Manaek Simamora and Syahrul Aiman Center for Innovation Indonesian Institute of Sciences-LIPI

1. Policy Approaches and Support Mechanisms to Promote Innovation in SMEs in Indonesia: A Case of Iptekda Manaek Simamora and Syahrul Aiman Center for Innovation Indonesian Institute of Sciences-LIPI Jl. Jend. Gatot Subroto Kav. 10, Jakarta 12710, INDONESIA Telp. (62-21) 5276023 Fax (62-21) 5276024 manaek@inovasi.lipi.go.id, manaek@yahoo.com; syahrul@inovasi.lipi.go.id National Workshop on Sub-national Innovation Systems and Technology Capacity Building Policies to Enhance Competitiveness of SMEs, 27 – 30 October 2006, Beijing, China

2. Outline • Policies aimed at strengthening innovation capacity of national industry • Mid-Term National Development Plan 2005-2015 (RPJM) on S&T • Incentive Programs supporting promotion of innovation before and after 2005 • Promotion of innovation to SMEs: Case of Iptekda Program • Conclusion

3. On National Innovation System of Indonesia-1 • Studies on national innovation system of Indonesia conclude that there is a weak linkage amongst the element of national innovation system. Factors contribute to this condition, among other: • absence of a national innovation policy—fragmented and sector-based policies and • institution responsible to ‘lead’ the process of its development and its implementation has not been clear (Aiman and Simamora, 2004 and Aminullah, 2006).

4. On National Innovation System of Indonesia-Cont. • In the last few three years there has been an increasing attention and efforts to accelerate the development national innovation policy and its implementation. • The national innovation system of Indonesia has become one of national development agenda (Short-Term and Long-Term National Development Plan)

5. Policy Directions of S&T in Mid-Term National Dev’t Plan, 2005 - 2011 • Enhance the focus and S&T capacity of R&D institution, • Accelerate diffusion and utilization process of S&T results, • Strengthen S&T institutional aspects, and • Create conducive climate for innovation in the forms of appropriate incentives schemes in attempts to strengthen industry competitiveness

6. Program on Diffusion and Utilization of S&T -1 • Aimed at supporting dissemination process of R&D results and its utilization by business community, industry, and society. Main activities to be supported in this program include: • Dissemination of R&D result to business community, industry, and society through provision of information on S&T and commercialization of technology; • Provision of consultancy services and technical assistance through development of liaison officer to assist provide technological solution needed by industry and local government. • Development of communication system, coordination, and partnership schemes amongst S&T institution (in R&D institution, universities, industry, and supporting institution) both in Indonesia and overseas.

7. Program on Diffusion and Utilization of S&T –Cont. • Enhancement of local government participation and development S&T partnership schemes between central and local government, and amongst local governments themselves. • Development of infrastructure in supporting implementation of standard and conformance assessment of product quality of businesses. • Recognition and appropriate appreciation of society participation in the promotion of S&T through development of techno-education, techno-exhibition, techno-entertainment, and technopreneurship as well as development of innovation and S&T creativity of society. • Development and utilization of S&T traditional knowledge-based and other local resources;

8. Strengthening of S&TInstitution-1 • Aimed at enhancing capacity and capability of S&T institution to support national economy growth. Main activities to be supported in this program include: • Development of science centers and actualization of incubator role and technical implementation units in intermediary function; • Optimalization of Local Research Council (DRD) in determining specific priority local product and formulation of development of S&T based on local content; • Development and implementation of supervision of research activities, development and application of high risk technology, law enforcement, prevention and alertness on nuclear;

9. Strengthening of S&TInstitution-Cont. • Enhancement of integrated S&T management system, include regulation improvement that supporting R&D result commercialization, intellectual property management, quality standard, safety, and environment; • Improvement of incentive system and S&T funding scheme; • Enhancement of involvement of scientific profession organization involvement, universities and society in strengthening ethical foundation in S&T policy formulation; • Provision of national S&T indicator and statistics; • Improvement of quality and quantity as well as optimalization and mobilization of S&T human resources through national and international collaboration.

10. Program on Enhancement of S&T Capacity and Production System-1 • Aimed at supporting technological capacity improvement and production system of businesses, raise synergy amongst various elements of innovation system. Activities to be focused in this program include: • Acceleration of transformation process of local-based and high-tech industry; • Development of supporting regulation infrastructure and conducive policy in the form of tax incentives, technology insurance for SMEs and Cooperatives; • Development of financial institution venture capital and start-up capital, provision of compatible research contracts;

11. Program on Enhancement of S&T Capacity and Production System-Cont • Technopreneur development, such as through development of new venture based on research results through technology incubator; • Promotion and implementation of technology audit/assessment; • Enhancement the role of metrology and testing personnel in formulating development of Indonesian National Standard (SNI); • Capacity enhancement of technology-based SMIs (small and medium industry) and cooperatives through utilization of technology information system and technical assistance, training, encourage partnerships with large industry, and develop various incentive schemes.

