TOKYO–(BUSINESS WIRE) – In June 2021, the ASEAN-Japan Center (AJC) published paper 4 of the series “Global Value Chains in ASEAN” with a focus on Indonesia. According to the paper, Indonesia accounts for a significant share of domestic value added through exports (DVA). to 88 percent in 2019; This high DVA percentage, however, focuses on manufacturing activities at the lower stages of production, which require a minimum of imported input and foreign technology.
Indonesia is the 10th largest economy in the world with a gross domestic product (GDP) of 1.1 trillion US dollars. Nevertheless, the manufacturing industry only accounts for a fifth of the total value added. This shows that manufacturing creates little value despite its size, which is twice that of the primary sector in terms of output. Compared to other upper-middle-income countries like Malaysia and Thailand, Indonesia has maintained lower income levels and has the slowest growth in value added in manufacturing. Expanding global value chains (GVC) is a great opportunity to improve the technological capabilities of domestic manufacturing companies, which is believed to be one of the keys to escaping the middle-income trap.
A higher GVC stake can lead to growth through higher trade volume and larger foreign direct investment (FDI). The paper recommends Indonesia to consider adopting this growth model as an option for the policy framework. The FDI figures show that the manufacturing industry accounted for more than 40 percent in the period 2014-2019 and is mainly focused on medium-high technology manufacturing such as food, metal and mechanical engineering. The country needs to strengthen its local industries and markets and strategically promote FDI. In order to lead the country towards a more knowledge-intensive and innovation-driven economy, measures are needed that promote the industrial and technological upgrading of the local economy and the development of human resources, such as advanced engineering, design and R&D skills.
Maximizing national economic potential does not automatically follow deeper integration into GVCs. Local actors may not be able to benefit from global manufacturing networks as requirements such as compliance with international standards, greater management and financial resources, and protection of intellectual property can prevent small and medium-sized enterprises from participating. At the national level, the value creation process becomes the key. Here the role of the national innovation system (NIS) through an effective science, technology and innovation policy (STI) is crucial in order to maximize spillover effects.
A well-planned NIS could be the bridge that could transform foreign technology into domestic technology in the manufacturing sector. The government must give priority to upgrading domestic manufacturing companies within the GVC, especially at the medium-to-low-tech and medium-to-high-tech levels, as most domestic manufacturing companies continue to operate in low-tech sectors. The Indonesian government needs to put in place a well-planned and efficient NIS focused on industrial catch-up and coordination with key ministries of industry, research and development and higher education to support the appreciation of domestic manufacturing companies within the GVC. Consistent with this, STI politicians need to focus on building a network to convert foreign technology into indigenous tech skills rather than creating something that is “purely local”.
Global Value Chains in ASEAN: Indonesia can be downloaded from the AJC website as below.