INNOVATION SYSTEM-BASED INDUSTRIAL CLUSTER DEVELOPMENT: A COMPARATIVE STUDY OF INDUSTRIAL CLUSTER IN INDONESIA AND SOME ASIAN COUNTRIES 1.

Transcription

1 INNOVATION SYSTEM-BASED INDUSTRIAL CLUSTER DEVELOPMENT: A COMPARATIVE STUDY OF INDUSTRIAL CLUSTER IN INDONESIA AND SOME ASIAN COUNTRIES 1 Yan Rianto, Muhammad Zulhamdani, Chichi Shintia Laksani, Dian Prihadyanti Center For Science and Technology Development Studies, Indonesia Institute of Sciences Widya Graha Building 8 th Floor, Gatot Subroto Kav. 10 South Jakarta 12720, Indonesia yan.rianto@lipi.go.id, muha068@lipi.go.id, chic001@lipi.go.id, dian013@lipi.go.id Abstract This paper is described industrials development and their policies in Indonesia. Beside that, this study analyze industrial cluster development which is conducted by using innovation system approach and is made comparison it with some countries in Asia. This study shows that the industrial cluster is designed to be an agglomeration based on the network of the raw material for production, financing institutions, wellprovided human resources, and other economics infrastructure. There is lack of interaction among actors in the cluster and R&D activities to support innovation in the cluster. Comparative analysis of industrial cluster development in Japan, Taiwan, and China shows that clusters are supported by development of transaction market. It also involves innovation stimulus from the benefit obtained from the presence of the cluster which shows the concentration of large enterprise with various

2 human resources in smaller geographic area. We suggest a recommendation regarding to industrial cluster development to increase technological and innovation capability within cluster in order to make more competitive industrial cluster in Indonesia. Keywords: cluster-based industrial development, innovation system approach, Indonesian Industrial policy Introduction Nowadays, economic activities are moving toward knowledge-intensive business, accompanied by rapid development of technology in globalized economy era. This condition has impact on the tight competition, and rapid change in business environment. Domestic manufacturing products are directly compete with foreign products and business world must accept reality that technology advancement has become a reason on the obsolent production facilities, short product life-cycle, and lower profit margin. At the other side, globalizing economy inevitably testifies whether individual regional economies and SMEs in them can compete and survive by showing their own competitiveness or not. Once it was widely believed that the very development of transporting and information technology and borderless economy inevitably break the barrier of distance and make regional economies or industries almost meaningless. Nevertheless, surprisingly a sort of reincarnation of regionalism started in the 1980s, and many academics and researchers then ignited debates as well as numbers of empirical research works on the importance of regional industrial agglomeration and local networking (Mitsui, 2003)

3 For the last three decades, industrial agglomerations have played a leading role in the development of cities and regions and have formed a new industrial organizational basis for economic planning and development. The industrial clusters are determined by the trade dependency and concentration of small enterprises at the city and township level (Isbasoiu, 2007). It is also known that Alfred Marshal (Sonobe and Otsuka, 2006) has studied three benefits of the presence of industrial cluster, as follows: 1. Information spillovers 2. Specialization and division of labor between companies 3. Development of skilled labor markets Considering the benefits of industrial cluster for industrial development, Indonesia s government has formulated National policy of Industrial Development (KPIN) to compel new direction for future national industry development, and solve problems blocking industrial development at present. This policy is arranged in order to face world global economic challenge and to be able to anticipate rapid environment change. International competition becomes new perspective for all countries, so the focus of strategy of future industrial development is to build sustainable competitiveness of industrial sectors in domestic or foreign market. Industrial development policy in KPIN consists of core and operational strategy, and also main points of policy on industrial development policy, include development of 10 core industry clusters, development of supporting industries, and development of vanquish industry in the future. Policy in KPIN has also considered national industry capability based on economic resources potential, industrial performance, and problems faced by national industry. Nevertheless, the strategy of industrial development in KPIN has not explicitly include element

