Imports, Industry and Innovation
Operators move containers at the Jakarta International Container Terminal (JICT), Tanjung Priok, Jakarta, on Friday (20/10).
Entering 2019, Statistics Indonesia (BPS) released Indonesia\'s international trade performance data, which was quite surprising: in 2018 the trade balance deficit was quite deep, at US$8.57 billion.
It was caused mainly by the oil and gas deficit of $12.4 billion. For non-oil and gas, there was still a surplus of $3.84 billion. Even though the absolute value of the non-oil and gas deficit was lower, we should not ignore it because the non-oil and gas surplus fell sharply from $20.4 billion (2017) to $3.84 billion (2018).
It is also very vital to seriously deal with the slowdown in non-oil and gas performance, especially because of the strategic aspects of the sector, particularly the manufacturing industry, in the context of economic growth, employment and determining the competitiveness of a country.
The slowdown in the 2018 non-oil and gas export surplus, which was recorded at $5.49 billion, was mainly affected by the slowdown in global economic growth and the effects of the US-China trade war. However, amid the issue of this slowdown, our non-oil and gas imports have actually risen dramatically to $26.15 billion (2017-2018). If seen from the country\'s sources, it turns out that the biggest source of our deficit came from China, which increased $6.67 billion, up by 47 percent (2017-2018).
This is relevant to an by Anwar Nasution (Kompas, 9/1/2018), which said that in Tanah Abang Market, a lot of Muslim clothing and headscarves being sold are from China. In Senen Market there are also many kinds of imported products from China, especially household goods. The rise of imported products from the Bamboo Curtain country is mainly due to lower prices. This is made possible by the economic scale factor in the global marketing network so that it can cut down the fixed costs and also be supported by efficient logistics and highly coordinated and planned policy support.
Therefore, this historical deficit should be a strong alarm for us, especially considering that the invasion of imported products is still potentially high.
Several results of the World Bank study (2015) and the writer et al (2016) concluded some key notes regarding the structure of the domestic manufacturing industry. First, judging from the composition of national non-oil and gas exports for at least the last 10-20 years, the condition tends not to experience much changes and the majority is still dominated by raw materials and intermediate goods, such as palm oil/vegetable fats, mining products, intermediate goods and low-tech manufacturing goods. On the contrary, our non-oil and gas imports are still dominated by raw materials, auxiliary materials and capital goods, which have higher added value than our export products.
Moreover, in the national manufacturing industry which is a global production network (GPN) or global value chain (GVC), even though it is export-oriented, its raw materials and supporting materials still depend on imports, especially from the parent companies. Second, for the past 30 years Indonesian export products have not been stuck. The type of products produced is relatively lagging behind Thailand and Malaysia. Third, there are indications that Indonesian product space is getting away from its core, meaning that we are experiencing a decrease in the number of products with comparative advantages in the “dense forests” (machinery, electronics, garments, textiles and furniture) so that suppliers in the domestic market are also decreasing. This advantage turns out to have been widely "taken over" by China (Ridhwan et al., 2017).
Main challenges
With regard to the 2018 deficit, the potential for import invasion in 2019 will probably be repeated, while the challenges for national industries to enter the export market will be increasingly complex. However, we cannot give up and even have to be strategic and creative to make breakthroughs in advancing the industries. Paying attention to the Trade Ministry report (2018), there are a number of large, medium and small domestic companies that have been able to penetrate trade abroad amid the current turbulence in the world economy.
Learning from the "export champion" companies of the Trade Ministry version, there is one vital factor in determining success while competing in the international market, namely
innovation. At the company level, the application of innovation can be seen from the products produced and the process or combination of both. Product innovation is a significant product update or improvement, while process innovation includes improvements in manufacturing processes, logistics-distribution models, marketing management, and organizational management. The innovative exporters have several levels of technology, both simple and high-level, such as exporters of fake eyelashes, processed food and organic herbal products, classy furniture products from processing of used wood, up to manufacturers of world-class parts and tires.
However, according to the World Bank (2018), the number of innovative domestic companies is only about 8 percent of the total industrial population; or less than the Philippines 21 percent and Vietnam 19 percent. In fact, empirical evidence shows that innovative Indonesian companies tend to have relatively higher levels of labor productivity, around 2.15 times compared to non-innovative ones. Moreover, theoretically and empirically, companies with high productivity also tend to succeed in the export market (Wagner, 2007; Ridhwan, 2018). Relatively, the value added of manufacturing labor in Vietnam is around 3.5 times higher than Indonesia (WBES, 2015), which is relatively in line with the higher share of manufacturing exports to Vietnam\'s GDP which is higher by about five times (BPS, 2015).
Why are innovations, especially domestic industries, difficult to develop or relatively left behind compared to the neighboring competitors? Besides industry, research products from universities and research institutes published in peer-reviewed international journals (also as proxy for innovation) have been relatively left behind compared to Singapore and Malaysia in particular (Regulation of the Research, Technology and Higher Education Ministry No 20/2017 was issued to get rid of this lag).
