[KAJIAN ONLINE] Underfunded and Underdeveloped: The Plight of Indonesian R&D

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Achmad Zaky, as the CEO of Bukalapak, tweeted a while ago about his concerns for Indonesia’s low rate of spending on research and development. As the CEO of a Unicorn company that relies on technology and thrives in the modern, fast evolving world, he is right to be concerned. The tweet created controversy overnight as many people misinterpreted it as a political statement. He apologised the day after for the controversy he caused. However, he was on to something here. We do need more spending on research and development, and failure to address this issue could hinder Indonesia from realizing its potential.

Research and Development (R&D) is the term commonly used to describe activities undertaken by firms and other entities such as individual entrepreneurs in order to create new or improved products and processes (Hall, 2006). In a broad sense, R&D has been done throughout history. Any tool that has been invented, be it a simple spear or elevators, is a result of research and development to ease human life and/or gain advantage against other society. In short, R&D creates new technology.

However, efforts in R&D will generally fail to reach the optimum level where the result of research will yield the most benefit in relation to cost (Arrow, 1962). Optimum level is where investment spending is at its most ideal level; if it’s below the optimum level, then it will lose potential benefits, and if it’s below the optimum level, then it will not efficiently yield results. This is due to the inherent nature of R&D that lacks the characteristics to reach the optimum level. This is because the result of R&D (be it knowledge or product) may be imitated and adopted across the nation or further (Mankiw, 2016). Even though it will benefit society as a whole, the person/group will not enjoy the full benefit from his/their innovation. This issue has been addressed with, although imperfectly, with the creation of patents. However, the second problematic characteristic is uncertainty. The products of R&D, simply, may or may not be profitable enough.

 

Why We Need Research and Development

Multiple indexes have been invented to measure and quantify standard of living. These indicators serve to focus efforts towards improvement in living quality. The most used indexes are Human Development Index (HDI) and GDP per capita. Both indexes have its strengths and weaknesses that complements each other. The factors these indexes use are widely accepted indicators for universal standard of living.

HDI is a statistical index that includes life expectancy, education level, and income. Life expectancy represents the health quality of a nation’s inhabitant, Education is measured based on the length of education an average person in the country had, and income represents a nation’s inhabitant purchasing power. Through HDI, we can observe that technology has improved human life drastically. Vaccines have prevented an estimated amount of 2.5 million deaths per year (World Health Organization, 2012). The industrial revolution has been said to be one of the most important turning points in human history, as it is the first time in human history that the living standards of the masses of ordinary people have begun to undergo sustained growth of income (Lucas jr., 2002). Technology has made education far more available to the masses through various mediums, from the printing press to the internet. It is not an exaggeration to say that technology has been one of the main reasons of improved standard of living.

GDP per capita, on the other hand, simply measures the average output of a nation’s population. The logic behind this is as follows: the more productive a person is, based on the society’s valuation of his productivity, the more able he is to buy the commodity he needs. R&D has a significant effect on determining the level of GDP of a nation (Dębski, et al., 2018) (Mao, et al., 2015). Vice versa, the level of spending of GDP on R&D also improves the quality of research (Meo, et al., 2018).

 

Indonesia’s Current State 

Indonesia is by far not the haven for research. In 2017, it spent only 0.21% of its GDP on research (Pramitasari, 2017). 81% of the funding was provided by the government. To compare, the world average at that time spent 2.058% of its GDP on research and development (World Bank, 2019). Developed countries in Asia spent on average 1.6% of its GDP on R&D. The highest level was achieved by South Korea and Japan while we have never reached the 1% point for the last 10 years (Kemenristekdikti, 2017) (Tim Redaksi Katadata, 2019). It may be some sort of relief that Philippines, the nation with the most resemblance in geography and GDP per capita, spent less than Indonesia, at the level of 0.138% (World Bank, 2019) and is still below 0,2% as of 2017 (Gonzales, 2017). However, it is not a reasonable justification of why Indonesia’s spending on research has been so low.

