A Study of ICT Firm Innovativeness in Indonesia Influencing Conditions and Design of a Change Strategy

Abstract

This PhD study investigates the challenges of and proposes potential solutions to relatively low innovativeness of small and medium-sized enterprises (SMEs) in the ICT sector in Indonesia. Since there is not much understanding of apparent ‘missed opportunities’ in Indonesia's ICT sector, there is a need to investigate internal conditions that affect innovativeness at the firm level (firm-specific managerial and competence factors) as well as external factors, such as networks’ knowledge spillovers and foreign direct investment (FDI). Low innovativeness also indicates the urgency for the country to take necessary actions, such as improving ICT education to stimulate more ICT talent, enhancing strategies to attract more investment in the ICT industry, and reducing the digital divide between regions. Considering the geographical and cultural uniqueness of Indonesia, this thesis further proposes a set of change strategies to improve the innovativeness of the ICT sector in the country.

The study starts with the introduction and problem statement (Chapter 1). This is followed by a discussion of theories on Resource-Based View, Dynamic Capability, Agglomeration and Entrepreneurial Ecosystem, Culture, and Multi-actor theory (Chapter 2). Such broad approach is taken to enable a theory-underpinned broad scan of empirical reality. In this chapter several hypotheses are formulated that will be investigated in the empirical chapters that focus on the firm level. Next, Chapter 3 discusses the problematic situations and opportunities in the ICT sector in Indonesia (sector-level study). Although the ICT sector is a fast-growing sector in Indonesia, one of the problematic situations is that Indonesia is still a net-importer of ICT, which draws attention to innovativeness of domestic firms. In addition, the disparity of ICT infrastructure within the country is relatively wide between the western and eastern regions. The sector-level study in Chapter 3 is followed by a discussion on a set of conditions of ICT innovativeness at the firm level, including specific internal management conditions, and external and entrepreneurial ecosystem conditions in Chapter 4. The empirical results in this chapter are derived from an e-survey among 260 ICT firms (mainly small- and medium-sized), spread over Indonesia, and from estimation of multiple regression models. The findings suggest that firm capabilities and external knowledge spillovers positively influence firm innovativeness only after having reached relatively high values, as indicated by a quadratic relation. Moreover, the country’s entrepreneurial culture faces a ‘strong power distance’ or hierarchy that needs to be transformed for developing innovation. Chapter 5 examines the development differences between the Jakarta area (core region) and the rest of Indonesia (non-core regions) and how each of the conditions influence innovativeness in these regions. The study in Chapter 5 indicates that core and non-core regions in the country show differences in the entrepreneurial ecosystem and firm capabilities in various aspects. In the non-core regions, the innovativeness relationships with the management conditions and entrepreneurial ecosystem seem weaker than those in the core region. The most pressing outcome for non-core regions is that non-core regions have relatively modest firm-internal capabilities but also small potentials in the entrepreneurial ecosystem. The non-core regions also need to expend more effort on increasing innovativeness in terms of ICT skills and manager cognitive capability. Next, through change strategy formulation and in-depth understanding of innovativeness based on the empirical findings in Chapters 3, 4 and 5, the design of innovation change strategies in the ICT sector in Indonesia is explained (Chapter 6). This chapter provides direction for a set of solutions following empirical analysis at the firm level in the ICT sector for the entire country and two different regions. Chapter 6 also presents the elaboration of collaborative policymaking to improve policy implementation in Indonesia’s ICT sector, including more attention for consultation and deliberation between stakeholders and for evaluation. Chapter 7 discusses suggestions for making the study transferable in practice and the key contributions of the study. Chapter 8 concludes the study with reflections on the whole PhD study and discussions of the limitations of the research and suggestions for future research.

Three key conclusions from the empirical part of the study can be mentioned as follows. First, compared to larger firms, small firms in Indonesia have to put extra effort into learning to increase innovativeness. In this regard, the study found some non-linear relations (mostly quadratic) in management capabilities, especially in the ICT skills. This situation calls for improvement of small firms’ management capabilities, in particular ICT skills combined with market-related skills. Second, a relatively weak positive influence of urban environment and somewhat stronger positive influence of clusters can be found in the study. For example, the study could support theoretical ideas of agglomeration advantages (e.g., benefits of knowledge spillovers in metropolitan areas). The findings confirm the positive influence of networks within clusters. As the third conclusion, firm innovativeness tends to have a non-linear relationship with FDI, suggesting increasing returns (benefits), despite firm limitation to use FDI opportunities fully. In addition, the study found that the core and non-core regions in Indonesia differ in most firm-internal conditions, including management and entrepreneurial ecosystem conditions. For instance, ICT skill level is much higher in the core region than that in the non-core regions.

The key scientific contribution of this PhD study is in extending general innovation theories with a partially densely populated developing country like Indonesia, characterised by low technological level and low innovativeness mainly among small firms. The study reveals the extent to which the phenomenon in the developing countries can confirm or refute what has been postulated for developed countries, for example, concerning ambitions to be innovative and power structure within firms. As the policy contribution, the study suggests a new (policy) approach to respond to the many challenges in Indonesia, namely, in improving policymaking concerning conditions for innovation. The related approach is collaborative policymaking, including all stakeholders involved, in particular those at the level of practical policy implementation, with more emphasis on consultation and deliberation between them. The study also suggests a new approach at the firm level referring to ‘co-creation of inventions with customers’, which is relatively new in innovation practice in Indonesia.

Further, some limitations are inevitable due to financial and time constraints during this PhD study, including survey tools and representation of particular regions (e.g., Papua), though attempts were made to overcome the limitations by interviewing practitioners and experts. The study provides a number of suggestions for future research, including: first, to tackle the reluctance of SMEs to act as respondents, future research may extend and complement the survey in this PhD study through other data collection techniques, e.g., via professional surveyor. Second, future research may consider conducting an in-depth survey and complement it with interviews to identify other important qualitative aspects that have remained beyond the study, for instance cultural influence in innovativeness. Third, to use an advanced model assessment technique, such as Structural Equation Modelling (SEM), to evaluate whether theoretical models, including complex interactions between influencing factors, are plausible when compared to observed data. Fourth, the use of agglomeration index to allow the evaluation of the intensity of spatial agglomeration in a single sector and make a comparative analysis among different sectors. Fifth, to obtain the outcome in improving management conditions through a cascading strategy because the cascades process allows the firm to overarch the strategy throughout the organisation and create a supporting strategy for the firm’s entire value chain of activities to ensure the execution of management change. And sixth, a recommendation for collaborative experimentation to identify best practice, e.g., in co-creation.

Overall, this PhD research fills the gaps of innovation studies in Indonesia such as the incomplete focus of existing studies that are limited to a specific region of Indonesia (i.e., western Indonesia) and the limited follow-up for policy solution in practice. To the best of our knowledge, this PhD study is one of the few studies that covers large regions of Indonesia focusing on ICT sectors and also proposes policy and management solutions.