Indonesia’s false choice between investment and innovation

Author: Andrée Surianta, ANU

Despite initial concerns about the impact of the COVID-19 pandemic on foreign direct investment (FDI) flows to Indonesia, the country has done well to win over foreign investors in 2020. FDI influx decreased by 2.4% in one year, better than the 31 percent drop recorded by ASEAN and the 42 percent drop collapse at the World level. The positive signal sent by the omnibus law on job creation and “Debottlenecking” of investment arrears by the Indonesian Investment Coordination Council (BKPM) appear to be the main factors in this success.

A regulation implementing the Omnibus Law – Presidential Regulation 10/2021 – marks a radical change in the Indonesian government’s approach to FDI. It reduces by 60 percent the number of business sectors reserved for foreign investors and introduces 245 priority sectors eligible for incentives. Indonesia also improved its investment authority from an agency to a ministry. Due to maximum number Ministries being established in Law 39/2008, the new Ministry of Investment will come at the expense of the Ministry of Research and Technology. the the functions of the latter will either be merged with the Ministry of Education and Culture, or delegated to the National Research Agency.

The decision to “sacrifice” the ministry that deals with innovation instead of investment can inadvertently create the impression that the two are at odds. In addition, although investment promotion is a welcome development, questions remain about the effectiveness of the new ministry in overcoming regulatory obesity and the overlap created by the 30,000 ministerial and regional regulations across the country.

Before the Omnibus law, the government tried to solve the problem of overlap by forming the Single online submission (OSS) agency. Delivered at BKPM in 2019, the agency processes permits on behalf of other ministries and local authorities. Being a permit keeper means that BKPM has little ability to prevent other institutions from putting up permit barriers. Becoming a ministry can finally give the investment authority a seat at the table to appeal hindering policies.

One question to be resolved is whether the new Ministry of Investment remains just a gatekeeper or becomes the ultimate licensing authority. Inter-institutional coordination seems to be hindering the implementation of new free software under the ministry. It is also still unclear whether the new ministry will deal with sectors outside the current jurisdiction of the BKPM, such as oil and gas and financial services. A clear division of powers will be essential to avoid further duplication.

The government should carefully manage the public perception of this cabinet reorganization. Dismantling research in favor of investment can give the impression that innovation is secondary to capital. Indonesia needs both to achieve its Make Indonesia 4.0 transformation. Indonesia’s innovation ecosystem, ranked 85th out of 131 countries in the ranking of the 2020 global innovation index, is underdeveloped. Indonesia spends only 0.2% of its GDP on research and development (R&D) compared to 2% in China, the United States and Singapore. Singapore spends 45% more than Indonesia on R&D and received 21% more patent applications in 2018.

Indonesia is particularly weak in the business innovation space. Business enterprises finance only 8 percent of R&D expenditure. Companies contributed well below 60 percent to the the top five R&D spenders in the world. We might expect it then, this commercial sophistication is Indonesia’s weakest pillar in the Global Innovation Index 2020.

The Omnibus law has started to fill this innovation gap for businesses. It revises the heavy local production requirement of Law 13/2016 on patents and assigns R&D requirements to public companies with the aim of stimulating R&D spending by companies. But the government seems to contradict itself with the ministerial merger because it apparently reinforces the old paradigm of “research is only for academia”. In addition, the delegation of R&D functions to an agency limits policy-making power in that space. One can only hope that the government does not forget its own idea that innovation should be integrated into investment policies.

The essential role of companies in innovation is evident in the development of COVID-19 vaccines. the Oxford-AstraZeneca vaccine developed in the UK is the result of university-business collaboration. The three vaccines approved for distribution in the United States have been developed by companies. The universities and research institutes that form the Indonesian Consortium for Red and White Vaccines – led by the former Ministry of Research and Technology – to partner with local pharmaceutical companies for clinical trials and increased production.

Indonesia has recognized the importance of fostering innovation in the private sector and has taken the first positive steps on the long road of investment reform. For companies in a competitive market, R&D is an investment – expensive, but necessary to generate higher returns and ensure survival. Fair competition will encourage companies to continue investing in innovation. Indonesia must continue on the path of economic openness, inviting more investment and leveling the playing field to motivate businesses to generate new ideas and ensure their sustainability.

Andree Surianta is an Australian PhD candidate at the Crawford School of Public Policy, Australian National University and Associate Researcher at the Center for Indonesian Policy Studies (CIPS), Jakarta.