Improving the Innovation and Entrepreneurial Ecosystem in Indonesia: human capital, incubators, city initiatives and innovation funds

Writen by Declan Carol, TCF Senior Expert in Innovation & Technology

In a previous article we discussed the pivotal role and importance of innovation to Indonesia’s economic development, concluding “As one of the largest economies in both GDP and population terms, largest Muslim state and arguably one of the world’s largest democracies Indonesia needs to also be an exemplar for the type of innovative, entrepreneurial mind-set which will ensure its future as a world leader in economic and inclusiveness terms”.

Developing human capital for innovation  

For this to happen, we have to recognise the importance and contribution of human, rather than physical capital, as the primary factor driving innovation and, in consequence, entrepreneurship. Human capital produces constant returns, rather than the diminishing returns most often associated with the depreciation of physical capital. Yet, even in developed, growth economies, the challenge remains of balancing the cost benefit analysis of the high levels of up-front investment required to develop human capital (through education and training) against the investment required to develop physical capital. Often, rather than expand the capabilities of human capital, by tapping into the innate, versatility of the human brain, it is much easier to exploit low-cost human resources or the relatively risk-free application of mechanisation or automation.

Companies undertaking R&D to innovate and gain competitive advantage require confidence and belief in the ability of individuals to bridge the gap between unmet or unappreciated market need and the most appropriate solution involving realised R&D or ‘innovation’. This often requires a fundamental change in mind-set towards the fundamentals of innovative change in enterprise and economic development. To this end, the EU-Indonesia Trade Cooperation Facility project (TCF) has been piloting initiatives aimed at stimulating change in mind-set and facilitating changes needed to create a more innovation-supportive and entrepreneurial ecosystem in Indonesia where:

  • good ideas can be transformed into excellent businesses;
  • enterprises are upscaling, building strong market positions, nationally and internationally;
  • entrepreneurs and investors (domestic and foreign) are committed to, and investing in new, risk opportunities;
  • new quality jobs are being created; and,
  • an obvious ‘can do, will do’ innovative culture exists.

Some of these initiatives are concerned with incubation, innovative funding approaches for innovation and exemplar city/region innovation programmes.

Business Incubation

Incubation is often wrongly confused with the delivery of business development or advisory services, whilst what really defines incubation is its holistic approach to supporting the project team,  from conceptualisation through feasibility, start-up and scaling, to achieving a positive return on investment and setting the business on the road to successful growth and internationalisation.

Around 5,000 incubators exist today offering many different types of incubation model, from managed work space through the EU BIC model to the Accelerators of today, such as YCombinator, TechStars and 500Start-ups. Whatever the model, the primary goal remains that of boosting the chances of individual start-ups to raise capital, produce a positive revenue stream and provide community benefits, such as, better paid, higher regional employment and economic added value.

The basic concept involves creating a “half-way house” for fledgling entrepreneurial companies by offering space, shared overhead resources (secretarial services, communications, possibly production equipment, or other business resources), focused training, business development assistance, and other services in a single location. However,  an incubator is much more than just multi-occupancy, managed workspace; by providing a physical focus, it can contribute to the emergence of a common business culture, and facilitate the cost-effective delivery of services. Businesses with the capacity for accelerated growth exhibit specific needs that can be met by the incubator with reference to existing (or non-existing) business support services in the country. Moreover, guided by the notion of creating and strengthening economic value networks that will propel the Indonesian economy toward improved competitiveness, incubation can also contribute to structural progress in building a more integrated economy that adds greater value to the country’s products.

There are many organisations and facilities that call themselves incubators in Indonesia today and TCF hopes to assist a number of them to build their models and capacities as exemplars for what incubation could really mean in terms of stimulating and supporting, high-potential, new enterprise creation and economic development in Indonesia.

Innovating Jogjakarta

Given the size of the country’s population, its geographical spread and its cultural and linguistic variations, the stimulation, facilitation and support of innovation in Indonesia will require customised approaches and ‘fit-for-purpose’ modalities. Recognising this,TCF is piloting a city-based innovation facilitation approach in Jogja to serve as a potential model approach towards development for other cities and regions.

All of the major economic actors have been consulted and brought together to facilitate the design and implementation of the pilot approach, including the Governor, BNI Bank (as sponsor) and local organisations, such as balai, educational institutions, business and trade associations, business advisory services, mentors, business angels and investors. The aim is to initiate a competitive approach to stimulating and supporting innovative ideas  that will provide training, capacity building and acceleration of project concepts, as well as funding for emerging entrepreneurs and enterprises. The first competition and support programme is set to run from July to November.

Innovative Funding for Innovation Funding

TCF is currently in discussing with RISTEK and the Indonesian Academy of Sciences the creation of a new Innovation Fund for Indonesia to support innovative and transformative research, development and innovative enterprise-based activities. The idea is that the fund would support proposals that harness leading technologies and innovation with the country’s existing assets, its industries, natural assets and its people. We hope to provide more information on this key initiative in subsequent issues of our newsletter.