Constraints on technology (2)

By David Ray

How does Indonesian industry move up the technological ladder? This is the last of two installments of an article attempting to isolate the four key issues which explain why Indonesia is losing the regional technology race and what the implications are.

BANDUNG (JP): 3) Foreign Investment: According to many industry surveys and studies foreign investment (FDI) has played a very minor role in Indonesia's industrial technological development. In the case of joint ventures, foreign partners tend to transfer only enough technology to the local company to ensure efficient production operations.

All design or innovative work tends to be carried out by the foreign partners in their home base where the research personnel and infrastructure are of higher quality. Licensing arrangements on the other hand tend to engender a higher degree of innovation in the local firm. This is because having bought the technology, the local firm must adapt and modify the technology itself to suit local supply and demand conditions and cannot rely upon the technical know-how of a foreign joint-venture partner.

Two key factors prevent Indonesia from deriving greater technological benefit from FDI. The first is the low skill and education levels of Indonesian workers as discussed above. The second is the policy environment within which FDI must operate. Given Indonesia's long and painful period of colonial rule, FDI in the post-independence period has always been a controversial matter. Throughout much of the 1970s and 1980s strict controls on FDI prevented the development of a number important industries in Indonesia; industries that played a key role in the industrial technological development of regional competitors such as Malaysia, Singapore and Thailand.

The best example in this regard is the case of Fairchild and National Semiconductors who simply moved all Indonesian operations abroad in 1985 after failing to get government permission to upgrade production facilities.

This was a major blow to Indonesia's technological development as it is the electronics and computer industries that have driven Asia's move toward more knowledge-based production over the past 2 decades. 4) R&D Institutions and Government Technology Policy:Public R&D institutions have a crucial role to play in developing certain types of technology or knowledge that benefit the economy as a whole. Private firms are usually reluctant to invest in these types of technologies because of their inability to internalize (keep secret) the economic benefits of their research.

In a development context R&D institutions have another important role in helping the manufacturing sector -- particularly small to medium producers -- to effectively use modern technologies.

In Indonesia the institution charged with this latter role is the Badan Penelitian dan Pengembangan Industri (BPPI -- Agency for Industrial Research and Development) of the Ministry of Industry. Faced with serious resource constraints, however, this institutions has yet to prove effective in raising the technological capacity of the of the manufacturing sector.

The lion's share of the government's R&D budget is taken by LIPI (Lembaga Ilmu Pengetahuan Indonesia or the Indonesian Institute of Sciences) and BPPT (Badan Pengkajian dan Penerapan Teknologi or the Agency for the Research and Application of Technology).

However, according to Dr. The Kian Wee (a well known LIPI based economist) these two institutions have yet to develop any significant links with the private sectors. Much of their resources are instead, he argues, channeled to the needs of the 10 strategic state owned industries (BPIS) which operate under the umbrella of BPPT.

The issue of generating linkages with the private sector is a problem not only for the institutions mentioned above but also for the many ministerial and university based research centers.

It is part of a more wider problem, I will argue, concerning the type of policy approach employed by the government to generate domestic technological capacity. Unlike most other countries (both developed and developing) technological advancement in Indonesia is seen to be principally the domain of the state.

About 80 percent of all R&D funding comes from the state whilst 85 percent of all engineers and natural scientists are employed by the government or universities. Similarly, the huge inflows of budgetary funds into the strategic industries are indicative of the government's commitment to make these state- owned industries the backbone of national industrial growth.

Clearly the government sees itself as the principal promoter of technological development. Technological development is clearly an important element of economic development. The two however should not be equated.

The development of technology must be driven by economic stimuli for it to generate economic growth. Consider the case of Japan and the former Soviet Union. Technology in certain areas of the former Soviet economy could match if not exceed that of the United States. However, it was the ability of the Japanese to effectively market and commercially apply much lower forms of technology that enabled it to become a global superpower.

Indonesia, however, is yet to develop the right kind of incentive structure that will foster innovation. For a country to succeed economically, technological development needs to be driven by the profit-seeking behavior of entrepreneurs and businesses in a competitive environment.

In Indonesia, however, technological development continues to be driven by politicians and the few scientists employed by government within a non-competitive environment. This suggest that Indonesia will continue to be left behind by her regional competitors in the race toward higher technology-based production.

The writer is a doctoral candidate at the Centre for Strategic Economic Studies, Victoria University, Australia. He is currently in Bandung carrying out research towards his PhD.