Investment and Innovation

Kompas/Raditya Helabumi

President Joko Widodo giving a speech when opening the Kompas 100 CEO Forum which carried the theme Economic Macro Policy 2018 to Maintain Quality Growth in Jakarta, Wednesday (29/11/2018).

"Economic growth springs from better recipes, not just from more cooking". —-Paul Romer, 2018 Nobel Laureate in Economics

Every country has a dream of making its people prosperous. That is why they always strive to drive economic growth, as one of the ways to make the dream come true. Indonesia is no exception.

At the initiative of President Joko Widodo, in May 2019 we, at the time at the National Development Planning (PPN) Ministry/National Development Planning Agency (Bappenas), had compiled the Indonesian Vision 2045. In this vision it is projected that after one hundred years of independence, Indonesia will become a developed country and the number five economic power in the world, with superior human qualities mastering science and technology.

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This vision does not only give an overview of Indonesia in 2045, but also a road map that must be taken to make it happen. Under this vision, it is targeted that Indonesia will succeed in getting out of the middle income trap by 2035, and by 2045 it will be included in the category of high-income countries.

Efforts of their achievement are carried out through four pillars of development, namely 1) human development and mastery of science and technology; 2) sustainable economic development; 3) equitable development; and 4) strengthening national resilience and governance.

The first phase (2016-2025), aims to strengthen the economic structure, where economic growth is expected to reach an average of 6 percent per year.

Then, there are three phases of development that are designed to move towards the developed country in 2045. The first phase (2016-2025), aims to strengthen the economic structure, where economic growth is expected to reach an average of 6 percent per year.

The second phase (2026-2035), speeds up innovation-based growth with an average target of 7 percent per year. Then, the third phase (2036-2045), carries out a quality-based and sustainable economic modernization with an average economic growth of 6.3 percent per year.

KOMPAS/PRIYOMBODO

Construction workers finish a concrete pillar on 14 Dec. 2019 at the site of the Light Rail Transit (LRT) Jabodebek project on Jl. H.R. Rasuna Said in South Jakarta. According to the World Bank Quarterly Report, Indonesia’s economic growth is estimated to reach 5 percent in 2019 and 5.1 percent in 2020.

The keys to sustainable economic growth are 1) increased investment; 2) increased productivity; 3) improvement in the quality of human resources (HR); and 4) labor market improvement. All of this is with the assumption that there is a paradigm shift from an economy based on natural resources (SDA) to an economy based on innovation.

However, this article is not about the entire Vision 2045, but about two of the many things that are important to realizing that vision, namely investment and innovation.

Investment drives growth

We have been familiar with the role of investment in spurring economic growth. There are also many theories regarding the relationship between investment and growth. That is why, we always try to boost investment value. Apart from the government and state-owned enterprises (BUMN), the sources are mainly private and foreign.

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The latest estimate from Bappenas shows that we need Rp 5,900 trillion to be able to grow 5 percent and get out of recession due to the pandemic.

The efforts that have been carried out by inviting investment from abroad are very good at driving the rate of economic growth as well as creating jobs. However, as formulated in the first phase of Vision 2045, namely to strengthen the economic structure with an economic growth of 6 percent, we will need funds far greater than Rp 5,900 trillion.

The issuance of the 2020 Job Creation Law is in line with these efforts. We know that one of the objectives of the Job Creation Law is to create a conducive investment climate. The hope is that this will increase the attractiveness of investment so that as many business people as possible come to invest in Indonesia.

To be able to answer that question, it is better for us to learn from the South Korean experience.

However, the question is, will the investment flow and growth rate be sustainable? What kind of growth do we want? Will that be able to help realize Indonesia\'s dream of becoming a developed country in 2045? To be able to answer that question, it is better for us to learn from the South Korean experience.

Innovation-based economy

Why South Korea? This country is often used as an example of "economic leaps". Like Indonesia, South Korea also officially became independent in August 1945. However, it was only completely free after the civil war ended in 1953. At that time, its gross domestic product (GDP) per capita was roughly the same as Indonesia\'s, even slightly lower, aka a little poorer than us. And, unlike Indonesia, it has no natural resources.

KOMPAS/WAWAN H PRABOWO

Finance Minister Sri Mulyani Indrawati (second left, front row) attends a working meeting with the Budget Agency of the House of Representatives (Banggar DPR) at the House complex in Jakarta, Friday (6/9/2019). On that occasion, Sri Mulyani conveyed the basic assumptions of the State Budget’s temporary posture such as economic growth of 5.3 percent, inflation of 3.1 percent, the rupiah exchange rate of Rp 14,400 per US dollar, and interest on government treasury bills (SPN).