The quality of Indonesia’s research products is, simply, underwhelming. During 1996-2017, Indonesia have published only 75,220 documents, ranking 52 out of 239 countries (Scimago, 2017). Average citations from documents published, implying the relevancy of our research and its quality, was only 6.2. That figure ranks Indonesia 217 out of 239 countries. H-index, the index that attempts to measure both the productivity and impact of research documents that were published during 1996-2017, ranks Indonesia 57th. As the 4th most populous nation in the world, these figures are worrying. It can be inferred that Indonesia lack both the quality and quantity of research products. The amount of researcher per million inhabitants is also very low. Indonesia has 1.071 researchers per million inhabitants, while Malaysia has 2590 and Singapore boasts more than 7000 (Gerintya, 2017). This contributes to the to the low productivity of Indonesian R&D.

LIPI (Lembaga Ilmu Pengetahuan Indonesia) stands as the governmental institute that functions to conduct research in Indonesia. With the low funding provided by the government, it is no wonder that research is not considered an attractive occupation in Indonesia. While researchers hired by universities may fare better than their brethren from LIPI (with wage ranging from minimum 9 million rupiah for lecturers, 19 million rupiah if they conduct research, to 38 million rupiah maximum in Universitas Indonesia (Soemantri, 2018), this does not resonate for their LIPI colleagues. Many researchers funded and hired by LIPI have left Indonesia in search of better wages (Wibawa, 2017). Even under low wage rates, there are numerous cases where LIPI was late in paying their researchers (Sulistyo, 2019). These, over time, ultimately resulted in a brain drain, which means we lose our precious talented researchers as they seek more lucrative work abroad. This loss comes from such a systematic problem that, if not repaired, will bleed out Indonesia’s potential and let Indonesia stay as another third-world country that perpetuates its own stereotype.

Interest of the private sector to conduct research in Indonesia is very low. Mohammad Nasir (2019), as the Minister of Research, Technology, and Higher Education, stated that 76% of the budget for research came from the government’s yearly budget, while many other countries such as Malaysia, South Korea, and Singapore receive research funding mostly from the private sector. This is due to the insufficient incentive provided by the government. UU Number 28 Year 2007 and UU Number 42 Year 2009 only allows single tax deduction. As stated by the current BAPPENAS Minister, Bambang Brodjonegoro (2017), Thailand and Malaysia have allowed double tax deduction for research activities, while Singapore quadrupled it. Furthermore, the process to claim these deductions are notoriously confusing and complicated (Mardiasmo, 2018).However, there’s hope for the future as the government was reported to have been considering on further tax deductions for private research (Laucereno, 2019).

 

Speed Up Indonesia’s Catching Up Process 

Fundamentally, R&D is an investment for the future. Its benefits are not to be reaped right the day after, or even a year. It is a process in which we have to optimize our efforts. The solution is quite straightforward: We need to increase our spending on R&D. Funding for research must be increased. Wage rate and benefits for researchers must be improved. There are definitely trade off from other sectors to increase funding in R&D, but it doesn’t have to be as burdensome as imagined. The government can increase it with two ways, public and private sources. From the public sectors, the government can push its efforts towards tax realisation, as only 72% of Indonesia’s population pay its taxes (Kusuma, 2018). They can also put more effort to reduce wastefulness in fiscal spending, as it is estimated that fiscal spending that goes to waste to be Rp392,87 billion per year (Abnur, 2018). If that wasteful spending can be reduced by at least 1% and channelled entirely to R&D, it can quintuple the amount of Indonesia’s R&D funding, which is set, for 2019, at almost Rp1 billion (Djunedi, 2018). From the private sector, incentives need to be given to the firms, such as tax deductions and strong patent protection services.

Increase in R&D spending is a necessary and impassable step that needs to be taken. Undeniably, it is will be a lengthy process to catch up our lag in the R&D sector. However, there are a few ways where we could speed up our process to catch up with our neighbours.

