Tuesday, October 22, 2013

ENHANCING THE COMPETITIVENESS OF SMES: Subnational Innovation Systems and Technological Capacity Building Policies

                                                                       Andi Eka Sakya                                                                                

Materializing the national development on Science and Technology (S&T), the Government of Indonesia has implemented the National System of Innovation approach. The S&T related Law and Regulation have been promulgated with the objective to create and encourage the S&T institutions to have a close collaborative network among them. The incentive schemes related with S&T activities that bridges and facilitates researchers into economic scale of activity, has also been made possible. Furthermore, the government has also set up incubators as an intermediation body facilitating research to innovation that is expected to expedite the creation of technology based SMEs. The small adoption of R&D products has, however, impeded the progress of technology based SMEs creation. Further reviews show that this matter seems to relate with various kinds of conditions, among others, a low percentage of S&T budget to GDP. This report discusses existing data related with the effort of the Government of Indonesia in establishing the National System of Innovation. 

A. Introduction
In the modern age, it is realized that the key to national prosperity lies in effective combination of three factors: technology, natural resources and capital. The first is the most important factor since the creation and adoption of new scientific techniques can make up for a deficiency in natural resources, and reduce the demands of capital. Indeed, the depth of the innovative ideas and technologies implanted in services, products and manufacturing processes determine the capability of a nation in fostering high standard of living and job creation within her society. We are now entering a transition period bridging the changing from traditional economy to knowledge-based one or information society. There are three fundamental items that have affected overall life of the people, and thus competitiveness of a state, and those are Globalization, Information, Knowledge, and Networking and Connectivity.

The information technology turns out to be the main core of means in connecting and accelerating the operation and process of development in the future. Speed have lessen the time lack and shorten the distance, and thus inflict the 24 hours a day operation and process. Information and knowledge goes into the place where no bottleneck exist, milieu determines the price and value. And it confirms that the key component of knowledge-based economy lies on the human capital and competencies.

As an initial approach toward the afore-mentioned problem, the Ministry of Research and Technology (MoRT) of Indonesia enacted the Law on the National System of the Research, Development and Application of Science and Technology. The Law has emphasized on efforts in providing and adopting innovation as a means through the approach of manifesting the National System of Innovation. Appreciation for an innovation will be facilitated and implemented through various kinds of operational policies such as incentive policies in promoting research, development and engineering activities. Furthermore, the development and the impact of technology in the modern era required obedient people who responded to the technology’s demand. Only by committing to permanent practice of management of technology, will organizations experience technological change as a principle driver of competition. Through that approach, it is expected that the creation of innovation-based SMEs can be facilitated.

This paper discusses the growth of SMEs in Indonesia, the available incentive programme and schemes as well as the intermediary mechanism introduced by the government. A brief discussion on the important function of incubators in facilitating the commercialization process is touched upon. The R&D budget that pose important support for the creation of technology-based SMEs is also reviewed.

B. SME in Indonesia
There is no doubt that SMEs in Indonesia – as also generally occur in many countries – can be trustworthy. The crisis took place several years ago had proven themselves. Therefore, their position is very strategic. In 1998, based on the National Statistic Bureau (BPS – in Indonesian), the total number of SMEs reaches approximately 37 million. Despite the crises, the number increases to 42.3 million in 2003.

The SME’s contribution to the non-oil and gas exported product had risen from US$ 7.55 million in 2000 to US$ 7.59 million in 2003. Apart from its great number, SMEs has also a very strategic role in workforce absorption, poverty alleviation and a safeguard during the crisis. The existence of SMEs has absorbed 99.40 per cent work force in 1998, despite its small contribution to the GDP, which is only 39.8 per cent. But, in 2003 the labour absorption attains 99.45 per cent and shares 56.71 per cent of GDP. In 1999, Kaswanto run a survey on 167.000 SME in the manufacturing sector observing their technological problem [1]. It can be concluded that (i) although the number of SME is very potential, it seems structurally very weak, (ii) the constraint faced by SME related with technology is very significant, and (iii) the technological problem that can be connected to Management, Production, Competition as well as Material Access, arrives at approximately 69 per cent.

It is presumable that within the SME, only a small portion adapts to innovation and technology, and that is the medium-sized one (15 per cent). Our recent investigation shows that only 11.5 per cent within this group admits to apply management of innovation and technology at their organization [2]. This reproduces result of survey by Kaswanto [1] that more than 68 per cent of SME faced technology related problem. The Government has, in fact, offered SMEs to adopt research results through research incentive policy mechanisms, either in the form of direct fund or others such as proliferation of product. On the R&D side, the problems seem to not only relate with the adoption and transaction processes, but also regulation.

It is widely accepted that the human resources in the R&D institutes especially the public one are very potential and highly capable, their performance and working culture are exceeding the average level of their counterparts in non-R&D Institutes. The number of regulation has, however, caused the number of research products fail to reach an ambient number or critical level that can regenerate resources. On the other hand,
Sudarsa [3] reiterated the problem that SMEs faced on transferring technology. The process of internalization within the organization is hampered by various kinds of causes. Technology transfer in Indonesia still needs direct involvement of the government. Our survey supports the Sudarsa’s presumption in term of participation in the government programme on technology development (21.4 per cent) and acquisition (7.4 per cent) in the period of 2000 – 2004.

C. Policy on science, technology and innovation
The Indonesian S&T and Innovation Policy and its implementation derive from various kinds of legal products. By constitution the Government of Indonesia ought to develop the national S&T Policy based on religious values and the unity of the nation in order to ensure the human civilization and the national prosperity (Art 31 clause 5 of the Amendment of the 1945 Indonesian Constitution - UUD 45).

Under the State Guidelines covered within the Decree of the People’s Consultative Assembly (No. 4/1999), it has been affirmed that the empowerment of SMEs and cooperatives as well as the improvement of national competitiveness shall be conducted through the mastering and utilizing S&T. It furthermore stresses that technology shall be further utilized to conduct activities to improve national health, education, food fulfillment, industry and others, in order to meet self-sufficiency and improvement of the nation competitiveness.

The Law No. 18/2002 on the National System of the Research, Development and Application of S&T was enacted in 2002. This Law aims at enhancing the support on National S&T, in order to accelerate the national achievements and to improve national competitiveness, self-reliance and excellence for supporting economic importance in international forum. It functions as a guideline to the formulation of the National System of Innovation.  In this regard, the role of the central government, regional governments and society especially business players should be in synergy and harmonist in order to develop the national S&T.  Furthermore, it also emphasizes on the importance of the networking among universities, R&D institutions under the Ministries and the Departments, supporting institutions, aiming to establish the joint cooperation which will be supporting, encouraging, and completing one another, in order to avoid the overlapping of R&D activities.

This Law has been made operational through the Presidential Instruction No 4/2003. This instruction reaffirms the function of MoRT as the coordinator for the formulation of a national S&T policy and its implementation. Figure 4.4 shows the interrelation among the institutions within the perspective of this policy.

The promulgation of Laws No. 18/2003 has given a foundation on the operational and implementation level. Basically, there are four aspects included in that Law. The aspects intrinsically describe the basic pillars of the National System of Innovation, i.e. (i) institutional synergy covering resources and S&T Network, (ii) utilization of S&T product for economic purposes, (iii) protection for S&T doers, and (iv) encouragement of society within the utilization and development of S&T activities.

Aiming at facilitating the national S&T activities and products in order to become the main core of national industrial product, the State Ministry of Research and Technology strive at creating an environment that conducive in transforming S&T activities and products into economic scale of activity. The improvement of competitiveness position is, therefore, aimed at, such as: (i) enrichment of resource advantage by encouraging
society to cultivate national assets and capabilities so that they can collectively become part of the national competitiveness, (ii) betterment of positional advantage by strengthening production value-added chain for domestic as well as international markets, and (iii) sustaining regeneration advantage process by disentangling all competition that weaken the regional bargaining position and by encouraging the activities that can regenerate and renovate the sources of national competence.

Those three efforts were implemented through the instrument policy in the form of incentive programmes. Until in the year 2004, there were about 32 incentive programmes, ranging from basic research till the proliferation and dissemination of technology products. Table 4.4 shows a matrix of the incentive programme mapping seen from the perspective on sustaining activity from research to commercial activities.

Percentage of S&T budget as well as R&D tends to decrease. It can be seen that the S&T budget in 2002 decreases from that of in 2000. Not only did the nominal amount of the budget decreases, but also the percentage of R&D budget to GDP within the last three years. The ratio of S&T budget utilization for R&D tends to grow lately (Figure 4.5).

The source of research funding in the universities is supported by the government 76 per cent, internal source of income within the university 11.2 per cent, private companies as well as foreign sources shares 5.6 per cent each, respectively. The government is central to the development of S&T.

In the last 5 years, within the institutes that directly coordinating the S&T activity, the funding is distributed into 8 institutions under the coordination of MoRT. The ratio of budget utilizing the 0.2 per cent of GDP between MoRT and the R&D agencies is 60 per cent to 40 per cent. And, within the MoRT, 65 per cent of the budget is allocated to run the incentive programmes.

