Indonesia's National Innovation Policy requires consistent support from the private sector participation to raise its knowledge-based economic growth and become one of the top 15 powerful countries in the world by 2045, as declared by the Presidential decree. The low participation rate of private industries in R&D activities is a cause for concern for the government, as an effort to improve the country's social and economic performance must be a shared responsibility. This chapter looks into how the private sector participation in innovative effort plays an essential role in improving the country's economic performance. The challenges that lie ahead in achieving the goals of National Innovation Policy rest with both the government and the private sector.
TopPolitical Economy That Underlies National Innovation Policy
Indonesia's economy has gone through rapid transitions from being dominated by the purely agricultural sector in the early 1960s to oil and import substitution in the 1980s, and labor-intensive and export-oriented activities in the 1990s. Throughout the thirty years, many economic and social reforms from 1966 to 1998 induced stability and unity within its society.
Immediately after independence from Dutch administration in 1819, the Indonesian Republic under the “Old Order” faced economic stagnation and severe budget deficits. Back then, it traded on commodities and natural raw resources as the main economic activities and source of income. However, the Indonesian economy has been vulnerable to the instability of the world's prices of natural resources and agricultural produce.
When President Suharto came into power in 1966, severe economic and social reforms were needed to stabilize its economic return and provide the younger population with jobs. When oil prices were going down, and economic return was minimal, the New Order under President Suharto sought to open up the economy to foreign investors in order to liberalize trade from 1966 to 1973. From 1974 to 1985 onwards, they increased oil revenue and set up Indonesia's pace to develop its domestic industries, supported by its import substitution strategies. There was an air of anti-foreign investment during this period. Due to imbalanced economic development between regions in Indonesia, and in order to centralize power and administration in the capital, political reform was adjudicated for the allocation of revenues and redistribute earnings.
During these years, Indonesia was still dependent on the trading of natural resources and small capital-intensive industries of questionable efficiency. (Soesastro and Pangestu, 1998). Unlike other countries in South East Asia, (example, Singapore and Malaysia), Indonesia did not have a full focus on building industrial development during this period. Imbalanced economic development between regions in the young Republic was the source of political upheavals and contempt. The strong military supported this centralization of power in order to unify the country.
As the country's political order stabilized, its economic activities had also changed. Decentralization of power became the norm as regional developments came into effect. Regional governments with subsidiary legislative powers were accorded recognition under the new order of President Suharto. From 1986 to 1996, the effects of globalization and deregulation set in. Trading partners demanded openness and liberalization of trading activities with Indonesia. It, therefore, had to step up its economic activities towards a more export-oriented strategy. Indonesia once again had to open its borders to foreign investment but at this period, with only a few import restrictions. (Bhattacharya & Pangestu, 1993)