the writer is A former research fellow- ICT industry analyst at the JRC Directorate Growth and Innovation, European Commissions.
The Indonesian government has just enacted the new Industry Ministry Regulation No. 65/2016 on local content. Information and Communications Technology (ICT) companies, especially those producing laptop computers, smartphones and tablets, are the main targets. They are now required to meet a threshold of 30 percent domestic content in terms of hardware, software or investment.
In response, Apple, a United States giant tech company headquartered in Cupertino, California, has pledged to dedicate funding of about US$44 million to support a three-year Research and Development (R&D) program in Indonesia. In return, Apple now has the right to market all types of its iPhone in the country.
Apple lags slightly behind its competitors. Samsung is now leading the Indonesian smartphone market, obtaining a quarter share, followed by China’s new baby Oppo with one-fifth. Thus, for some, the R&D policy offered by Apple might be seen solely as an effort to facilitate penetration of its latest iPhone 7 in Indonesia, the largest market in Southeast Asia.
However, irrespective of its motives, we can still perceive the initiative as a big milestone that will potentially re-address the pathways of the Indonesian economy toward a more knowledge based-nation.
Previous studies have defined the importance of investment in R&D and human resources. Renowned economist Paul Romer (1990) explains these two aspects are essential elements for countries aiming to achieve a greater economic output. Robert Barro (1991) empirically studied the performance of 98 countries from 1960 to 1985 and assured poorer countries they could catch up with richer nations provided that they invested in a higher level of human capital.
Therefore, Apple’s commitment has sent Indonesia at least three important signals.
First, R&D has long been missing vocabulary. Indonesian R&D performance remains very, very weak. At the country level, we trail far behind other developing nations, let alone advanced ones.
The ratio of Indonesia’s gross R&D expenditure (GERD) to gross domestic product (GDP) in 2010 was only 0.08 percent, the lowest among Asian countries. Taiwan, Japan and Korea are not only leading the region but also the world. Mulyanto (2014) recapped that Indonesia’s ratio was among the lowest in ASEAN, compared to Thailand (0.25 percent), the Philippines (0.11 percent) and Vietnam (0.19 percent)
At the industry level, Indonesian companies have disappeared from the map of the 2,500 most R&D intensive companies in the world (European Commission, 2015).
There is not even one Indonesian company on the list, against 24 Indian firms, six each in Hong Kong and Singapore, three Malaysian, a Thai and couple of hundred Japanese, Chinese and Taiwanese companies combined. Just to remind us, Indonesia is the third most populated country in Asia and fourth in the world.
Second, Indonesia as a knowledge economy is still quite up in the sky.
The knowledge economy is all about innovation. The Oslo Manual defines R&D as input for innovative capabilities. Consequently, the amount spent on R&D by a country or a company should support both technical and non-technical innovations. Moreover, activities should go far beyond the confines of research labs. They can occur in both the public and private sectors and are conducted across borders, sectors and institutions.
Nevertheless, the policy directed toward increasing the role of private R&D in Indonesia is also somewhat limited. To exemplify, given the importance of R&D data, the Indonesian Central Statistics Agency (BPS) has even dropped the questions that address research activities carried out by industry. Consequently, the last release of the annual manufacturing survey in 2011 served as the lone and the latest data point to observe this variable.
Hence, talking about the triple helix in R&D stages and innovative capabilities of industry, they are still a long way off this goal.
Third, the importance of becoming an ICT R&D hub.
High-tech ICT companies are now leading the landscape of world industries. Companies like Google, Facebook and Apple are not only making big sales but are also among the most R&D -intensive companies in the world. ICT industries are, in general, five times more R&D intensive than non-ICT companies (European Commission, 2015).
Just to better imagine the size of these companies, based on the Industrial Scoreboard (European Commission, 2015), Google recorded net sales of €77 billion (US$80.6 billion) in 2014, which equals 60 percent of Indonesian government revenues. It also spent €10 billion on R&D, which equals one-third of Indonesia’s education budget. Facebook spent €2.2 billion on R&D.
Apple’s $44-million R&D funding commitment in Indonesia only accounts for 0.8 percent of its total R&D spending in 2014.
Based on the classification of ICT industries defined by the OECD (2009), we can only identify 22 Indonesian ICT players among 23,370 companies covered in the annual manufacturing survey (BPS, 2011) — indeed an atomistic portion. They performed less convincingly in R&D and innovation.
Thus, if domestic Indonesian firms cannot rival top-notch ICT companies, we can alternatively serve as an ICT R&D hub. In return, the country is always endowed with a large and enthusiastic market where all tech-gadgets are sold out just in seconds. To give a stronger emphasis, ICT R&D hubs should go beyond building factories in, for instance, Bekasi or Karawang, both east of Jakarta.
Moreover, the Apple success story can be used as a blueprint for other tech giants to engage Indonesia not only as a solid final consumer — which has been well proven — but also as an important partner in building a sustainable ICT ecosystem.
To conclude, as a long awaited gift, we should identify closely with these signals from Apple, secure the commitment and provide a clear action plan involving all stakeholders, including universities, and make sure that the R&D activities are mutually beneficial.
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Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.