History records that rapid knowledge transfer has been done multiple times throughout history. The city-state of Urbino became one of the igniting flames for Renaissance through Federico da Montefeltro’s efforts to compile knowledge into one collection. The academy of Gondishapur was once the pride of the Sassanian empire. The scholars came to the academy came because of the shelter the emperor provided and other incentives. China, one of the fastest growing economy in the world, saw an interesting advancement in their R&D department. Through their cheap labour, they attracted companies to do multiple productions in China. However, the Chinese government also put efforts to cooperate with foreign companies to catch up in R&D. They have moved from merely imitating technology to deeper levels of technological engagement that enables them to do various innovative activities on industries (Bell & Figueiredo, 2012). However, the foreigners, which were more advanced from china on their technological development, tends to avoid cooperation in key R&D activities in core knowledge, which is extremely important to a firm and deeply linked with firms’ core competence (Prahalad & Hamel, 1990). Nevertheless, R&D cooperation still creates beneficial spillover of knowledge. Even though the companies may only be willing to share complementary knowledge that has adds little value, the nation the companies cooperated with can create new knowledge (de Faria, et al., 2010) and build its own path of technological development (Lee & Lim, 2001). Indonesia may study from China’s development. To speed up the process of knowledge spillover, Indonesia must open ways for foreign industries that contain valuable technology or knowledge to operate or even conduct research in Indonesia. It is here where said tax incentives play a big role. Without lucrative rewards that incentivize the private firms, their participation on research in Indonesia will stay low. However, Indonesia must carefully thread a thin line or it may end up killing its own local industry.

Furthermore, there are several reasonable doubts about private research. Many researches concerning the products sold by firms may have distorted so as to not hurt or boost the firm’s income. One such famous example is of the tobacco industry. In the 1950’s, various scientific studies have shown the link between the rise in lung cancer and smoking. However, tobacco-producing firms waged war on it to protect their business. They firmly stood ground against the controversy and find new ways to distort proofs of statistical links between lung cancer and smoking into one with no causation effects. However, the problem here, as with many other, is not the research itself. A well conducted research with enough amount of sampling will find the correct result no matter what. The moral hazard that lays within the model (a firm conducting research to uncover its own product safety) is the problem. Supervision of the research results and activities must be maintained. The whole benefit of research must not be thrown under the bus just because of one set of problems that may arise that was not caused by itself, rather by private firms.

Another solution that may help kill two birds with one stone is by the example of the U.S. Indonesia has a rather dilemmatic problem, which is the excessive amount of labour that infested its military (TNI). Luhut Binsar Pandjaitan, Indonesia’s Coordinating minister on maritime, has proposed that the military should fill some of the civilian’s role in the government. One of the major reasons for that is that the military personnel have expertise on a few roles the government were involved in, especially marine science (2019). If the military personnel are indeed skilled and in need of job to do, why not in research? America is the highest spender, as the planned spending for 2019 military budget would be $686,074,048 (Office of the Under Secretary of Defense, 2018). The research budget is $92,364,681, which is 13.5% of its total budget. Simply put, why create a new set of problem by placing military personnel on civilian’s position? Indonesia should instead put the excess labour into research, possibly with cooperation with LIPI. However, this is problematic, as it will potentially cause resurgence of TNI’s dual function. Additionally, this might result in too much government-supported research to be military in nature, as in the case of the American military-industrial complex.

Considering the above, perhaps one of the sectors that should be focused on is manufacture. For the last 5 years, Indonesia’s manufacture value added has contributed to 20,2-22% of Indonesia’s GDP (World Bank, 2019). However, that number is still too low, as Indonesia’s manufacture has not been composed of high value adding processes. The CIP (Competitive Industrial Performance) Index released by United Nations Industrial Development Organization (UNIDO) listed Indonesia as 66th in terms of value added per capita. As a country that highly depends on its manufacturing sector, this is far from satisfactory. This shows that Indonesia’s manufacturing process is still dominated with basic assembly that mostly deals with labour intensive manufacture. Research and development should be focused here, in the short term at least, to modify and diversify the manufacturing process with production that is technology intensive instead of labour intensive. Some may doubt this movement as it could leave a lot of people unemployed. However, combined with current government incentive to educate and certify current labours, this will prove fruitful in a time to come. In the long term, as the manufacturing sector is dealt with, we would have enough capital to move our R&D forward towards product conception. Some may argue that Indonesia already has a catalyst and flagship for product conception, which is the Esemka car production line. But with the potential Indonesia has with all its population, it is simply not enough.

As any spending in R&D is an investment, there will always be uncertainty and risk factors. However, this is not an excuse to refuse to improve. Indonesia must look to the future and put more efforts towards investments in R&D. As was stated before, Indonesia need not to worry because these efforts will not lead to a net loss, but rather an increase in its own GDP.

 

 

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Writer: Rama Vandika
Editor: Miftah Rasheed Amir
Illustrator: Shahifa Assajjadiyyah

 

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