Innovation: The Experience of Indonesia

This study addresses the impact of industrial upgrading on firm performance. It puts forward a general hypothesis which states that linkages of firms with other firms or economic agents, either globally or domestically, should facilitate the upgrading process. The empirical results based on the survey of 150 respondents provide some support to this. In particular, and among others, foreign or joint venture firms seem to have been more successful than domestic firms in conducting industrial upgrading. The study also found some supportive argument based on a few in-depth interviews on the importance of the linkages. Specifically, having an export market orientation and a motivation to improve competitiveness encourages firms to upgrade their production capability, particularly in terms of the technology of their machinery. Based on the key findings, this study puts forward some policy recommendations. One, the government needs to increase the level of foreign direct investment (FDI) as well as domestic direct investment, and to create a more liberal FDI policy such as non-discriminatory national treatment and liberal negative investment list. Thi