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[TiVA]: Indonesia's Productivity Can be Improved through Firms' Innovation

2 September 2016

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Indonesia could increase its productivity and achieve higher economic growth if its firms adopted more innovation, according to a study by Professor Gunther Schulze of the University of Freiburg. Professor Schulze presented the finding of his study during a two-day workshop organised by the Economic Research Institute for ASEAN and East Asia (ERIA) on In Making Indonesia Internationally Competitive in June 2016.

Professor Schulze's paper titled The Role of Small and Medium Enterprises in Improving Indonesia's Productivity assessed innovation in Indonesia's manufacturing and service firms through the application of the World Enterprise Survey 2015. The study also investigated the main obstacles to productivity enhancement and firm growth in Indonesia. The World Enterprise Survey showed that small and medium firms were more likely to innovate, while large firms were found to be less innovative. However, this theory was not applicable in Indonesia since most firms of any size were seen to be lacking innovation.

Citing Keller, Xaneloo et al., Schulze argues that innovation creation, adoption, and diffusion can be impeded by either external or internal barriers. Their paper analysed both the internal and external obstacles to innovation in Indonesian firms. They considered a country's political and economic condition namely poor governance and infrastructure as external factors, while internal factors stemmed from a firm's capacity to develop and adopt innovation, which required skills and financial support.

During the discussion session following Professor Schulze's presentation, Ari Kuncoro from the University of Indonesia said that most firms in Indonesia have found new processes to more efficiently produce products but are not developing new or improved products because the costs of creating new products are too high. Smaller firms also face regulatory burdens that put a damper on their willingness to innovate. Kuncoro gave an example of a small firm located in a remote village that found innovation difficult due to the lack of financial and governmental support. However, this situation did not apply to small firms who are working for bigger firms. This showed that innovation in the country has been primarily driven by large and medium firms that have the means to invest financially in the innovation process.

Nevertheless, Professor Schulze's study also found that medium and large firms faced obstacles when they innovate, in the form of administration or regulatory issues as well as infrastructure and skilled labour. In order to overcome these obstacles, the government must develop policies that address the needs of firms to foster technological and organizational change. Additionally, they must improve the education system and infrastructure to ease the innovation process.

The two-day workshop was attended by 16 economists and academes from across multiple countries, including Prof Fredrik Sjoholm (Lund University), Prof Hal Hill (Australia National University), Prof Christopher Findlay (University of Adelaide), Prof Gunther G. Schulze (Universitat Freiburg), and prominent researchers from Indonesia. Former Indonesian Trade Minister Professor Mari Elka Pangestu and ERIA Trade Economist Dr Lili Yan Ing are the project leaders. The study will be published in ERIA-Routledge Development Series in the second quarter of 2017.

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