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loomberg, a financial data and media company, on Jan. 22 released the 2019 Bloomberg Innovation Index, which represents a country’s technological advancement and innovation level. It is based on seven criteria: 1) R&D intensity; 2) manufacturing value-added; 3) productivity; 4) high-tech density; 5) tertiary efficiency; 6) researcher concentration; and 7) patent activity.

The index shows that South Korea has been fortifying its position as the most innovative country in the world since 2018. It was followed by Germany and Finland in second and third place. Singapore and Japan, other Asian giants, were in the sixth and ninth positions, respectively. The United States and China, the global superpowers, were ranked eighth and 16th, respectively.

Unfortunately, Indonesia was not included on the list, even though further investigation reveals that Indonesia was not ranked because of insufficient data.

From a methodology point of view, the 2019 Bloomberg Innovation Index ranking process started with a sample of more than 200 countries. Each country was scored between zero and 100 based on the seven equally weighted categories mentioned above. However, nations that did not report sufficient data for at least six categories were eliminated. After the elimination process, 95 countries made it to the list, from which Bloomberg publishes the top 60 countries.

Indonesia can breathe a sigh of relief and make an excuse that it did not make the list because of insufficient data instead of poor innovation performance. However, even with sufficient data it would only have a 50-50 chance to make the top-60 list.

In this case, the more pressing matter concerns the country’s laxity with regards to technological advancement. From a policymaking point of view, data are important because they are the foundation of economic policy. Insufficient data simply means that the country does not have enough indicators to determine its technological advancement level and the essential policy direction to improve it.

This also means we are falling behind our neighbors, despite Indonesia being the largest economy in Southeast Asia. Thailand’s overall score was up five ranks to 40th in 2019 from 45th last year. As a matter of fact, its manufacturing value-added was ranked 14th globally.

Malaysia also managed to maintain its position as the 26th most innovative country in the world. Even Vietnam, a country with a gross domestic product (GDP) per capita lower than Indonesia, for the first time reached 60th position.

Theoretically speaking, growth theorists suggest that innovation and accumulated knowledge are the important factors needed for sustainable long-term economic growth. These components are also the key to escape the middle-income trap, which is a phenomenon by which rapidly growing economies stagnate at middle-income levels for many years, thus failing to reach the high-income level.

To improve innovation, Indonesia has to open up its economy through trade and investment.

The promotion of international trade, if supported by effective trade and industrialization policies, can benefit local manufacturers and would result in technological spillover. To promote international trade, Indonesia has to more aggressively reverse its trade protectionism measures.

A 2018 study by the Lowy Institute, an Australian think tank, estimated that protectionism was still on an upward trend, despite recently declining rates. Hence, export promotion strategies and the abolishment of unnecessary tariffs have to be implemented to increase Indonesia’s exposure to international trade.

Foreign direct investment (FDI) is another important component of innovation since it leads to strong productivity gains, investment efficiency and further technological spillover. Nevertheless, data from World Bank show that Indonesia’s FDI only accounted for about 2 percent of GDP in recent years, below many of its neighboring countries such as Vietnam’s 6.6 percent, Malaysia’s 3.5 percent and Thailand’s 2.5 percent.

To its credit, as reported by the World Bank’s ease of doing business index, the government has been improving business climate and infrastructure to attract more FDI, even though in some areas these reforms may still have limited effects.

Further fiscal reform is also necessary. Even though the government has done much in the last couple of years, much more is still needed. Last year the government reduced fuel subsidies to fund infrastructure development in anticipation of the election year.

Infrastructure development is crucial for Indonesia’s long-term competitiveness. Attracting more FDI can create more positive spillovers. Reducing infrastructure spending may hamper this progress.

The government also spends too little on development spending, i.e. spending on capital, education, health and social assistance. Whereas many other emerging economies spend more than 14 percent of their GDP on development spending, Indonesia spends less than 8 percent.

Last but not least, the government needs to reform the education sector. First, it needs to provide universities with adequate research funding to foster improvement not only of research quantity but also quality. Second, better cooperation among universities, the private sector and the public sector is also necessary to establish coherent technological advancement and innovation that can benefit the economy.
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