This document discusses incremental innovation and its importance for development in Indonesia. It defines incremental innovation as small, continuous improvements that build absorptive capacity over time. Incremental innovation is important because it leads to economic benefits and helps narrow technology gaps. Most firms, especially small- and medium-sized enterprises (SMEs), engage in incremental innovation. For Indonesia to benefit, it needs support local innovation systems involving firms, universities, government, and non-profits to help SMEs build absorptive capacity and participate in global value chains through activities like training, business services, and financing. Trends in globalization and large firms gaining more control of value chains also present opportunities and challenges for Indonesian SME inclusion.

1. 12-01-2010IHS Masterpresentation 1
…. the leading role of SME’s
Jan Fransen
September 2013, ICID
Incremental innovation

2. Sep 2013Innovation for development 2
Content
 What is incremental innovation?
 Why does it matter for Indonesia?
 How to build local capacity, to bring people along?
 Firm: absorptive capacity; R&D
 Local innovation system and local context
 Global value chains

3. What (Jensen et al, 2007)
Sep 2013Innovation for development 3
Science Technology Innovation Doing
Using
Interacting

4. Why
Hard and soft technology
From imitation to innovation
Incremental innovation
Absorptive capacity needed & developed
Technology gap reduces
Local knowledge becomes more important
Proces often starts in low tech sectors
Sep 2013Innovation for development 4

5. Why
 Incremental innovation leads to economic rents
 SME’s innovate, often incrementally
90% of all firms, 2/3rd employment, > 0.5 value added
Flexible and resilient
Low cost innovations
Sep 2013Innovation for development 5
Shumpeter

6. Why
Summary
Incremental innovation is needed for ‘transformation of society’
(Stiglitz) and ‘capability expansion’ (Amartya Sen)
12-01-2010IHS Masterpresentation 6

7. Woodware
Woodworks
Silverware
Bambooware
Ceramics
Stoneware
Paper, plaiting
Home accessories
in Yogyakarta
Out of AsiaOut of AsiaOut of Asia
Institutional
support?

8. Innovation
Absorptive
capacity
Firm
R&D
How: start with the firm

9. Absorptive capacity
Access Knowledge gap
Education & training
Attracting high educated
Realization
 BDS
 Venture capital
Improved ‘90s
LIS immature
Improved since ’66 & ’00
Ease of doing business: 128
Focus?
External
sources Acquire Assimilate Transform Exploit
RealisedPotential

10. Innovation
Local Innovation system
Global value chain
Absorptive
capacity
Firm
R&D
How

11. External sources
12-01-2010IHS Masterpresentation 11
Sub -
contractor
Global
buyer
Raw
material
Equipm’t
Tools
Materials
PeriodicalsInternet Tradefairs
CoCBus.Ass.Gov’tUniv.Banks
LocalInnovationSystem
Public sources
GlobalValueChain
Exporter

12. Local innovation system
Metropolitan
Incomplete
context
Immaturity
Firms
Non firms
Embedding in
value chains with
specific roles

13. Sep 2013Innovation for development 13

14. Global Value Chains
Opportunities and trends
Segmentation and fragmentation
Open innovation
Environmental laws
Large suppliers gain control
Larger exporters as gate keepers
Demand, FDI, MNC relocates
Impact on SME’s In Indonesia?
Buyer– supply driven chains

15. Conclusion
1. Incremental innovation of SME’s is key to inclusive development
2. Systemic, multi-scalar, multi actor institutional support
 People: education & training
 Firm: BDS, venture capital, ease of doing business
 LIS: Non firm actors in maturing local innovation systems
Responsiveness to rapid changes
 Global value chains: inclusion
3. Trends: a rat race?
 Indonesia is closing the knowledge gap
 Small differences become more important
 Global value chains focus on large specialized suppliers and exporters
 Geography of the market changes towards emerging economies
Sep 2013 15