The total funding disburses through the incentive programme, although it creates support for SMEs especially for technology-based ones, is still not sufficient to fortify the 42.3 million SMEs. Moreover, as it can be reviewed that, although the government support is needed during the early period of research, but majority (> 60 per cent) of funds is, however, required during the development, fortification and sustaining the product.

A case of example can be taken from the RUT Programme (Integrated Priority Research Fund) which was started in 1993. It is aimed to encourage researcher to collaborate with their colleagues to propose research topic in the subject defined. This programme has funded more than 1,307 research topics. Each topic is granted for – at the longest – three years. In average each researcher is granted for US$ 10,000 annually.

Research proposals are categorized in three groups, i.e. basic research, applied research and technology product development. Among the research funded, approximately ~17 per cent is basic research, ~ 68 per cent applied research, and the rest is technology product development. The programme has successfully reduced the idle capacity of laboratories, increased the communication among researchers in various places in Indonesia, and facilitated many new ideas. However, the adoption of the result apparently smaller than what is expected. The monitoring and evaluation conducted in 2001 showed that adoption of research result was less than 4 per cent [5].

Many developing countries have implemented the idea of Technology Based Incubator (TBI) as an intermediary between researches to innovation. The goals of incubator are, among others, technology transfer and commercialization, fostering innovation and technology based SMEs, promotion of a market-oriented economic system and private sector economic development [6]. Through the TBI, a newly start-up S&T based SME is made capable of affording premises, appropriate business services as well as seed capital or working capital. This is seen as factors that increase rates of entrepreneurship and entrepreneurial success. Bearse [7] speculated that without TBI, any policy that stimulates R&D would have a limited impact. In this regard, the TBI is seen as a tool of transformation – catalyst in the transformation of small-scale research activities into the economic scale ones.

In Indonesia, there are not many incubators available. It may be said that only one incubator so-named Technology Incubator, because most existing incubators are business ones. It was established in 1996 and located within the National Centre of Research Science and Technology (in Indonesian – PUSPIPTEK), which is now being coordinated under the Agency for the Assessment and Application of Technology (In Indonesian – BPPT). The number of tenants and graduated companies are still far from satisfying and less than 5 per cent annually. Table 4.6 shows the statistics of tenants at the Technology Incubator from 1997 to 2001.

In brief, as noted by Sakya’s study, the incentive schemes have encouraged some interest among researchers. However, the results, in term of economic of scale, are still not encouraging. The number of incubators dealt with the R&D is still far from the ability to push the R&D products into the market. The existing VCs seem to be risky in dealing with the newly found products. An intermediary agent, such as a credit guarantor that facilitate a new established technology-based seems to pose an alternated solution to sustain R&D product in Indonesia [8].

D. Concluding remarks
A brief review on the SME development in Indonesia has been outlined. The S&T activity that related with the growth of SME-based technology has also been drafted. The number of incentive schemes has been initiated by the government as part of the national policy to foster the national system of innovation. The adoption of technology or innovation produced by the schemes is still far from being able to push self penetration of S&T activity into economic scale of activity. But, this can also be connected to the other policies such as small budget of R&D, education and SMEs and cooperatives

[1] Kaswanto, B.T., Potensi Pengembangan Industri Kecil dan menengah pada Industri Komponen, Majalah Pengkajian Industri No. 7/Agustus/1999, Badan Pengkajian dan Penerapan Teknologi, Hal. 25 – 31.

[2] Sakya, A.E., Promoting Management of Innovation and Technology through Awareness Dissemination Programme for SME based Innovation, APEC International Forum – Economy Globalization and Business Incubators, Beijing – China, 18 – 20 October 2005.

[3] Sudarsa, M.,  Policy on Strengthening SMEs, Seminar on the Perspective of Strengthening Technology within the SME, Jakarta, 3 – 5 March 2005.

[4] Cooper, R.G., Winning at New Product, Accelerating the Process from Idea to Launch, Perseus Publishing, Cambridge, Massachusetts, 2001.

[5] Assistant to the Deputy for Programme Evaluation, Monitoring and Evaluation of RUT’s and RUK’s Economic Outcomes, Ministry for Research and Technology, Jakarta, 2001.

[6] Schoen, C., Design Principles for the Incentive Structure of Industrial R&D, Assessment Workshop on Design Principles for the Incentive Structure of Industrial R&D, UNDP, March 11, 2002.

[7] Bearse, P., Development of Technology Business Incubators for Technology Innovation and Entrepreneurship Development, UNDP, July 1993.

[8] Sakya, A.E.,  Seeking the Proper VC-s Complementing the Incentives Programme Schemes to Accelerate the Creation of Technopreneurs – Indonesian Case, APEC – Forum – Venture Capitals’ Role in Science Parks and Business Incubators, Xi’an – China, 20 – 23 May 2002.