By Bob Widyahartono  

As we enter the second decade of the 21^st century, one of the development strategies of Indonesia’s  economic policymakers and players  should be the creation of a plan to develop SEZs (Special Economic Zones) in selected provincial regions.

The required characteristics of the provincial regions are namely, infrastructure, quality and quantity of labour, knowledge spill-over, and the ability for existing supporting and related companies to attract new companies to move into the areas.  

In SEZs, agglomerations and clusters of industries are the main players. Agglomerations and clusters should be treated equally, meaning that industrial factories and distribution facilities come together in a common location and form a concentrated business area outside regional capitals in order to avoid large-scale urbanization. Industrial clustering is indeed of great importance in terms of economic growth.

SEZs are a means to attract domestic as well as foreign direct investments (FDIs). The main issue, however, is that our existing industrial policy should be in line with domestic as well as regional changes in consumer behaviour on the following products:

• electric appliances
• wood and wood products
• garments
• household appliances
• pulp and paper
• leather products and footwear
• fish and shrimps
• agriculture

Our macroeconomists claim that Indonesia’s success in industrialization is due to macro-economic stability, export-oriented policies, trade reforms, investment licensing deregulation, investment in infrastructure and education. The speed of industrialization has however led to a relatively “shallow” structure. In the early 1990s ‘broad-based’ industrial policies resulted in shallow export-driven industrialization.   

When the Asian crisis (1997-1998) occurred, not many members of our elite were fully aware of a number of factors in our manufacturing sector, stemming from long-standing weaknesses such as narrow export base and limited capacity to cater to in regional as well as international markets. 

Several weaknesses can still be obeserved in the concentration of industries in Java, particularly in Jabotabek (Jakarta-Bogor-Tangerang-Bekasi), Bandung, Semarang and Surabaya-Gresik-Mojokerto (the East Java triangle).  There exists a low level of local component content in industries and limited capability in adopting as well as absorption of appropriate technology in industries. There is no significant ‘clustering’ of industries’ to enable effective use of resources, and the list of resources includes oil and gas, tin, nickel, and other mineral resources, hydropower, lumber, special marine products and agriculture products.

In new SEZs, clustering would be more realistic since they encourage product specialization in certain locations and enhances competitiveness. In short, this means grouping intensively inter-linked industries. In the outer regions, and especially in Sumatra, Sulawesi, Kalimantan, Maluku and Nusa Tenggara islands, there has not been much industrial clusters involving SMEs, since a small number of large foreign affiliated or even wholly Indonesian non-oil industries on the sites usually have their profit transferred to Jakarta or outside the country, leaving little in the regions in question. This makes it more difficult to foster the establishment or growth  of small local businesses.  

In reality, interaction between local government and existing industry associations has been mostly confined to taxation and regulations, and limited to public-private networking in the form of formal irregular dialogues. Because of time constraints, what took place in the 1990s and 2000s are short-term industrial and export diversification, productivity enhancement and skill development in product and process technology, and assessing international competitiveness. 

Dialogues are constrained not only by time, but also by weak analytical capacity of most industry associations as well as low-quality professionalism on the part of local authorities involved in facilitating industrial development.

Therefore, regular upgrading is a bigger requirement in the region so as to enable associations to absorb information on how to effectively pursue industrial development for members. Meanwhile, the function of local authorities must be confined to provision of services and executing ‘good governance’, since too many regulations and interventions will hamper the productivity and efficiency of the related industries.

Clustering will still be beneficial to society as the stakeholders of economic development. Well-planned industrial clusters in SEZs could effectively function in places where locally specialised items are produced or where a large core firm has a handful of subcontracting or parts makers surrounding it. It should be in the vicinity of large cities – in order to create a multiplier effect to society – and government-led or semi government-led export processing zones.

These forms of industrial clusters have several shared features despite differences according to category. There are strong externalities derived from vertical as well as horizontal linkages through sub-contracting and what is referred to as ‘inter-firm alliances that produce ‘collective efficiency’.  With the advancement of information technology (internet, facsimile, hand phones) accumulated knowledge is also shared. On the other hand, transportation and communication costs are unavoidable factors in the sense that when they are high, firms prefer to concentrate or rely on one and another.

Knowledge is crucial in any cluster. R&D (Research and Development) activities, new devices and skills are inevitably shared in the community through regular interactive meetings and dialogues.  Lastly, the role of government and local authorities is also significant since clusters could mainly consist of small-and medium scale enterprises (SMEs).

Clustering, in our case, is of importance in terms of economic growth. The creation of industrial parks in alliance with Japanese industries has proven beneficial since the 1990s. But this kind of alliance must be further encouraged by other qualified investors. It must be borne in mind that creating industrial clusters is not always and instantly successful. It depends on several factors: Firstly, infrastructure (highways, ports, electricity supply, banking services, health and local transportation facilities etc.); Secondly, institutional framework, e.g. legal system, and networking based on trust.  

Thirdly, good public governance and to a certain extent government support in terms of laws, taxation and financing, and Fourthly, the required human resources in terms of basic knowledge in business as well as professional and skill development.

The private sector particularly in the regions should be encouraged to develop and operate demand-driven technical training centres,  in alliance with  training institutions  with  financial and other incentives (e.g. tax), and under a very carefully designed quality control and accredited system.

Take the case of Japan with their industrial policy, which from time to time is reviewed since 1970s until now. Their METI (Ministry of Economy and Industry) orchestrates the development of their ‘picking winners’ strategy in their home market as well as the international market. Since the 1980s a number of Japanese firms have been allocating a substantial amount of their budget for R&D:  one-third on new products and two-thirds on new processes resulting in faster entry and penetration into domestic as well as regional (East Asian) markets.  Japan’s industries have never been confined to large- scale industries, the majority are more medium-scale in size.

Why do certain locations attract firms to take part in clustering? Several factors that should be understood by the stakeholders in charge of promoting prospective SEZs are, Firstly, essential raw materials must be easily accessible by industries in the zones, as well as well-organized infrastructure such as sea transportation facilities e.g. port facilities, efficient shipping, and highways. Secondly, stable supplies of electricity, gas and water are indispensable. Thirdly, a large pool of quality labour to attract firms must be in place. Fourthly, city government facilities are essential, providing tax incentive as outlined by the Central Government with no ‘additional local tax”. Fifthly, our representatives and embassies abroad should actively and continuously promote SEZs to interested business circles, domestic as well as international.

The success or failure of  SEZs  in  selected provincial regions will also depend  on institutional framework i.e. legal system,  competent and credible participatory actors,  coordination/networking with  actors  having  continuously  ethical sensitivity and behaviour in  ‘ better, faster and cheaper’   in the provision of services.      

 The writer is a senior economist and lecturer in International Business at Jakarta-based Tarumanagara University