PUBLICATIONS & REPORTS

Contents Introduction

This paper describes the major channels through which imported technologies from the advanced countries are transferred to Indonesia and then tries to assess the extent to which each of these channels has contributed to the development of local technological capabilities (TCs). The development of these TCs is crucial to raise the international competitiveness of Indonesia’s manufacturing sector, which has emerged as the major engine of Indonesia’s economic growth and the major source of export earnings after the end of the oil boom era in the early 1980s. Based on several micro studies at the firm-level, this paper finds that the major channels of technology transfer to Indonesia, including foreign direct investment, technical licensing agreements, capital goods imports and participation in world trade, have generally contributed to the basic operational (production) capabilities, and occasionally also the acquisitive (investment) and adaptive (minor change) capabilities. None of these channels, however, has been able to encourage firms, whether FDI firms or local firms, to develop the more demanding innovative (major change) capabilities. To achieve this goal, two basic conditions are needed, namely a proper incentive system, including sound macro-economic policies and pro-competition policies, and a greater and better investment in human resources in order to raise the ‘supply-side capabilities’ of the firms.