4 of innovation system in industrial development through cluster approach. KPIN has just shown the needs of the role of R&D institution, university and government in order to support industrial cluster development. This can be seen from the relationship framework in KPIN document which include the three actors. Unclear role of R&D institution and industrial sector have result in Indonesia s high import of raw or supporting material (technology), as shown in Fig. 1. December 2007 December 2008 Consumption Goods 8.90% Capital Goods 15.12% Consumption Goods 6.482% Capital Goods % % 75.97% Raw Materials Raw Materials Source : Statistic Indonesia, 2009 Fig.1. Indonesia s Import, Thus, the presence of innovation-based industrial cluster can reduce import of raw or supporting material. Therefore, this paper seeks to examine the development of industrial cluster in Indonesia, as mentioned in National Policy of Industrial Development (KPIN). This paper also discuss about industrial cluster development based on innovation system carried out by Japan, Taiwan, and China. The result is then compared with Indonesia's industrial cluster development based on innovation system. Development of Industrial Policy in Indonesia

5 In its development, the struggle of national industry at the end of 1960's has enthusiastic progress, either in its structure, diversification, and market orientation. The development is not detached from external development influencing industrial policy implemented. Chronologically, industrial development policy describe that in rehabilitation and stabilization periods ( ), and periods when oil booming happened ( ), the policy implemented is by supporting the development of import-substitution industry, for example textile and garment industry, paper, cement, or food and beverage. By the increase of oil price (oil boom), the policy was prolonged and even intensified. Even though, in period of , price of oil had weakened. Therefore, industrial development policy was aligned by adding new mission: developing export-oriented industry, and deepening and strengthening industrial structure. By economic crisis in 1998, the policy is saving industry in order to make it preserved through Industrial Revitalization Program. To define prospective industries, measurement of competitiveness was conducted, either from demand or supply side, to catch a glimpse of its capability to compete either in domestic area or overseas. The result of analysis for developed industry is grouped by two categories, included export oriented and domestic oriented industry, which then divided into four categories: natural-resource-based industry, labor-intensive industry, capital-intensive industry, and technology intensive industry. In defining industrial building as what is dreamed, based on the present industry, those chosen industries are fulfilled by other industry which is chosen based on its potential. Figure 2 explains the development of industrial development policy in Indonesia.

6 Fig.2. Development of Industrial Policy from 1967 to 1972 Future strategy of industrial development in Indonesia mentioned in KPIN adapts latest ideas at the moment related with globalization and 21 st technology development in industrial development approach through cluster concept at context of building sustainable industrial competitiveness. Basically, industrial cluster is an exert of grouping the interrelating core industry, either supporting industries, related industries, supporting services, economy infrastructure, and related institution. Besides to reduce transportation and transaction costs,the benefit of this cluster is also to increase efficiency, create collective asset, and pursue the creation of innovation. In middle range term, increase of industrial competitiveness is conducted through building and developing prioritized industrial cluster, while in long term is pointed out in integration of cluster approach by managing the demand, and building core competence in each cluster. To make it to be reality, it needs to be suppoted by managing the network, either for local cluster or multinational corporation, and/or overseas cluster. KPIN also defines prioritized industries which will be stimulated in the future. The selection of the industry has purpose that the development process is more focused and easier to measure the criteria of success.

7 Based on the formulation of national industry policy, the development of industrial cluster is aimed to achieve the followings: Strengthening industries in the value chain includes core industries, related industries, and supporting industries by location advantages, which may stimulate comparative advantages to be a competitive advantage. Strengthening relationships among/between clusters in the same sectors or between/among clusters in the other sectors, all at once stimulate partnership between SMEs and large enterprises and other relevant interactive relationships, which then form industrial network and structure supporting increase of value-added through productivity improvement. Stimulating the growth of related industries which need supplies of the same raw material and supporting material, therefore it can strengthen partnership between/among prioritized, related, or supporting industries. Facilitating marketing efforts either in domestic or overseas areas. Concept of Cluster Based on the studies by Alfred Marshal (Isbashoiu, 2007), three conditions for setting an industrial cluster are identified: the existence of a pool of adequate labor, the existence of specialized suppliers and the possibility of external spill-overs (the rapid transfer of knowhow and ideas inside the cluster). In addition, Walter Isard (Isbashoiu, 2007) expanded this concept using the export-oriented industries and its linkages to other industries in the region. According to him, these strong industrial linkages are indicating the existence of an industrial cluster.