However, by 2020, its GDP per capita was already above US$30,000. Seven times our GDP per capita! Even, they have entered the category of developed countries before the turn of the millennium. Meanwhile, since the 1990s, Indonesia is still struggling in the category of lower middle countries. Why is that?

The short answer is hardworking human resources. It is typical of Korean people who want to imitate -- even surpass -- the Japanese. But, of course not only that. They are also very innovative. South Korea has regularly entered the world\'s top ranking in the Innovation Index compiled by Bloomberg or other institutions. Their economy is based on innovation supported by intensive research.

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In the early stages of development in the 1950s and 1960s, they invited/imported a lot of capital and technology. Two things they did not have at that time. While working hard to speed up the pace of the economy, they also studied and were determined to master the technology brought by investors. They made efforts to minimize the technological gap with other countries. They made improvement in the quality of human resources a priority. This became increasingly intensive and well-coordinated with the formation of the Science and Technology Ministry in 1969.

Through this ministry (now known as the Science, Information and Communication Technology Ministry) they began to invest in technology by shifting the focus from technology imports to research and development (R&D) for more complex technologies. Policies regarding science, technology and innovation (STI) had begun to be included in the Five-Year Economic Development Plan.

If in the first two decades R&D of this ministry (1970s and 1980s) R&D tended to be financed by the government, at the beginning of the 1990s the private sector began to get involved a lot. The STI policies in the 1990s began to encourage a system of technological innovation by the private sector whose involvement continued to increase rapidly.

It is not surprising if today about 80 percent of R&D costs in South Korea are funded by the private sector. They are always included in the group of countries with the highest R&D ratio to GDP in the world. They compete with Israel at a figure of more than 4 percent.

Slowly but surely they began to develop a research ecosystem, which has recently proven to be very useful and become a fertile ground for generating ideas and creativity that contribute greatly to the added value of the economy.

Even though initially they imitated a lot and only assembled focused products, such as automotive and electronic goods, from an early stage they had tried to develop products using their own brand name. Along with the mastery of increasingly sophisticated technology and high innovation capabilities which are strongly supported by intensive R&D, slowly South Korean brands are increasingly recognized. Even, it has become very superior in today\'s world. Who does not know Samsung, LG, KIA, or Hyundai?

So why do we need to emulate South Korea? First, because they do not rely on natural resources (which they really do not have), but focus on developing the quality of human resources. Second, in line with that, they also invest a lot in R&D which ultimately leads to innovation. Third, related to the previous two points, they have successfully made use of the abundant middle class. That means, escaping the middle income trap.

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The success of the investment they invited to enter in the early period of economic development was not only seen from the amount of capital inflow and how many jobs were created, but also how to absorb the technology that accompanied the investment.

Institution driving the research ecosystem

So, we must make efforts to achieve high economic growth towards a prosperous society. In order to realize it, we must work hard to invite investment as much as possible because of its crucial role in driving the economy.

There will be a sustainability problem and an even more serious one: getting into the middle income trap.

However, we have to think further. Investment alone without research-based innovation and science and technology will be risky, especially if the investment is linked to natural resources. There will be a sustainability problem and an even more serious one: getting into the middle income trap. This is what we want to avoid.

Certainly that is not the kind of growth we want. Paul Romer, winner of the Nobel Prize for Economics in 2018, said that "economic growth springs from better recipes, not just from more cooking. New recipes generate more economic value per unit of raw material.”

In learning from South Korea, we should make innovation based on scientific and technological research the main stream of the economy so that investment must be linked to innovation. This means that incoming investment should be accompanied by research developments that lead to innovation. This is our new recipe.

The hope is that our human resources can immediately overcome the problem of being left behind in science and technology so that, in the future, we can become a nation that is innovative, independent, and globally competitive.

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The South Korean experience also exemplifies that there should be a special institution to handle all of this. An institution that acts as a conductor orchestrating the shift from an economy based on natural resources to an economy based on innovation. An institution that can be the main driver for the creation of a research ecosystem. An ecosystem that does not only contain research and development agencies of the government and BUMN, but also universities and enterprises owned by the private sector (BUMS).

KOMPAS/IWAN SETYAWAN

Bambang PS Brodjonegoro

In this context I would like to underline the role of the Research and Technology Ministry/National Research and Innovation Agency (BRIN) as the government\'s only integrated research and innovation institute. This is in accordance with Law No. 11 of 2019. However, this role has not been fully implemented, let alone to be like the one in South Korea.

Support from related stakeholders is badly needed here, apart of course from the classic problem: very limited research funding.

Bambang PS Brodjonegoro, Research and Technology Minister/Head of National Research and Innovation Agency (BRIN)

(This article was translated by Hyginus Hardoyo).