01 Final Paper(1501 01) A Revised

Asian Journal of Technology Innovation 15, 1 (2007)

Long-term Forecasting of Technology and Economic Growth in Indonesia *1)

Erman Aminullah

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. Introduction Attention 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 for his suggestion(s) with regard to the clarity of this paper, and I am thankful to two anonymous referees who have also 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 and feasible 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 and then 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; 3

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(ii) Singapore, South Korea, India, and China were countries with the ability to maintain the rise 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 the economy; (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 Indonesia Indicators Past

South China India Malaysia Thailand Philippines Korea Recently

Technical capability: Added value per worker in manufacturing (US$ 1997 price)

4.24 (1990)

4.22 (2003)

48.19 6.59 14.30 17.97 (2003) (2003) (2003) (2003)

11.01 (2003)

8.24 (2003)

Share of high technology in manufacturing added value (%)

3.50 (1990)

4.30 (2003)

32.19 21.52 19.00 5.08 (2003) (2003) (2003) (2003)

4.20 (2003)

17.80 (2003)

R&D expenditure as % of GDP

0.39 (1972)

0.10 (2004)

2.85 0.44 0.78 0.69 (2004) (2004) (2001) (2002)

0.26 (2003)

0.11 (2002)

Patents registered in USPTO

9 (1993)

36 (2005)

28 (2005)

18 (2005)

2.67 (2002)

3.10 (2002)

8.60 (2000)

17.60 (2000)

180 (2003)

-

173 (1991)

90 (1984)

Knowledge mastery:

-

-

-

95 (2005)

Capacity to govern: - see explanation in text -

Policy direction, institutional set-up, and policy instruments Intellectual capital: Public expenditure on education as % of GDP

1.40 (1998)

0.80 (2004)

8.10 3.39 5.29* 4.02 (2002) (2001) (2002) (2002)

Population with bachelor degree per labor force (%)

0.47 (1990)

2.70 (2004)

18.50 2.70 3.30 (2000) (2000) (2000)

-

245 (2004)

3365 (2002)

181 (1988)

282 (2004)

87 151 537 2636 (1994) (1993) (1990) (1992)

-

955** (2004)

56572 (2004)

Doctoral graduate in science and engineering RS&E per million population Researcher with doctoral degree

-

-

-

6317 (2003)

-

3893 (2000)

-

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 number of 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 development of 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 industries in 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 out R&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 special treatment 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 government’s S&T budget to the total development budget has continued to decrease since the 1970s: 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 to 0.035% 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 little incentives 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, resulting in 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 the “genetic 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 shock coming 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 increasing production, 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 10

Asian Journal of Technology Innovation 15, 1 (2007)

consumption rate (R2, R3). The level of production is determined by production rate, which is 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 from an 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 capitaloutput 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 lower the 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 notation of “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 only by 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 technological innovation. 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&D expenditure is due to the lack of research scientists and engineers working in R&D units and government’s 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 bridged by: (i) consumption augmentation or preferences to consume for high quality of products; and (ii) an adjustment process which needs a two-year time delay to bring the innovative product accepted by the market. In the model equations, 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 of government 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) industry’s ignorance to innovate through R&D is shifting toward the industry’s preference to invest in innovation for long term business survival; and (iii) the past wishful thinking for incentives will be a cost for the government’s limited budget, which should be shifted toward positive thinking in the future, that is, incentives should be an investment to create future government income. 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% of GDP, 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 and consumption 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&D expenditure 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 14

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The scenario of maintaining a defensive economic growth would likely happen if the pattern of 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 would possibly 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 growth can 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 four simultaneous 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 in the 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 activities inside 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, the business 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 bought so why take the risk of making the technology; the academic community mostly regards technology as not the main element but a residual factor in productivity improvement; and the government still regards government incentives for innovation financing as a cost that should have quick yields for the people, yet do not consider it as an investment for long term benefits.

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research universities and R&D institutions, as well as between research universities and the business 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&E exchange 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 country’s long range plans in the field of science, technology, and innovation.

