Pursuing Complexity, Not Just Growth

Statistics Indonesia (BPS) has just announced economic growth of 5.47% year on year in the third quarter of 2026. About a month earlier, Vietnam reported growth of 9.95% for the same period. This comparison needs to be treated carefully: Indonesia’s economy is much larger, while Vietnam is in a catch-up phase.

The gap in growth rates is not meant to suggest that Indonesia is “losing”, but rather to indicate the direction of competition: which country is more committed to building an industrial base, attracting high-tech investment and securing strategic positions in global value chains (GVCs).

It is worth emphasising that in the modern era competition is no longer simply about how quickly gross domestic product (GDP) expands, but about the depth of a country’s industrial structure and the technological capabilities embedded within it. Hausmann, Hwang and Rodrik (2007) found that countries exporting more sophisticated goods tend to grow faster in subsequent periods.

Vietnam and the dilemma of becoming a global assembly hub

Vietnam’s growth rate is impressive. In the first nine months of 2026, its exports surged 24.5% to US$434.3 billion. But imports also soared 36.7% to US$453.7 billion, leaving a goods trade deficit of US$19.4 billion. The deficit narrowed to about US$12.1 billion in the first ten months, thanks to surpluses in September and October.

This deficit is not a sign of economic weakness. Production inputs account for 94.1% of Vietnam’s imports. Realised foreign direct investment (FDI) also reached US$21.1 billion, its highest level in five years, with 82.6% flowing into manufacturing and processing.

Nevertheless, this trade structure warrants scrutiny. Computers and electronic products are Vietnam’s largest export category, at about US$124 billion. Ironically, they are also the largest import category, at about US$189 billion, resulting in a sectoral deficit of as much as US$65 billion.

Large exports with high import content mean that the value added retained domestically is far smaller than gross trade figures suggest. Foreign-invested enterprises, including those operating in crude oil, account for 80.7% of exports, while domestic firms account for only 19.3%. The World Bank (2024) has also noted that the share of Vietnamese firms connected to global value chains fell from 35% in 2009 to 18% in 2023.

Vietnam has successfully become an important assembly hub for the world’s factories. This is a common early stage of industrialisation. The next challenge is to increase domestic value added and the technological capabilities held by national businesses.

Indonesia’s economic complexity: escaping the commodity trap

One relevant indicator for assessing the quality of economic transformation is the Economic Complexity Index (ECI). The index combines the diversity of a country’s export products with how few other countries are able to produce them. Products that only a small number of countries can make reflect more complex productive knowledge (Hidalgo and Hausmann, 2009).

According to 2024 trade data in the Atlas of Economic Complexity (Harvard Growth Lab), Vietnam ranked 45th with a score of 0.63, while Indonesia ranked 69th with a score of 0.23. Over the past five years (2019–2024), Vietnam rose ten places, while Indonesia fell eleven. The Atlas links Indonesia’s decline to a lack of export diversification.

The ECI should nevertheless be interpreted critically. It is calculated using export data by country of origin, not company ownership, and therefore includes the production capabilities of foreign firms operating in a country; it does not automatically reflect those of local producers. Nor is the ECI a measure of domestic value added (DVA). It is a useful starting point, not a standalone indicator.

The lesson for Indonesia is not simply to attract more foreign factories to assemble goods domestically, but to ensure knowledge spillovers reach national companies. A study by Javorcik (2004), based on data from Lithuania, found that productivity spillovers from foreign investment mainly flowed through links with upstream local suppliers, rather than through competitors in the same sector.

This is where Indonesia faces a structural challenge. Manufacturing accounts for about 19% of GDP and was the largest source of growth in the third quarter of 2026, contributing 1.20 percentage points. But a large manufacturing share does not necessarily mean high economic complexity.

The non-oil and gas trade surplus of US$34.2 billion in January–September 2026 was driven mainly by animal and vegetable fats and oils (US$29.3 billion), mineral fuels (US$21.4 billion), and iron and steel (US$14.0 billion)—none of which are high-tech products. Footwear (US$4.9 billion) was the only labour-intensive product among the five largest contributors to the surplus.

With a structure like this, high export volumes can coexist with a decline in economic-complexity rankings. Downstream processing that stops at intermediate products may increase export value, but it does not necessarily raise overall economic complexity.

Policy agenda

For growth to go hand in hand with stronger national industrial capabilities, the government needs to pursue four measurable policy priorities.

First, establish predictable, performance-based rules. Requirements for knowledge transfer and domestic supplier participation should be transparent and measurable. Fiscal incentives such as tax holidays or tax allowances should not be granted without conditions; they should be tied to clear key performance indicators, such as spending on components from local suppliers and the number of local technical workers, with regular published evaluations.

Second, measure success across multiple dimensions and promote research partnerships. Downstream processing should not be assessed solely by investment figures or smelter capacity. The government should publish data on domestic value added, the share of local suppliers, labour productivity, patents and research. This should be supported by the revitalisation of industrial vocational education and research and development (R&D) partnerships between foreign investors, universities and domestic research institutions.

Third, make the Domestic Component Level (TKDN) policy realistic and phased. TKDN should not become an administrative obstacle that merely fulfils formal quotas. Rules should be introduced gradually, in line with the readiness of supporting industries, and paired with vendor development programmes. Imposing quotas without adequate supplier capacity risks raising production costs and reducing the competitiveness of finished products.

Fourth, integrate micro, small and medium-sized enterprises (MSMEs) into supply chains. MSMEs should not be treated merely as objects of social empowerment. Through standardisation, quality certification and access to finance, they should be developed into competitive and reliable producers of precision components for large industries.

Trade openness complements this agenda. Indonesia completed substantive negotiations on the Indonesia-European Union Comprehensive Economic Partnership Agreement (IEU-CEPA) in September 2025. The government aims to sign it on 21 November 2026 and bring it into force in early 2027, when the European Union’s preferential tariff facilities for Indonesia under the Generalised Scheme of Preferences (GSP) expire.

However, market access does not automatically improve competitiveness; national companies must be able to meet increasingly stringent standards for quality, sustainability and traceability.

Ultimately, Indonesia does not need to copy Vietnam’s model blindly. That model is not without risks either. In September 2026, the Asian Development Bank (ADB) warned that rapid growth in investment and credit could increase financial vulnerabilities. What Indonesia should adopt is a consistent commitment to building an industrial ecosystem and permanently linking foreign investment with domestic suppliers.

High growth is an important foundation, but the depth of the industrial structure and the complexity of production are crucial to long-term economic resilience. With an integrated industrial ecosystem and strong research and human resources, Indonesia has an opportunity to escape the middle-income trap and become an advanced, self-reliant industrial nation.