The Value-Added Challenge Behind Manufacturing Growth

On paper, Indonesia’s manufacturing sector closed 2025 with convincing results. The sector grew 5.3 per cent year-on-year, up from the previous year’s 4.43 per cent. Its contribution to economic growth was the highest in four years.

Yet the figures leave a lingering question: why has such seemingly impressive performance not fully translated into sustained improvements in value-added and productivity?

The latest World Bank report, entitled “Country Growth and Jobs Report: Indonesia”, released at the end of January 2026, notes that over the past 15 years, Indonesia’s investment ratio has remained high, averaging around 30 per cent of gross domestic product (GDP).

However, approximately 70 per cent of capital flows over the past five years have been directed towards low value-added manufacturing sectors.

Investment has been heavily absorbed by processed food industries, basic metals, and accommodation and food services, driven by commodity cycles. Meanwhile, export-oriented and higher-technology sectors such as automotive, electronics, pharmaceuticals, and information and communications technology are no longer the primary magnets for capital.

This contrasts sharply with the situation from the early to mid-1990s, when trade reforms and deregulation spurred the expansion of high value-added industries.

The World Bank notes that increasing market restrictions in recent years have contributed to a 20 to 30 per cent decline in Indonesian manufacturing productivity compared with its heyday in the early 1990s.

Excessive protectionism has been assessed as shielding major players and state-owned enterprises from competition, concentrating economic activity in low value-added manufacturing and services sectors.

Nevertheless, the World Bank acknowledges the various steps the Indonesian government has taken to improve the investment climate and the quality of investment absorption, including the Job Creation Law and other business regulatory reforms.

To ensure manufacturing growth translates into public welfare, the World Bank recommends that the Indonesian government pursue policies strengthening business competition, improving resource allocation efficiency, developing modern services sectors, and accelerating digitalisation to drive structural transformation.

From the business community’s perspective, conditions on the ground do not entirely match the optimism of macro-level data. Shinta Kamdani, Chairwoman of the Indonesian Employers’ Association (Apindo), assessed that whilst Indonesia’s economic growth has been relatively solid in aggregate terms, the recovery has been uneven.

Of the 16 manufacturing sub-sectors, nine grew below the national average throughout 2025. The textile industry, for instance, grew only around 3.5 per cent. Footwear managed just 3.3 per cent, and furniture only 1.6 per cent. The wood and rattan industry contracted by 3.29 per cent, whilst rubber and plastic goods fell by 4.07 per cent.

According to Shinta, macro-level figures do not fully reflect the operational challenges faced by industry. Logistics costs, energy costs, and lending interest rates remain higher than those in competing countries in the region.

“Additionally, there are burdens that are difficult to measure directly, such as convoluted licensing processes, overlapping regulations, and policy inconsistencies between central and regional governments,” said Shinta at the Indonesia Economic Outlook 2026 event at Hotel Kempinski, Jakarta, on Tuesday (10 February 2026).

Starting a business, for example, still takes approximately 65 days. In several other countries, the same process can be completed in just one day. This disparity erodes competitiveness.

Apindo is pushing for more effective deregulation at the implementation level, accompanied by regulatory impact assessments, public consultation with business actors, and cross-institutional policy consistency. Without fundamental reforms, growth is feared to be only short-term and insufficient to strengthen the national industrial structure.

The surge in investment recorded throughout 2025 brought optimism, but also raised questions. Data from the Ministry of Investment and Downstreaming (BKPM) showed that investment realisation reached Rp 1,931.2 trillion over the past year.

This figure increased by Rp 217 trillion, or 12.66 per cent, compared with the 2024 figure of Rp 1,714.2 trillion. In nominal terms, this represents a significant leap. However, when linked to job creation, the picture is not entirely aligned.

Throughout 2025, investment of that value absorbed 2,710,532 workers. On average, creating one job required investment of approximately Rp 712.48 million. This investment requirement was far higher than in 2024, when investment absorbed 2,456,130 workers at an investment cost per person of approximately Rp 698.1 million.

In other words, the investment cost of creating one job increased by approximately Rp 13.8 million within a year. The ratio of labour absorption to investment realisation has declined. Investment value grew positively, but its effectiveness in absorbing labour relatively weakened.

This phenomenon reflects how the surge in capital flows has not been fully aligned with the strengthening of labour-intensive sectors. Amidst rising investment and improving sectoral growth, the effectiveness of job creation and the direction of economic transformation have become issues that cannot be ignored.

The challenge is not merely maintaining the pace of growth, but ensuring that growth is of high quality, absorbs labour broadly, and drives a shift in the economic structure towards higher value-added sectors.

Ariyo DP Irhamna, a researcher at the Institute for Development of Economics and Finance (Indef), highlighted the declining trend of manufacturing value-added contribution to GDP, from 22.1 per cent in 2011 to 18.67 per cent in 2023.

This decline reflects falling labour productivity in the manufacturing sector. Each worker produces relatively less value-added than a decade ago. Incoming investment has not yet altered the industrial structure, which remains dominated by natural resource-based products also exported by many other countries.

“The future industrialisation strategy needs to focus on sectors that already have a domestic technology mastery base. This way, productivity improvements can be driven without excessive dependence on foreign technology transfer,” he said when contacted on Thursday (19 February 2026).

Several sectors deemed to have potential include agro-industry based on biotechnology, supported by domestic research institutions for palm oil, rubber, and cocoa.

Additionally, the defence and aerospace industry, developed by state-owned enterprises such as PT Pindad, PT Dirgantara Indonesia, and PT PAL Indonesia, is considered to have broad spillover effects into the civilian sector, provided it is supported by consistent domestic procurement.

In the health sector, strengthening generic and standardised herbal pharmaceuticals is also viewed as strategic. State-owned enterprises such as Kimia Farma and Indofarma already possess generic production capacity that can continue to be scaled up and innovated.

The ambition of the Prabowo Subianto administration to revitalise national industry faces formidable challenges. The task is not simply to maintain growth momentum, but to ensure that growth delivers structural transformation.

Amidst increasingly intense global competition, Indonesia is called upon to move away from dependence on commodities and low-cost manufacturing towards technology-based, high value-added industries. Without this shift in direction, growth risks remaining a series of figures that have yet to fully strengthen the foundations of long-term economic prosperity.