Abstract

Manufacturing forms the largest sector of Indonesia’s economy. According to Statistics Indonesia-BPS, its share is roughly 19 percent of the total Gross Domestic Product, providing jobs for roughly 19 million workers, ranking it third after the agriculture and trade sector. Due to its strategic role in the economy, the national initiative of Making Indonesia 4.0 had been launched in 2018 focusing on industrial transformation in technology, research, innovation, and sustainability. From the business perspective, the increasing costs in materials, energy, and high expectations of customers or investors have brought the advanced adaptation in hi-tech and green business as critical aspects to increase efficiency and competitiveness. However, in the light of mixed findings about industrial revolution 4.0's (4IR) effects, this paper tries to unveil the impact of 4IR in Indonesia, particularly in large- and medium-scale manufacturing sector. Focusing on the effects of innovation and research and development (R&D) on the economy, productivity, and sustainable manufacturing, we analyse data from annual manufacturing surveys from Statistics Indonesia-BPS by using panel regression analysis. We found that innovation, particularly product innovation, had a positive significant effect on manufacturing value added and productivity. The rise in the innovation component index caused increasing in value added by 1.92-2.17 percent and in productivity on an average of 5.32 percent. On the other hand, we found that R&D did not have any significant effect on manufacturing growth and productivity. In terms of employment, only in the context of large-scale manufacturing, innovation has a very light positive effect on employment. Regarding sustainable manufacturing, both R&D and innovation had a positive and significant effect on the sustainability manufacturing index. Our results show that to pursue a global top 10 economy by 2030, combined with a demographic bonus, Indonesia can focus on supporting adequate digital skills by re- and up-skilling workers for dealing with productivity and employment challenges in 4IR. In addition, nudging policies, such as easing the bureaucracy and low cost for patent registration, can complement the existing super tax deduction program for encouraging the company to run R&D-based business for boosting the output and sustainable manufacturing.