8 Porter popularized the concept of industrial clusters in his book The Competitive Advantages of Nations (cited by Isobashoiu, 1997), in which he examines two types of clusters: vertical clusters, made up of industries that are linked through buyer-seller relationships; horizontal clusters, that include industries which might share a common market for the products, use a common technology, labor force skills and similar resources. Many academics point out that regional clusters had their origins in particular local factor conditions, local demand, and the presence of a related industry. Source: Enright ( Isobasoui, 2007) Fig.3. Enright s Typology of Clusters by Stage Development

9 Based on different kinds of knowledge (Ishobaoui, 2007), there are two types of competitive clusters: techno clusters, which are high-technology oriented, well adapted to the knowledge economy; historic know-how-based clusters, which are based on more traditional activities that maintain their advantage in know-how over the years. Industrial cluster in Perpres No. 28/2008 regarding the National Industry Policy is defined as a group of core industry concentrated regionally or globally which relating and has social interaction each other dynamically, either by related industry in improving efficiency, creating collective asset, and encourage creation of innovation, so that it creates competitive advantage. Moreover, formulation of national industrial policy explain that cluster industry is industrial grouping which relating each other, either as core industry, supporting industry, or as related industry. Concerning with innovation, industrial cluster can be categorized in four groups (Pavitt, 1984). They are science-based clusters, scale-intensive clusters, supplier dominated clusters, and specialized suppliers clusters. In sience-based clusters, access to basic research and government R&D institution become important aspects in research activities. This type of cluster is patent intesive and need high level of R&D. It tends to collaborate with government R&D sector. This type of industry in this cluster is pharmaceutical industry. Scale-intensive clusters tend to build relationship with universities and technical insitution as research performer. Therefore companies are not conducting many research activities. Their innovative achievement depend on their ability to import and build science developed in other area. Industry in this cluster is food

10 industry, and transportation industry. Supplier dominated clusters has tendency to import technology, especially capital goods and intermediate products. Innovation in this cluster is determined by interaction capability by supplier, e.g. in forestry and services industry. The last category is specialized suppliers clusters. This cluster is R&D-based, and concern with product innovation. It generally interacting with either supplier or user, for example hardware and software industry. Development of Industrial Cluster based on Innovation System One of the main key as an effort to achieve sustainable industrial development is by competing through innovation and learning. This can be conducted through several ways: 1. Developing linking with partner and international source of technology and knowledge 2. Use the existing foreign technology and knowledge with domestic resources 3. Carry out learning to increase adoption capability, using, and improving technology obtained 4. Continuously repeating the three cycles For this reason, UNIDO carefully examine industrial innovation and learning system as shown in Fig. 3.

11 Source : UNIDO 2002 Fig. 3. Industrial Innovation and Learning System As a whole, innovation performance is not only depending on how particular actor (e.g. companies, research institution, university) play its role, but also on the interaction one another as an element of an innovation system, either on local, national, or international level. Related with it, OECD conceptualizes a comprehensive framework of important actors and relationship in innovation system (Fig. 4). From the figure, it seems that industrial cluster becomes part of national innovation system.

12 Source : OECD, 1999 Fig. 4. Innovation System Besides, innovation is also a part of a natural process in industrial development. As what is analyzed by Sonobe and Otsuke (2006) to industrialization in Japan, China, and Taiwan, industrial cluster has impact to industrial development in those countries. Despite significant differences in political regimes and stages of economic development among the three countries and in production methods and skill requirements across the selected industries, we found extremely similar processes of industrial development across the eight cases. Thus, these processes may be termed An East Asian Model of Cluster-Based Industrial Development. We characterized the development processes into three distinct phases: (1) initiation, (2) quantity expansion, and (3) qualitative improvement (See Fig. 5).

