01 final paper(1501 01) a revised

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Asian Journal of Technology Innovation 15, 1 (2007)

1

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

([email protected])

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:

01 final paper(1501 01) a revised

Documents