References Aminullah, E. (2005), “The Needs for Adaptive Innovation Policy under Free Market Complexity: The Indonesian Experiences”, Paper presented in Global Network for the Economics of Learning, Innovation & Competence Building Systems (Globelics-Africa 2005), Tshwane University of Technology, South Africa. Aminullah, E. (2006), “Technology Investment Strategy for Stable Economic Growth”, Paper presented in the 4th Globelics Conference, 4-7 October, 2006, Trivandrum, India.

7) An example of an umbrella institution is the Malaysian Industry/Government Group for High Technology (MIGHT). See UNCTD (2003), pp. 43-47.

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Arthur, B.W. (1990), “Positive Feedback in the Economy”, Scientific American, No. 262. Bar-Yam, Y. (1997), Dynamics of Complex Systems, Cambridge, MA: Perseus. Beinhocker, E. D. (1997), “Strategy at the Edge of Chaos”, The McKinsey Quarterly, No.1. Benedetto, L. and Poglia, E. (2002), “Research Policies in the Triple Helix: The Case of Switzerland”, Paper presented in the Triple Helix Conference, Turin. Davis, M. (ed.) (2004), Toward a New Literacy of Cooperation in Business: Managing Dilemmas in the 21st Century, Institute for the Future, Technology Horizons Programs (Report SR-851-A). Gammeltoft, P. (2001), Embedded Flexible Collaboration and Development of Technological Capability: A Case Study of the Indonesian Electronics Industry, Ph.D. Dissertation, International Development Studies, Roskilde University. Gammeltoft, P. and Aminullah, E. (2006) “The Indonesian Innovation System at a Crossroads”, in Lundval, Bengt-Åke, P. Intarakumnerd and Vang, J. (eds.) (2006), Asia’s Innovation in Transition, Aldershot, UK: Edward Elgar. Hakim, L. and Aminullah, E. (2006) “Towards Effective Innovation Policy in Indonesia”, Paper presented in Asian Conference on Technology Transfer organized by APCTT, Korea. Indonesian Institute of Sciences (IIS) (2006), Indonesian S&T Indicators 2006, Jakarta: LIPI Press (in Indonesian). Keller, W. W. and Samuel, R. J. (2002), Innovation and Crisis in Asia, MIT Japan Program, Working Paper 02.03. Kim, C. K. (2003), Industrial Development Strategy for Indonesia: Lessons from Korean Experiences, Working Paper, UN-SFIR, Jakarta. Mani, S. (2002), Government, Innovation and Technology Policy: An International Comparative Analysis, Cheltenham UK: Edward Elgar. Okamoto, Y. and Sjoholm, F. (1999), “Protection and the Dynamics of Productivity Growth: The Case of Automotive Industries in Indonesia”, Working Paper Series in Economics and Finance, No. 34. Okamoto, Y. and Sjoholm, F. (2001), “Technology Development in Indonesia”, EIJS Working Paper No. 12. Pascale, R. T., Millemann, M. and Gioja, L. (2000), Surfing the Edge of Chaos: The Law of Nature and the New Laws of Business, New York: Three Rivers Press. Seong, S., Popper, S. W. and Zheng, K. (2005). Strategic Choices in Science and Technology: Korea in the Era of Rising China, Rand’s Centre for Asia Pacific Studies. Sigurdson, J. and Polanka, K. (2002), “Technological Governance in ASEAN: Failings in Technology Transfer and Domestic Research”, Institutional Change in Southeast Asia, Stockholm School of Economics, Working Paper No.162. Sterman, J. (2000), Business Dynamics: Systems Thinking and Modeling for a Complex World, Irwin/ McGraw-Hill. Syarif, N. (1989), Technology Atlas: A Framework for Technology Development Based Development Planning, Vol. 6, Bangkok: UNESCAP. UNCTD (2003), Investment and Technology Policies for Competitiveness: Review of Success Countries’ Experiences, New York: UNCTD. Witt, U. (1999), “Bio-economics as Economics from a Darwinian Perspective”, Journal of Bio-economics, Vol. 2, No. 1. World Bank (1999), World Development Indicator 1998, Washington, D. C.: World Bank.

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