13 Source : Sonobe and Otsuka 2006 Fig.5. Endogenous Model of Industrial Development Based on the process, industrial development is started from initiation stage. In this stage, companies tend to use simple production methods and technology used is the one which is already available. If these industries are having difficulties in selling their product, they will build an industry located in suburban, because of the great competition in urban area and also based on the experiences of their business partners. Companies in this stage have low education level. But, it there is company which already used little more complex production methods it will become a new company. A new product in this process is obtained through many experiments and failures which then result in a product. This experiment and failure happened because they imitate many products for trials. This development is said by Schumpeter as economic development theory (Sonobe & Otsuka, 2006)

14 Source : Otsuka, 2005 Fig.5. Cluster Based Industrial Strategy Fig. 5 shows that industrial development is started from initiation supported by cluster formation. This formation is supported by the building of a model design, and attract for joint venture. For next, the industry will be able to increase product quantity, then it will decrease transaction cost. Nevertheless, if the company develops to quality development, then innovation is needed. To stimulate the innovation, technology and management training program are needed. Technology research is also necessary in order to increase probability of innovation. At last, if the company has developed in final stage, it will attract joint venture and more globalize customer. Industrial Cluster Development based on Innovation System in Japan, Taiwan, and China Literature review on industrialization by Sonobe dan Otsuka (2006) in three Asian countries shows the rapid development of industry through innovation-based industrial cluster. The result of natural process of industrial development as explained earlier shows occurrence of

15 successful imitation and assimilation of foreign technologies, the formation of geographically dense industrial clusters consisting of a large number of small enterprises producing similar and related products, and the advent of multifaceted innovations leading to a great leap forward in the industrial structures are three of the important ingredients of the East Asian model of clusterbased industrial development (Sonobe and Otsuka, 2006). A critical question is why East Asian economies have developed so successfully. Like China for the last 28 years, the Japanese economy had grown at a rate of about 10% per year during the miraculous growth periods from the late 1950s to the early 1970s. The growth rate of the Taiwanese economy has been no less rapid than in Japan in the past and in contemporary China. Furthermore, the patterns of industrial development among the three countries are more similar than they are dissimilar (Sonobe and Otsuka, 2006) In the case of Taiwan, foreign joint ventures, foreign trading companies, and the Industrial Technology Research Institute (ITRI), a leading national R & D center founded in 1973, played major roles in introducing new technologies from abroad since the 1960s. Spin-offs from the joint ventures and those who were trained at ITRI often became the founders of new enterprises in this country. In the case of China, state-owned enterprises (SOEs) were the main sources of human resources, industrial technologies, and managerial know-how for the development of collective township and village enterprises (TVEs) and private enterprises. Thus, SOEs played the role of model plants. According to Otsuka et al. (1998), SOEs were inefficient in management due to regulations but knowledgeable about modern technologies. Moreover, SOEs have established marketing channels. Thus, the assimilation of technologies and management know-how from SOEs as well as the use of SOEs marketing channels were the