The government\'s efforts to encourage innovation development have actually begun for relatively a long time, especially seen through the launch of the National Innovation System (Sinas) and Regional (Sida) policy program. However, many experts said that its implementation has not been satisfactory. Lakitan (2013) outlines a number of key challenges/problems related to the national innovation system.
First, adoption of indigenous technology is still relatively low because it is still oriented to the supply side or more based on the preferences of technology developers rather than the needs of corporate users. Secondly, the demand for technology by companies is relatively limited because most domestic manufacturing companies depend on technology from overseas holding companies or it can be because they are not yet available locally. The majority of domestic companies also still view research-based technological innovations as having high costs and high risk, so they feel comfortable by simply running a business on a trade or just being an assembly plant.
Third, the absence of equality of paradigms that "need each other" between technology developers (research institutions and universities) and technology users (companies). Fourth, university academics and public research institutions still only focus on their own research interests (the "ivory tower" syndrome) rather than the actual problems faced by companies.
Likewise, there are also a number of challenges in terms of enablers for the development of research-based technology innovation in the country, such as the quality of education and human capital development policies, incentives for researchers and academics, budget allocation, socio-cultural factors, and strong political will of the central and regional governments. With regard to education, the results of the assessment of students\' abilities on Mathematics, Science, and reading (verbal) subjects as indicated by the Program for International Student Assessment (PISA) rankings, Indonesia in 2015 was ranked 62nd out of 65 countries; Thailand 55th and Vietnam was fantastically in the 21st position.
Many studies indicate that this is mainly because our education system is relatively limited in STEM (science, technology, engineering, and math) subjects and tends to be more oriented to the social sciences even though it can be understood also because the supply of employment generally comes from the service industry (trade and finance ) and extractive economic sectors rather than manufacturing. It is further added that, in terms of culture, there is public opinion that working in research or "R&D" is a minor position or the career there is considered difficult to develop.
Innovation, key strategies
Finding an answer to the tangled threads or complex problems of technological innovation is certainly not easy, especially to find ideal solutions to a number of challenges/problems, especially in large-scale industries like the one above, because they will surely need the support of large resources. The following are some notes regarding innovation strategies that focus and can be done immediately (quick-wins).
First, as the number and strategic role of small and medium industries (IKMs) in the economy, in besides the more flexible business scale for adjustments to changes, the policy strategy to support the capacity of innovation (technology) has high priority for the IKMs to be immediately carried out. Integrated policy support, especially in terms of technical know-how assistance (collaborating with universities/research institutions) and government budget allocations are certainly highly expected. Incentives for researchers and research institutions need to be improved. The contribution of studies from researchers in the development of IKMs or other strategic economic sectors can also be obliged, in addition to journal publications with Scopus standards and other attractive forms of incentives. However, of course there must be improvements in incentives for the researchers as well. Private companies or investors conducting innovative researches can be given incentives such as tax breaks or tax holidays.
Second, foreign manufacturing industries, such as automotive, which relocate their factories domestically, especially through direct investment (greenfield), can be required to collaborate with IKMs as suppliers of spare parts. The problems of standardization and product quality that have been complained by large investors can be overcome, especially by providing technical assistance, both by the government and foreign investors. This is expected to enable local industries to also grow from the
knowledge spill overs from the foreign investment and encourage economic progress in the region/country. Moreover, there should be apprenticeship opportunities for engineers and middle managers to principal companies, not only to technical workers.
Third, although a number of studies such as Blalock and Veloso (2007) concluded that imports in the context of vertical integration are the main source of technology transfer, in reality in our country the technology transfer seems to take place mainly low-tech products and this is evident from the type of products exported in the past decade, where there have not been many changes. Based on the experience of a number of countries, technological development by a country tends to be sluggish if it is not accompanied by additional innovations, among others by replicating parent company products and being marketed under their own more competitive brands. An example of China\'s experience that is successful in building a digital-based telecommunications industry is not far from this strategy, namely a combination of principal investment, transfer of technology and ATM (observe-imitate-modify) techniques.
Moreover, with the recent discovery of computerized replication techniques, known as Model-Based Definition and Additive Manufacturing such as: 3-D printing, it will certainly be very helpful if introduced to IKMs to innovate in making models/prototypes of IKM craft products or other home industry products, such as children\'s toys. The strategy of Intel (manufacturer of memory chips) with the copy-exactly technique has kept it to remain in the tight competition from similar products from Japan and Korea (WEF, 2012). However, the copycat strategy is only short-term, the culture of innovation is certainly more sustainable in the long run.
All of the above-mention quick-win strategies need ecosystem which supports each other so that structural reforms need to be carried out comprehensively, especially human capital development policies, policies in the industrial field, and support for access to finance. Above all, there must be political commitment or a share vision in the future to advance sciences and technological innovation as the main engines for the nation’s economic development. (MHA Ridhwan, Deputy Director at Bank Indonesia and Lecturer of the Doctoral Program in Economics)
