Development of the Indonesian Electronics Industry

Introduction

The electronic sector has grown rapidly and being the fastest export growth for more than two decades in the newly industrialized economies (NIEs) in the Asia Pacific, excluding Japan (Hobday, 2001: 13). Refer to Yeung (2007) as cited by Dicken (2007), electronic industry covers various subsectors, from semiconductors to consumer electronics. The success story of electronic industry within the region has been confirmed by many studies; among others are Mathews (1996), Mathews and Cho (1998), McKendrick et al. (2000) and Yeung (2007).

As noted by Sturgeon (2002, 2003), in the late 1990s there was a revolution within electronics industry in the sense of achieving cost efficiencies through economies of scale and supply chain management. The Growth of electronics production not only associated with growth in demand for consumer electronics, but also with the increasing electronic applications for manufacturing production and processing of information. For example, cars industry has been an important source of electronics demand (Wellenius, Miller and Dahlman, 1993).

In discussing electronics industry, it is very important to see the shift of electronics manufacturing from Japan, Taiwan, Korea and Singapore to four countries in ASEAN, namely Malaysia, the Philippines, Thailand and Indonesia (Rasiah, 2009: 123; Rasiah and Lin, 2005). All of these four countries had benefited from the relocation of electronics manufacturing from Japan, Taiwan, Korea and Singapore. This relocation was mainly caused by the appreciation of Yen, Won, New Taiwan dollar and Singapore dollar after the Plaza Accord in 1985. Another factor was the withdrawal of a general system of preferences (GSP) from the Asian newly industrialized countries in 1988 to encourage the expansion of electronics manufacturing to Indonesia, Malaysia, Philippines and Thailand (Rasiah, 2009: 125-126).

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Significant foreign direct investment in electronics industry has been accepted by Thailand since the middle of 1980s, Malaysia and Philippine since the late 1980s, and Indonesian since the 1990s. For the Indonesian case, Thee and Pangestu (1998) shows the emergence of electronic exports from Indonesia in the middle of 1980s, with several local companies have gained the ability of small repairs needed for the early stages of industrialization. In the early 1990s when Indonesia started to develop electronic exports, electronics has been a growing industry sector in the world economy. It is indicated by growth of the value-added of electronics production around 6% per year in the early 1990s, almost double the growth rate of real GDP (3.1%), and much faster than growth in manufacturing (3.8 %). Indonesia’s export opportunities in electronic products were highly conditioned by the rapid changes in the world electronics industry. These changes included increasing worldwide sourcing of components, shortening product cycles, increasing capital intensity of production, and increasing quality requirements for even low-end products. Indonesia electronics sector is still dominated by TNC subsidiaries, the common situation of Southeast Asia countries. This electronics industry produces many labor-intensive goods for export, the main simple consumer and industrial electronics and components (Hobday, 2001: 25).

Electronics industry occupies an important role in the Indonesian economy. As a sunrise industry, electronic industry in the future is expected to bring enormous economic benefits for Indonesia if the growth and development is not hampered. The export of electronic products is one of 10 main Indonesian export products, which could give positive contribution to the Indonesia international trade (Ministry of Trade, 2007). Indonesia is the 15th largest exporter in 2006 with the value US$ 8 Million, significantly increased from 28th position in 2000 (Ministry of Trade and Center of Statistic Bureau, 2008). The average market share of Indonesian exports of electronics in the world in the period year 2000-2006 was 0.99%. The export value of Indonesia electronic products to the world tend to increase in the last six years with a trend average of 41.08% (Ministry of Trade, 2008). One factor supporting the increase of Indonesia electronic exports in the world is the decreasing of world’s tariffs for Indonesia electronics products from 9.28 % in 2000 to 6:41 % in 2006.

The export of electronics products gives significant contribution to the Indonesian economy. In 2008, the total value of electronics products export was U.S. $ 7.65 billion, of which approximately 11.5% of Indonesia’s total exports (Ministry of Industry, 2009).