12. Focus of S&T Programs • Food security; • New and renewable energy sources; • Transportation technology and management; • Information technology and communication (ITC); • Defense technology; and • Medicine and health technology.  White paper for each area

13. White Papers for the Six Areas/Priorities • Elaborate specific quantitative target for each priorities for short-term (2005-2010), mid-term (2011-2015), and long-term (2016-2025). • Elaborates expected role of the government (including R&D institutes and universities) and that of industry in the roadmap. • Somehow, the document has yet to indicate the necessary public fund or the size of investment that needed to achieve the target

14. GERD, 1994 - 2004 Given the limited R&D investment by the Gov. (est. 70% of the total), there is an urgent need to focus that investment on a very focus area—six areas too many…

15. GERD, 1994 - 2004

16. White Paper and Linkages of National Innovation System Elements • There is a need to make a specific commitment reflected in the form of resource allocation for each of the six priority areas so as to attract or stimulate all elements of the national innovation system to direct their efforts to strengthen national innovation capacity in those priority areas

17. Incentive Programs to Promote Innovation before 2005 • Partnership Competitive Research Grant (RUK), • Catalyst Program, • Start Up Capital Program (SUCP), • S&T Fund for Region (Iptekda) • Incentive system for strengthening management and technology of MSMEs (Siptekman • Optimalization of Regional S&T (PRIDA), and • Establishment of Intellectual Property Offices (Sentra HaKI) in R&D institutes and universities • Some of these program had been in existence for more than ten years. • The existence of these program indicate a strong commitment from the government to build innovation capacity.

18. Incentive Program and Promotion of Innovation 2005… • In 2006, the Ministry of Science and Technology (MOST) launched five incentive programs to implement the policy direction. • Objectives: • to accelerate technology and innovation growth; • to stimulate research to produce innovation with high commercial value; • to encourage acceleration and widespread utilization of innovative products, and/or • to strengthen local industry competitiveness level.

19. Incentive Program and Promotion of Innovation 2005…Cont. • Incentive for basic research • Incentive for applied research, • incentive for enhancement of S&T capacity production system, • Incentive for acceleration of diffusion and utilization of S&T, and • Incentive for National Strategic Priority Researches (RUSNAS).

20. SMEs and Innovation Promotion Mechanism: A case of Iptekda Program • In Indonesia, a tiny number of large firms tend to dominate the private sector at one extreme, with an abundance of informal micro- and small- businesses (99.9%) at the other (IFC PENSA, 2006 and Djamhari, 2005). • On the other hand, in terms of the number of establishment, the Micro and Small segment are the largest in the structure as can be seen in Table 3. • The private sector has few businesses in the middle—the formal, stable enterprises averaging 20-100 employees (ADB study: The middle missing)

22. Innovation mechanism promotion through Iptekda Program • Since there seems to be difficult to make generalization of innovation mechanism from many SMEs policies and programs in Indonesia, the following case on promotion mechanism of innovation through Iptekda Program (S&T support to SMEs in regions) might provide some useful lessons

23. Iptekda In Brief • Iptekda (S&T for Region) is a program conducted by three R&D Institutes in Indonesia, launched in 1998 • Initial mission: Social Safety Network to mitigate the impact of monetary crisis in 1998/Krismon (then become economic crisis) for the poor—business feasibility not yet highly considered • Since 200, technical and economic feasibility main criteria for those who want to participate • Revolving fund scheme: Iptekda assistance recipients obliged to repay the loan • Transfer of Technology from R&D Centers (later since 2000) and faculty (Universities) to SMEs (recipient) one of the key criteria of the program

27. Iptekda Progress • Average survival rate of the business assisted through this program is quite high, that is, 60.3%*) (excluded data 2004). • One of the factors contributes to this condition is close technical supervision by researchers/experts from R&D institutes and faculties. • At the first three to five to six years, the type of activities as mainly in the resources-based sector such as agriculture, aquaculture, food and feed, and handicraft. Later on, the programs include other more advanced sector such as electric car (transportation), magnetic-based instruments, defense, and ITC. • *)This only applies to selected respondents, not representing all MSMEs involved in the program.

28. Example of Technology Transfer through Iptekda Program • ELECTRIC FUEL TREATMENT (EFT) • Energy saver and power booster • Commercial scale • Patent filed and trade mark certified • Electric Car (Gold Car) • Pilot scale • Patent files, Industry design granted, Trade Mark certified

31. Iptekda Program and Promotion of Innovation • The above review suggests that Iptekda program has become on of an effective mechanism to promote innovation and technology result to MSMEs in many provinces in Indonesia. Some key success factors for this results: • availability of technology/technical solution/experts related to local condition/problems (introduction of appropriate technology) • to some extent, proximity of the executing unit (universities) to MSMEs—this create close interaction with the SMEs. Technology transfer very often take place on a tacit-to-tacit process-based/people to people. • Consistent fund allocation over time—learning curve, provide accumulation of capacity so there is a chance to make improvement.

32. CONCLUSION-1 • Indonesia has launched many policies and programs in attempts to enhance national innovation capacity of the industry • There has been many programs on empowering SMEs in Indonesia since 1980s coordinated by different department and institutions. Many of the SMEs policies and programs still need to be more connected to overall private sector economic policies • LIPI’s Iptekda program (Revolving Fund Management-RFM managed by LIPI) deliver an impact to quite a number of Micro and Small Enterprises (MSEs) in Indonesia. Some key success factors of the program reconfirm the importance of close interaction amongst the elements of the system.

33. Conclusion-Cont. • There is a need to review the management of the RFM to allow the investment to be managed in a more businesslike manner so as to enable accumulation resources and make possible a self funding scheme of the program in the future. • The proposed simplified model of the RFM would allow to better manage the fund and treat it as integrated part of the corporate business. • Policy Implication: the government need to consider and introduction of Innovation Fund to ensure promotion of innovation to industry (including SMEs sector).

34. Thank You…Xiexie…Terima Kasih