16 major means for collective TVEs and private enterprises to improve the efficiency of production and management. (Sonobe and Otsuka, 2006). Sonobe and Otsuka (2006) remark that information spillovers are common and they are also important for the cluster. For example, in the garment clusters in both Japan and China, if a new design introduced by an enterprise turns out to be popular, many other enterprises copy it within a few days. But information spillovers, which are essentially imitation, are not always that simple. In the case of the printed circuit board enterprises in Suzhou, a group of spin-off enterprises, whose managers used to work at the same founding enterprises, employ the same technology to produce the same products. Thus, information spillovers in the industrial cluster are inseparably related to the development of skilled labor markets, wherein skilled workers move from one enterprise to another. Another important aspect of the industrial cluster is that it reduces transaction costs. Transaction costs have been neglected in the literature on economic geography and spatial economics, where the role of transport costs has been discussed extensively. Transaction costs arising from moral hazard and hold-up problems are low in the industrial cluster because rumors of such opportunistic behaviors quickly become public knowledge by word of mouth in the cluster. This is the major reason why the division of labor develops in the industrial cluster (Sonobe, and Otsuka, 2006) In other case, successful industrial development formed based on industrial cluster (Sonobe, Hu and Otsuka, 2006) can be seen from motorcycle industry in Chongqing, the sizable entry of new enterprises took place in the 1990s, which was made possible by the formation of an industrial cluster by relatively early entrants. Without the benefits of external economies arising

17 from the industrial cluster, it would have been difficult for tiny private enterprises to enter the industry and compete with the large SOEs. The formation of industrial clusters has been prevalent in China since privatization began in the early 1990s and, hence, it can be regarded as an important result of the privatization. A drastic decline in product prices occurred due to the sizable entry of private enterprises in the mid-1990s. Its impact on the course of this industry s development was quite large. It accelerated the decline of the dominant SOEs, and, as in many industries in other countries as well as the coastal region of China, it triggered the improvement of product quality, which led to the shakeout of the industry and the rise of large private enterprise groups. To achieve qualitative upgrading, the private enterprises in Chongqing obtained technical and managerial expertise by recruiting engineers and managers from SOEs. Thus, the success of this industry in large measure derives from the combination of the positive features of the industrial development in Wenzhou, in which industrial development is based on the cluster of private enterprises, and in southern Jinagsu, in which industrial development is based on the effective use of human resources of SOEs. M. Porter's theory of 'industrial cluster' model and competitiveness is now the most popular one in Japan, and many governmental ministries, local governments and public organizations are enthusiastically trying to apply it to seek regional innovation system, promotion of local business networking and new industrial development. Not only theoretical ideas but also its practical deployments and their attainments in Western countries such as in Finland, Ireland, Sweden, UK or USA are also attractive and frequently visited. As a result, new expected players are not necessarily existing local SMEs and skilled craftsmen, but universities, research institutes, or public institutions which can be linking together and creating critical mass for further innovation and industrial development (Mitsui, 2003)

18 Another case on the successful development of industrial cluster is the development of manufacturing industry cluster at Tokai, Japan (Industrial Cluster Project, 2005). This program aims to support effective innovation through support system which is the result of collaboration among industry, university, and government. Besides, this program facilitates foundation of innovation by support which depends on the needs of each stage of R&D purposed for protecting its market. Manufacturing industry cluster at Tokai has its own network consists of 800 institutions formed by organization, university, government R&D institution, local government, finance institution, and other organization. Then, this program result in the collaboration with other cluster outside the area, strengthened to support commercialization. Fig.6. Manufacturing Industry Cluster at Tokai, Japan

19 The figure above shows that industrial development through cluster approach becomes a unity of integrity among government, university, R&D institution, and companies. The relationship shows that the role of innovation system is to be the fundamental element in building manufacturing industry cluster. Learning from successful experience of other countries was also likely to be the key to the success, even though it is extremely difficult to quantify this effect. Sonobe and Otsuka (2007) explain that Taiwanese enterprise managers learned a great deal from the Japanese experience. Similarly, Chinese enterprise managers seem to have learned a number of lessons from both Taiwanese and Japanese experience. While it is difficult to provide the answers to the question of why Japan has been successful in the transition from the quantity expansion to the quality improvement phases in much earlier years, it seems clear that the successful development of the Japanese industries became the model of the industrial development in other East Asian countries Development of Industrial Cluster in Indonesia Design of industrial development formulates in the industrial development policy is based on the great potential of Indonesia which can be derived as the locomotive to pull industrial growth in Indonesia (see Fig.7). This potential is a chance for Indonesia in formulating strategy of industrial development in the future.

