Entrepreneurship and Innovation: Indonesian Case

Final Short Paper

By Efi Dyah Indrawati (FETA-Indonesia)

Since the political transition in October 2014, Indonesian economic growth has weakened, indicated by deficit in current account and sluggish exports. The real GDP on the second quarter of 2015 was 4.7%, which is significantly below the potential projection 0f 5.5% by ADB.[1] Therefore the new government needs to spur Indonesian economic growth by increasing its GDP, and one factor that contributes to growth is entrepreneurship, because it provides employment and higher earnings contributing to better national income (higher tax revenue and higher government spending).

The recent entrepreneurship condition in Indonesia can be seen from The EY G20 Entrepreneurship Barometer 2013, which scored 20 countries across five pillars of entrepreneurship (access to funding; entrepreneurship culture; tax and regulation; education and training; and coordinated support). Based on the survey, among G20 countries Indonesia is in 10th rank on access to funding, 19th rank on entrepreneurship culture, 12th rank on tax and regulation, 19th rank on education and training and 4th rank on coordinated support.[2]

In terms of access to funding, it can be explained that Indonesia have had some improvement in the IPO market activity but still not in the access to credit, which EY surveyed 56% of Indonesian entrepreneurs claim that access to funding as difficult. Then, tax and regulation in Indonesia keep improving, and the World Bank data support the view that the condition is on the rise. In addition, coordinated supports are available in Indonesia, the country now has KUM Ministry (Ministry for Cooperatives SMEs) that works with 23 government agencies for entrepreneurship programs. The areas that grow quickly are entrepreneurial workshops and associations, and areas that still need more improvements are business incubators and mentoring programs.

Dealing with weak entrepreneurship culture and also education and training reported by The EY G20 Entrepreneurship Barometer data 2013, I would elaborate several explanations. Entrepreneurship culture in Indonesia is weak for some factors. First of all, Indonesia is weak on innovation. This can be seen from the R&D spending (% of GDP) of only 0,15%, which is the lowest in the G20 (2007-09) average (as compared to Japan spent 3.5%, India 1,5%, Malaysia 0,5%, and Korea 4% of their GDP on R&D).[3] Also, OECD data shows that Indonesia has relatively small numbers of patents application, scientific and technical journal articles compared to other neighboring non-OECD countries like Malaysia and Singapore[4]. Second reason for weak entrepreneurship culture is due to the mentality problem of “risk aversion”. It’s a ‘job-seeker mentality’ caused by a common belief that successful life equals having a job at government institutions or prestigious companies; entrepreneurship hasn’t been seen as a career especially by young people.

Dealing with education and training, Indonesia has problem in the education system to create more entrepreneurs. Among G20 countries, Indonesia ranked 19th in education because of low enrollment in secondary and tertiary education. Public spending on education is only 3.1% of GDP from the EY Barometer 2008-2010 and has been relatively stagnant in recent years due to decelerating economy. This is worsened by the education system that has not quite linked and matched with business and thus hinders aspiring entrepreneurs. Until now Indonesian formal education system is still focused on national exam called UN, with school curriculum not fostering learners with creating new ideas and concepts, courageous risk-taking, real-life problem solving, and adaptability to changes. Although entrepreneurship is now put into national curriculum, it mainly comprises theories that are delivered by teachers or academicians who are lack of entrepreneurial practice.

In short, Indonesia has taken some steps to foster entrepreneurship since the previous presidential administrations, yet the challenges remain exist and even become greater with our weakened economy now. If we see from Korea’s remarkable economic growth and human capital development, their success in cultivating entrepreneurship is resulted from a strong government intervention in all stages of its reforms. Indonesia should set a clearer and visionary entrepreneurship master plan, like what Korea has, to spur the economic growth.

With GDP per capita in 2013 of US$25,977, Korea ranks no.2 in its entrepreneurship culture and no. 4 in their education training among G20 countries. Korea has successfully promoted ‘good’ or productive entrepreneurs and the government has shown strong political will to set the right policies and intervention to spur entrepreneurial activities in the areas of education, access to funds, infrastructure, product and labor market regulations, tax policies, and institutional collaborations. And the highlighted Korean success is high support for its ambitious initiatives for nurturing productive entrepreneurs by linking startups and large firms with the establishments of centers for creative economies and innovation. For my part, I see some key factors behind that success: focus, totality, unity, discipline, and collaboration among all citizens.

Therefore, in national efforts to develop better entrepreneurships that spur economic growth during slow economic condition right now, there should be better collaboration between Indonesian government, private sector, and civil society, led by a strong national leader. The proposed policies for the government are:

  1. setting aside bigger portion of GDP for R&D spending, at least up to 1.6% (the same as G20 average in the period of 2007-2009). This will make way for favorable financial management for innovation development.
  2. strengthening coordination and communication with different government agencies or ministries that support entrepreneurship and innovation. The synergy is especially intended for the improvement of laws/regulations and programs for entrepreneurship;
  3. stimulating more start-ups and small entrepreneurs by giving easier access to funding and favorable regulations, as well as collaborating them with large business firms;
  4. opening more collaboration with private sectors in funding R&D in Indonesia. We can adopt Korea’s practice of Public-Private partnership and tax credits for private R&Ds;
  5. providing more rewards and incentives for researchers and protection for Intellectual Property Rights and patents with stronger laws and regulations;
  6. engaging more involvement of civil society to civilizing and cultivating enterprises and innovation. This is an effort to change the entrepreneurship culture in Indonesia to be a “job-creator” one in two forms: individual’s / nonprofit organization’s active participation in community development and campus participation. Some steps taken can be:
  • collaborating with nonprofit organizations and wealthy individuals who want to invest in entrepreneurial community projects and in sharing their entrepreneurial success.
  • supporting campus/universities activities that provide better culture and motivation for entrepreneurship and innovation. In doing so, campuses will be facilitated to do more on:
  1. providing campus alumni who are successful entrepreneurs to share new strategies and technologies. They are the first priority motivators because of possessing previous experience of creating opportunities, running a business, surviving in competitive markets, and capacity building and size upgrading;
  2. publishing more studies and research on entrepreneurial innovations.
  3. providing free entrepreneurial workshops to public (as part of campus social responsibility program
  4. revising national curriculum on entrepreneurship by linking formal education with industry, with the necessity in delivery by successful business practitioners for practical guidelines.

 

To conclude, despite the unfavorable economic performance has, we still have optimism that our potentials for entrepreneurship and innovation are far greater than the challenges we are having now, since Indonesia have big population and rich in natural resources. Indonesia needs to strengthen its current capacities while providing better solutions for challenges in our entrepreneurship and innovation. If Indonesia takes the right policies and work hard collaboratively between the government, private, and civil society, we can foster innovation and entrepreneurship and eventually enjoy tremendous growth in the future as what Korea is having now.

 

[1] http://www.adb.org/countries/indonesia/economy accessed 2 September 2015

 

[2] The EY G20 Entrepreneurship Barometer 2013. http://www.ey.com/Publication/vwLUAssets/EY-G20-Entrepreneurship-Barometer-2013-Canada/$FILE/EY-G20-Entrepreneurship-Barometer-2013-Canada.pdf accessed 29 August 2015.

 

[3] [3] http://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS accessed 2 September 2015.

 

[4] http://www.oecd-ilibrary.org/science-and-technology/data/oecd-patent-statistics/patents-by-main-technology-and-by-international-patent-classification-ipc_data-00508-en;jsessionid=178m4pmlc281g.x-oecd-live-03?isPartOf=/content/datacollection/patent-data-en accessed 29 August 2015.

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