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Indonesia – Indonesia’s false choice between investment and innovation (Andree Surianta, East Asia Forum)

Despite initial worries about the impact of the COVID-19 pandemic on foreign direct investment (FDI) flows into Indonesia, the country did well to woo foreign investors in 2020. FDI inflows shrunk 24 per cent year-on-year, better than the 31 per cent drop experienced by ASEAN and the 42 per cent collapse globally. The positive signal sent by the Omnibus Law and the ‘debottlenecking’ of investment backlogs by the Indonesia Investment Coordination Board (BKPM) seem to be the main factors to this success.

A worker pushes a wheelbarrow at Walini tunnel construction site for Jakarta-Bandung High Speed Railway in West Bandung regency, West Java province, Indonesia, 21 February 2019 (Reuters/Willy Kurniawan).

An implementing regulation of the Omnibus Law — Presidential Regulation 10/2021 — marks a sea change in the Indonesian government’s approach to FDI. It reduces the number of business sectors restricted to foreign investors by 60 per cent and introduces 245 priority sectors eligible for incentives. Indonesia has also upgraded its investment authority from an agency to a ministry. Due to the maximum number of ministries being set in Law 39/2008, the new Ministry of Investment will come at the expense of the Ministry of Research and Technology. The latter’s functions will either be merged into the Ministry of Education and Culture or delegated down to the National Research Agency.

The decision to ‘sacrifice’ the ministry that deals with innovation in lieu of investment may inadvertently create the impression that the two are at odds. Furthermore, while the promotion of investment is a welcome development, questions remain about the effectiveness of the new ministry in overcoming regulatory obesity and overlap created by the 30,000 ministerial and regional regulations across the country.

Prior to the Omnibus Law, the government attempted to solve the overlap problem by forming the Online Single Submission (OSS) agency. Handed over to BKPM in 2019, the agency processes permits on behalf of other ministries and local governments. Being a permit caretaker means that BKPM has little ability to stop other institutions from setting up permit barriers. Becoming a ministry may finally give the investment authority a seat at the table to appeal impeding policies.

One issue to resolve is whether the new Ministry of Investment remains just a caretaker or becomes the ultimate licensing authority. Cross-institutional coordination seems to be hindering the implementation of a new OSS under the ministry. It is also still unclear whether the new ministry will handle sectors outside BKPM’s current jurisdiction, such as oil and gas, and financial services. A clear division of authority will be critical to avoid new overlaps.

The government should carefully manage public perception of this cabinet reorganisation. Dismantling research in favour of investment can create the perception that innovation is secondary to capital. Indonesia needs both to realise its Making Indonesia 4.0 transformation. Indonesia’s innovation ecosystem, ranked 85 out of 131 countries in the Global Innovation Index Ranking 2020, is underdeveloped. Indonesia spends a mere 0.2 per cent of its GDP on research and development (R&D) compared to 2 per cent in China, the United States and Singapore. Singapore spends 45 per cent more than Indonesia on R&D and received 21 per cent more patent applications in 2018.

Indonesia is particularly weak in the business innovation space. Business enterprises finance only 8 per cent of R&D expenditure. This is far below the 60 per cent that enterprises contributed in the top five R&D spenders worldwide. It is perhaps expected then, that Business Sophistication is Indonesia’s weakest pillar in the Global Innovation Index 2020.

The Omnibus Law has begun to address this business innovation deficit. It revises the burdensome local production requirement in Law 13/2016 on Patents and assigns R&D requirements to state-owned enterprises in a bid to boost business R&D expenditure. But the government seems to contradict itself with the ministerial merge as it seemingly reinforces the old paradigm of ‘research is only for academia’. Also, delegating R&D functions down to an agency limits policymaking authority in this space. One can only hope that this is not a case of the government forgetting its own insight that innovation should be integrated into investment policies.

The critical role of business in innovation is evident in the development of COVID-19 vaccines. The Oxford-AstraZeneca vaccine developed in the United Kingdom is the result of a university-business collaboration. The three vaccines approved for distribution in the United States were developed by corporations. Universities and research institutes that form the Indonesian Red and White Vaccine Consortium — led by the now defunct Ministry of Research and Technology — have to partner with local pharmaceutical companies for clinical trials and production upscaling.

Indonesia has recognised the importance of encouraging private sector innovation and taken positive early steps on the long road to investment reform. For businesses in a competitive market, R&D is an investment — costly, but necessary to generate higher returns and ensure survival. Fair competition will encourage businesses to keep investing in innovation. Indonesia must continue down the path of economic openness, inviting more investment inflows and levelling the playing field to motivate businesses to generate new ideas and ensure their sustainability.