20 Source : National Policy of Industrial Development, 2005 Fig.7. Indonesia s Potential for Developing National Industry Sector Future strategy of industrial development adopts latest ideas - the industrial development through cluster approach in order to build sustainable industrial competitiveness. In medium range, effort to increase industrial competitiveness is conducted by building and developing prioritized industrial clusters with effort to manage the demand, and build core competence in each cluster. To make it a reality, it needs to be supported by managing the network, either for domestic cluster or with MNC, and/or overseas cluster (KPIN, 2005). Based on Bangun Industri 2025 and Perpres No. 7/2005 about national plan of medium range development, Indonesia s government has grouped prioritized industry by developing 10

21 core industrial cluster, developing related and supporting industry for future, and particular branch of SMEs. Moreover, Indonesia s government has defined the direction of development for industrial sectors for the next five years: 1. Strengthening and deepening industrial structure 2. Create more conducive competition climate 3. Increase industrial revitalization, consolidation, and restructure 4. Increase the role of SMEs 5. Spreading industrial development 6. Increase in capability for mastering industrial technology Based on the urgency of the problem, development priority of core industry in is defined by the criteria. From those criteria and from result of analysis of international competitiveness, in medium range, core industry cluster is emphasized on the effort to strengthen and to grow cluster of: 1. Food and beverage industry 2. Sea-product manufacturing industry 3. Textile and garment industry 4. Footloose industry 5. Oil-palm industry 6. Wood product industry (include rattan and bamboo) 7. Rubber and rubber product industry

22 8. Pulp and paper industry 9. Electrical machine and electrical devices 10. Petrochemical industry To support core industry clusters development, it should be stated further in a national industry development strategy which more comprehensive and integrative, showing related industry development plan, and supporting industry from the 10 prioritized industrial cluster. The branch of related or supporting industries either in medium or long range includes: 1. Iron industry 2. Machine and plant devices, construction, and mining 3. Agriculture tools/machine 4. Cement industry 5. Ceramic industry 6. Consumer electronics industry Meanwhile, the future prioritized industry in the future includes three branches: agriculturebased industry, telematics industry, and vehicles industry. Development of industrial cluster in some countries e.g. Japan, Taiwan, and China becomes a lesson of industrial development. It is significantly different if it compared with industrial cluster design in the national industry development policy. For example, model in development of automotive industry in Indonesia becomes part of cluster design. Figure 8 show that automotive industry cluster program has no clear role of each of their actors externally.

23 Source : National Policy of Industrial Development, 2005 Fig.8. Relation Framework of Automotive Industry The figure above is an example of relation framework in automotive industry. Based on it, role of government (either central or local), competitiveness forum (working group dan fasilitatior klaster), R&D institution and university, services, and association are needed to develop automotive industry. Unfortunately, there is no connection to have cooperation in supporting industrial development. Development of cluster strategy based on innovation needs connectivity among/between actors, indeed industrial development will be more directed and clear. Defining the role and coordination is needed to support the design and development of national industry.

24 In national industry policy formulation about framework of development of automotive industry in Indonesia, cluster development is more aimed to get core, supporting, and related industry closer (Fig. 9). Core Industry Supporting Industry Related Industry Two and four wheel vehicles Engines & Parts; Electrical Parts; Transmissions & Parts; Axie; Universal Components; Machining; Iron/steel; Glass; Suspensions; Plastic Parts; Car Body Parts; Carburators Maintenance service; distribution/dealer services; transportation services Medium Term Target ( ) Long Term Target ( ) 1. Achievement of four-wheel vehicle production to unit/year (90% for domestic demand) 2. Achievement of four-wheel vehicle export for 10%/year 3. Achievement of two-wheel vehicle production to be unit/yr, export growth for 10% per year 4. Achievement of industrial capability for automotive component 1. Concretion of domestic vehicle industry capability conducting design and engineering of vehicle 2. Concretion of national vehicle industry which contributes in global design engineering activities industry, supplying 80% of main component demand for four wheel vehicle assembly and conducting in-house-engineering for twowheel vehicle components Strategy Sector: Development of commerce vehicle production base, small passenger vehicle and motorcycle, product technology and manufacturing technology of component industry. Technology: Development of full manufacturing, design and engineering of full motorcycle

