation of intellectual capital, techno-entrepreneurship, and entrepreneurial university. It
justifies government incentives for innovation financing as an investment for long term benefits,
specifically, adjustments in regulations enforcing the inter-ministerial support of government
incentives for innovation financing.
Workable Policy Instruments
The implementation of the aforementioned rules of the game in the real world needs a set
of appropriate policy instruments. First, the government of Indonesia should increase the supply
of doctoral degrees in science and engineering through the formation of doctoral research by
joint programs between R&D institutions and research universities, and the formation of doctoral
research programs sponsored by the business community. Second, it should also increase the
socio-economic relevance of R&D and innovation activities through the formation of RS&Eexchange programs between academia and the business community supported by government
financial incentives. Third, it should enforce the binding directions for the formation of intellectual
capital, techno-entrepreneurship, and university entrepreneurship through the establishment of
an umbrella institution to support their interconnection.7) Lastly, the government should provide
the financial and tax incentives for innovation in the designated sectors to realize the countrys
long range plans in the field of science, technology, and innovation.
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Appendix: