Best Paper: How to Develop National Technology Capabilities in the Economic Zones

Developing countries are trying to emulate the strategy of East Asia Countries, specifically China and South Korea, to use Foreign Direct Investment (FDI) as a key to their industrial development. They try to create conducive environment for business to attract foreign investment. One of the ways is by building economic zones, such as free trade zones, export processing zones, special economic zones, industrial zones, technology parks and regional economic corridors (ASEAN Secretariat and UNCTAD 2017).

In Indonesia, private sector participates in 80 percent of the development of the economic zones (ASEAN Secretariat and UNCTAD 2017). The zones are considered capable to attract FDI because they have advanced infrastructure, business arrangement assistance and cluster development. Besides, economic zones outside of Java have significantly reduced the cost of business establishment.

FDI that has been successful in creating inclusive industrialization is mostly found in countries, like China and South Korea, where the governments take economic intervention, resulting in the National Technological Capability (NTC). However, there are plenty of economic zones that only offer places for production process, not transfer of technology, which is as a key to attract FDI.

Economic zones in Indonesia have evolved from merely simple industrial zones to special economic Zones. The government has provided facilities and incentives to fulfill the needs of NTC and stimulate its development. However, is it true that the special economic zones have succeeded in developing the NTC?

South East Asia (ASEAN) Secretariat Staff, Karina Miaprajna Utari, has compared industrialization process between Indonesia and South Korea. South Korea is considered to be one of few countries which have succeeded in strengthening their economic zones and developing their national technology. 

Industrialization Paths for Indonesia and South Korea

South Korea’s industrial policy began in the early 1960s and it contributed to the GDP growth of 7.5 percent in average. The GDP reached 8.6 percent in the 1970’s and 9.3 percent in the 1980s (Radelet, Sachs and Lee 2001). However, the positive performance was disrupted when foreign investors withdrew their capital due to the Asian financial crisis from 1997 to 1998. Despite the crisis, the significant economic growth in the 1960s to the 1990s has become a strong foundation for the South Korean industry, which later recovered in the 2000s.

The South Korea government’s policy, which always ensures the provision of educated and hardworking employees, has resulted in the country’s strong industrial foundation. The government’s move has supported the transfer of technology from foreign countries and the production of quality products. Besides, the South Korean government also encourages chaebol or a large business conglomerate to produce export products.

Chaebol is the backbone of South Korea industrialization which is funded by the government, but it is still allowed to operate as private company. Chaebol gets subsidies from the government if it manages to export a quantity of goods targeted by the government. On the other hand, chaebol helps the government invest in technology, so domestic industry can produce quality export products.

Since 2003, economic zones in South Korea can only be found in underdeveloped areas, serving as the center of global capital market and information (Korean Free Economic Zones 2015). The economic zones are not only places to learn technology, but also a conductive environment to establish beneficial relationship with the existing companies.

The relationship has brought two benefits. Firstly, the companies keep doing research and business development together, so they build an innovation culture together. Secondly, the Small and Medium Enterprises have opportunities to enter global supply chains. Therefore, the South Korean economic development will be sustainable and inclusive.

Unlike South Korea, Indonesia changes its industrialization strategy by utilizing special economic zones to attract FDI as the main player. The country aims to assist local companies to join global supply chains and help them learn about technology from the foreign companies. Previously, special economic zones relied on the existing natural resources.

Industrialization in Indonesia began in the late 1960s and it was accelerated in the 1980s. The acceleration was due to government’s policies which encouraged diversification as an alternative when oil prices fell (Goeltom 2007). The period marks a moment where the country switched from natural resources industrialization to manufacturing.

Through the 2011 to 2025 Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI), Indonesia promotes export-oriented manufacturing based on the potential resources in each region. The master plan divides the archipelago into several industrial corridors based on the availability of the resources, namely Sumatera for plantation and processing industry; Java for innovation and cyber technology services; Kalimantan for energy; Sulawesi for cultivation and processing industry; Bali and Nusa Tenggara for ecotourism; and Papua and Maluku for mining and mineral processing (Berawi, Miraj and Sidqi 2017). The master plan uses economic zones as a strategy to increase industrialization in Indonesia.

Indonesia provides tax and non-tax incentives in the economic zones in order to compete with other countries to attract investment. In the zones, collective infrastructures, from connectivity to waste management, are also provided, another advantage of conducting business in the economic zones. Many economic zones are developed in underdeveloped areas in a hope of achieving inclusive development. However, incentives given in those areas fail to give added-value to the zones due to the lack of skilful employees and limited access to market. (Rothenberg, Bazzi, and others 2017).

National Technological Capability

South Korea’s industrialization policy affects the National Technological Capability. Characteristics of the direction and speed of technology in South Korea are the state intervention, chaebol, human resources development, export policy, strategy of transfer of technology, research and development policy, sociocultural system and private sector strategy (Kim, Imitation to Innovation: Dynamics of Learning Technology of Korea 1997).

The development of National Technological Capability in South Korea starts with the government’s policy to provide resources and access to market to chaebol. When chaebol succeeds to develop business, it is able to compete at the national and international level with innovative and high value products. Product innovation is a result of a strong relationship between business owners, universities, research centers and the government (Mazzoleni and Nelson 2007).

Industrial development in Indonesia seems to depend heavily on FDI. Foreign investment is driven by two ways, namely the advancement of technology in the host country and the investors’ move to create efficiency by looking for the cost-effective resources.

As a result, FDI improves the production, but it does not have an impact on technology (Humphrey & Schmitz, 2002). On the other side, FDI can also harm the economy of the host country if it is too dependent on foreign investment (Wade, 2010).

With its master plan, Indonesia has divided industrial areas based on its natural resources. The development of human resources has become a crucial factor in economic zones located in underdeveloped areas. If the development is ignored, the transfer of technology conducted by the FDI may be ineffective due to the lack of educated and skillful human resources.

Apart from incentive, NTC is also determined by the capability and the institutions of economic zones.  The capability is the company’s operational facilities of basic physical infrastructures such as roads, telecommunications and land. Meanwhile, institutions mentioned are academics and business owners. South Korean government has inspired policy making in Indonesia by integrating those institutions. Therefore, research and development products can be commercialized.

Focus on Industrialization

Even though chaebol has expanded their business to various industries, the South Korean government only focuses on investing in three industries namely automotive, semiconductor and electronics (Kim 1997). The focus of industrialization encourages diversification and specialization of products. Interestingly, the three industries are interrelated and complement each other so that technology can be implemented in other industries.

Through the master plan, Indonesia has eight development programs with 22 major economic activities (Coordinating Economic Ministry and the National Development Planning Agency 2011). The programs are agriculture, mining, energy, industry, maritime, tourism, telecommunication and the development of strategic zones. However, the focus of Indonesia’s industrialization is not clear because some of the eight programs do not describe specific industries.

The lack of focus on industrialization has made it difficult for the country to allocate resources. The condition is caused by the absence of technology which can help the country determine the focus of industrialization. As consequences, training and development programs for industrialization programs are hampered (Amsden 1991), even though both activities can create innovation that foster the national technology.

Conclusion

Based on the description above, the differences between industrialization in South Korea and Indonesia are the incentives and the adoption of technology. The inability of Indonesia to establish technology companies affects the NTC. Besides, Indonesia's industry is less focused on industrialization compared to South Korea, hampering the country from creating specialized workforce, a factor which will affect the NTC.

Nonetheless, the economic zone policy as a catalyst for the development of technology does not need to be changed because incentives have been given to companies in the region. However, the government needs to change the target of incentives to companies that are willing to learn and improve their technology. **