25 Principal Point of Medium Term Action Plan ( ) Principal Point of Long Term Action Plan ( ) 1. Increasing investment for component industry at 2 nd and 3 rd tiers level 2. Increasing component industry capability in mastering manufacturing technology or product technology 3. Increasing productivity and quality of component and motorcycle assembly industry 4. Increasing capability and relationship of SMEs with motorcycle assembly industry 1. Developing R&D center for motorcycle development 2. Increasing cooperation among automotive industry, raw material industry, and university 3. Increasing industrial cooperation with world main motorcycle industry 4. Benefiting from global marketing networks for motorcycle component product Supporting Element Periodical Technology Improvement Human Resources: A. Two wheel a. Rapid development ( ): full manufacturing, design and engineering b. Mature ( ): industry & technology upgrading a. Increasing human resources competence in mastering manufacturing technology and product development b. Developing human resources capability in management and engineering

26 B. Four wheel Infrastructure: a. Initiation ( ): Design and engineering local component b. Rapid development ( ): industry & technology upgrading c. Mature ( ): Design and engineering of full vehicle (commerce car and passenger car in small size), full manufacturing a. Harmonization tariff and taxation b. Preparing tax allowance for new investment and enlargement c. Credit/compensation for tax for human resources and R&D business development d. Building R&D center for motorcycle development e. Increasing capability of testing institution in order to obtain vehicle certification Market: f. Preparing automotive export/import harbor a. Increase export to ASEAN countries b. Increase cooperation with component supplier c. Building global marketing networks d. Developing component exchange Source : National Policy of Industrial Development, 2005 Fig.9. Framework for Development of Automotive Industry As already known, the role of R&D institution in industrial policy of automotive industry cluster has not seen significant yet. The presence of R&D institution is only as supporting element outside industrial cluster activities. From above description, it can be seen that industrial cluster in Indonesia is still at stage of industrial agglomeration, it has not directed on how the future industrial development will be. The natural process of industrial development occurs on three stages, starting from initiation, quantity expansion, and quality improvement. In the

27 industrial cluster policy framework, it can be seen clearly that the design of industrial cluster building has just start at initiation stage, and quantity expansion for delivering the needs of domestic and foreign market. Framework on quality improvement has not seen yet. Even though, Indonesia s national industry policy has defined two strategies in developing industrial sector, include main and operational strategies. The main strategies defined by the government are as follows: Strengthen connection on all level of value chain of industries include activities from supporting industries, related industries, infrastructure suppliers, and other supporting services industries. This connectivity is further developed as an effort to build networks of industry and increase competitiveness to stimulate innovation. Increase added-value along value chain by building core competence Increase productivity, efficiency, and kind of resources used in industry, and focus on the use of green product Development of SMEs through: (a) business stock scheme and technical and managerial support, and also special facilities for expansive growth and achieve high reliable competitiveness in its area. (b) Stimulating SMEs synergy with large enterprises through alliance. (c) Building supportive business environment for SMEs. While the operational strategy defined include the followings: Development of conducive business environment Focus of industrial development is conducted by stimulating growth of prioritized industrial cluster

