Technology Enabled Growth and Innovation

History tells us that technological advancements have been the driving force behind improved economic performance. This is not just a recent observation. The Industrial Revolution developed technology and a new manufacturing processes increasing productivity and accelerating economic development. The investments in the US moon landing programme and late-twentieth-century digital revolution created new businesses models and launched global corporations. Now AI has is creating excitement that another great leap in innovation and economic performance is just around the corner. These changes introduced business disruption requiring transition to higher level of skills often creating uncertainty in the workforce, but the most pessimistic predictions of “machines replacing workers” has not happened. Managing such change is a fundamental part of leadership and has brought massive increases in productivity and benefits to society.  In this “thought piece” we explore how Indonesia can use technology to innovate across government, state-owned enterprises and the private sector to help meet its aspirations to become high-income country by 2045.

Indonesia has been relatively late in the transition to technological innovation but that situation has changed rapidly in the last decade or so and technology companies are now thriving. It has produced its own multi-billion-dollar tech platforms, a home-grown “super-app”, and numerous tech startups. It has rapidly growing e-commerce markets predicted to reach $360 billion in value by 2030. In contrast with many counties this digital transformation has been largely achieved using local talent to develop its own applications which meet the country’s specific needs. This has the added advantage in building its stock of indigenous intellectual property.

 

So how does Indonesia rate in innovation in comparison to competitor nations? Since its inception in 2007 the Global Innovation Index (GII) ranks world economies according to their innovation capabilities. This consists of roughly 80 indicators, grouped into innovation inputs and outputs, the GII aims to capture the multi-dimensional facets of innovation. GII has become the industry standard measurement of innovation and is used as a cornerstone of economic policymaking, with GII annual results being analyzed by governments to help focus their policy responses to improve performance. From 2020 to 2023 Indonesia has moved from 85th to 61st rank overall and 5th amongst the 37 lower middle income group of countries, a commendable performance. But there is still room for improvement. Indonesia needs to better translate its innovation investments into more and higher quality outputs. Indonesia ranks highest in Market sophistication (37th) but ranks lowest in Human capital and research and development (85th), Business sophistication (77th) and Institutions rank 70th.

Indonesia’s GII ranking shows where improvement is necessary. It needs to invest more efficiently in education, research and development and, training and deploy them more effectively. Its 2.4% of GDP investment in education is significantly below its main competitors – it needs to move towards 5%. It needs innovation hubs to be co-located or in close proximity to skilled workers/employment centres, academia and/or research institutes. The best outcomes is when people of overlapping skillsets and disciplines from different organizations, come together to share knowledge either formally or informally. The other critical component is early and late stage financing of start-ups which is still immature. Within the State Owned Enterprise environment, the government needs to recognize that continuity of leadership is an important principle and frequent rotation of successful senior leaders is destabilizing and mitigates against innovation.

 

Within organizations they need to create a culture of innovation that challenges the existing ways of doing business. This can be culturally challenging in Indonesia where deference to seniority and age can mitigate against experimentation, risk taking and innovative thinking. Where should Indonesia focus its investments in technology and innovation to maximize socio-economic benefit? We would contend that some of the most important initiatives are: