Why Indonesia Needs a More Innovative Industrial Policy

In this paper the case is made that industrial policy in Indonesia should be based on recognition of the entrepreneurial economy and promotion of knowledge acquisition and commercialization through investments in research and development (R&D), human capital, and information and communication technology. Moreover, the current industrial policy framework may not take sufficiently into consideration that the external environment wherein Indonesia needs to industrialize, requires a completely different process than one based on the attempted creation of national industries or national champions, or on attracting investment through fiscal incentives or subsidies, as in the past. New challenges, such as industrializing in a global economy where production is fragmented, where the importance of knowledge and entrepreneurship is replacing the old ‘managerial economy’, and where the nature of manufacturing itself is changing, are discussed in this paper, and their implications for industrial policy drawn out.