Although Indonesia has a relatively high increase in market share in the world, but still less competitive when compared with other ASEAN countries namely Malaysia, Singapore, Thailand and the Philippines. The four countries in 2006 obtained a market share of 5.78 percent, 4.38 percent, 2.60 percent and 2.16 percent, respectively. The major factor of this situation is due to Indonesia too late in developing the electronics industry. The development of Indonesian electronics industry is still not optimal and not “aligns” with what is developing in the world, at least in the Asia Pacific region. Some factors contribute to this situation, among others were due to the unfavorable situation in the country such as a problem bureaucracy and, in particular Industrial policies in the electronics industry. These unfavorable Policies were caused by many factors such as no policy that really integrated and touched to the core issues in the development of industrialization in Indonesia. During this time, the policies were mainly reactive in nature, without systematization and consistency. In addition, the industrial development policies were not supported by technology development activities such as research and development for the electronics industry (Lall, 1998 as quoted by Thee, 2006).

However, the Indonesian electronics industry still has a chance to be further developed. Of course, it should be supported by appropriate strategies and policies of government as well as stakeholder participations. In this respect, the government needs to take necessary measures, such as improving investment climate, improving infrastructure as roads, and supporting research and development (R & D) activities (Thee and Pangestu, 1998). By these concrete actions, it is expected that electronic industry not only will further developed, but also will increase its contribution to export as well as to the economic growth at general in the future.

Research Problem

From the brief background presented above, it is very clear that although electronics industry has given important contribution to the Indonesian economy, but its development is still lack behind compared with neighbor newly industrialized economies such as Malaysia, Singapore, Thailand and the Philippines. In this respect, it is very important to see the dynamics of electronics industry development in Indonesia, both in terms of its performance and policies/institutional changes. To some extent, the dynamics of policies and institutions can be a sound proxy to the role of state in economic development. In addition, to see the relative comparative of strength as well as advancement of the Indonesian electronics industry, analysis of competitiveness is relevant to be presented.

Due to the explanation on the introduction above it is clear that the electronics industry is an industry expected to grow well in the future as in the 4 countries in ASEAN are first developed. But on the other hand, if the development of this industry is not supported by the efforts of the government, the industry will only become stagnant industry that does not have the competitiveness in the era of globalization. That is why, it is necessary to do research to find out about how the Indonesian electronics industry development in terms of the role of the state and competitiveness in world markets. So the future of this industry could become an industry mainstay for Indonesia.

The Objectives of The Study

This study is designed to analyze development of the Indonesian electronic industry with perspective of the role of the state and its competitiveness position. In this respect, the objectives of the study can be defined as follows:

To describe and explore how the Indonesia electronic industry has been developed.

To examine the Indonesian government policies and regulations to support the development of electronics industry.

To examine the competitiveness of Indonesia electronic industry in the world market.

To identify the prospect of the Indonesia electronic industry.

Methodology

This research is designed to employ both qualitative and quantitative approach. The qualitative approach is mainly employed to obtain a comprehensive description of a phenomenon, i.e. the development of Indonesia electronic industry, in terms of its performance as well as policies and institutions changes. In this case, theory of the role of state in economic development will be used to examine the importance of state in facilitating successful industrial development in Indonesia especially for the electronic industry. Meanwhile, a quantitative approach with RCA tools will be employed to measure the competitiveness of the Indonesian electronics industry.

In doing so, both primary data and secondary data will be used in this research. The primary data was gathered from the field research using questionnaire interview with major stakeholders of electronics industry, namely Ministry of Industry, Ministry of Trade, and electronic companies. While the secondary data are gathered by using the library materials, web sources, academic Journals, previous case study sources, newspaper, government sources (Ministry of trade, Ministry of Industry, Central Bank and Central of Statistic Bureau), UN Comtrade and WITS.

Structure of Thesis

This research consists of 7 chapters. There are:

Chapter I: Background of study, research problem and objective of study.

Chapter II: Literature review, consist of the role of the state in government on development economic theory and revealed comparative advantage theory.

Chapter III: Historical of development Indonesia electronic industry.

Chapter IV: Research Methodology.

Chapter V: Discussion and research finding.

Chapter VI: Policies Proposals.

Chapter VII: Conclusion and recommendation.