28 Defining priority of spreading the industrial development to areas which make the raw material located nearer Development of innovation capability in industrial technology and management Based on the strategies, it can be seen that development of national industry sectors is using cluster concept. Nevertheless, government is not further detailing how innovation may grow in the industry. Seen from the natural process of industrial development by Sonobe and Otsuka (2007), innovation will occur after initiation and expansion of product quantity, and innovation grows for improving quality. From focus of Indonesia s industrial cluster development, government is only dividing areas and industrial sectors, although includes actors supporting innovation into the cluster scheme (See Fig. 8). Even though, industrial cluster development based on innovation system is difficult to be implemented in Indonesia. This is as what has been described in the formulation of national policy of industry development, which states that technology development has been conducted by R&D activities in science and technology (S&T) institutions, universities, and business. Nevertheless, problems faced are on the limited utilization of S&T in business and society, compared with the number of research outputs which are potential to be implemented. There are many factors causing this condition, especially on the result/output of domestic research and technology. One of them includes the great number of business which still depending on foreign technology, or technologies from its parent company, besides the limited access to sources of information, technologies, and S&T services. The presence of Foreign Direct Investment (FDI) which have potential for technology transfer also has not used optimally by the companies.

29 Another problems in the development of industrial cluster based on innovation system in Indonesia is the unsynchronized management of S&T among R&D institutions in many organization based on the need of industries, then the optimization of strategic activities affecting national level cannot be seen yet. Conclusion Industrial development through industrial cluster based on innovation system in Indonesia is basically needed considering the great potential of the available resources, and also to increase industrial capability in international competition. Based on literature analysis that there is need to define stages in building industrial cluster based on innovation system in Indonesia, include the followings: a. Analysis of area characteristics, industrial resources (companies, technology, human resources, core personnel, local community) and market needs. This stage aimed to define share vision and area (pembagian) scenario. b. Building networks c. Create 'new fusion' by collaborating with academician-industry, industry-industry to broaden the cluster, promoting new business, venture, etc. d. Industry network agglomeration is purposed for producing further innovation to create positive cycle for further cluster forming To support stages on developing industrial cluster based on innovation system, there is need of policy schemes e.g. networks forming, business support, and promoting collaboration. Government through its policy must stimulates the forming of networks, either

30 between/among actors in innovation system (industry, universities or R&D institutions, and government) or between/among industrial cluster. This policy scheme can also become a stimulus for broadening industrial cluster including collaboration with local industry support institutions, etc. Government must also give business support to R&D, market growth, incubation institution development, collaboration among/between industries, innovation management, human resources supplies, etc. At last, to stimulate innovation in industrial cluster, government needs to promote collaboration with some institution, e.g. finance institutions, trade companies, education, etc. References Isbasoiu, George-Marian, 2007, Industrial Clusters and Regional Development. The Case of Timisoara and Montebelluna. Presented at the Conference of European Regions Knowledge Based Innovation Network (ERIK), Brussels, May th Industrial Cluster Project, 2005, Project to Create Manufacturing Industry in Tokai Region, Accessed on March, 5, Mitsui, Itsutomo, 2003 Industrial cluster policies and regional development in the age of globalisation -Eastern and Western approaches and their differences. 30th ISBC in Singapore. OECD, 1999, Managing National Innovation Systems. Organisation for Economic Cooperation and Development (OECD).

31 Otsuka, Keijiro, 2007, Cluster- Based Based Industrial Development: Industrial Development: A View A View from East Asia. Foundation for Advanced Studies on International Development (FASID). Patel, P. and Pavitt, K National Innovation Systems: Why They are Important, and How They Might be Measured and Compared. Accessed on March, 3, Sonobe, Tetsushi, Hu, Dinghuan, and Keijiro Otsuka, 2006 Development of the Motorcycle Industry in the Inland Region of China, Conference Paper of Cluster-Based Industrial Development, May 22-26, Vietnam, Hanoi. Sonobe, Tetsushi dan Otsuka, Keijiro, 2006, Strategy for Cluster-Based Industrial Development in Developing Countries, Foundation for Advanced Studies on International Development & National Graduate Institute for Policy Studies, July 13. The Ministry of Industry of Indonesia, 2005, The document of National Policy of National Industrial Development (KPIN), Jakarta, Indonesia. UNIDO, Industrial Development Report 2002/2003. Competing through Innovation and Learning, UNIDO.