Prof Fukunari Kimura, Chief Economist of the Economic Research Institute for ASEAN and East Asia (ERIA), delivered his lecture in the 12th Sadli Lecture series in Economic Policy on 2 May 2018 at Pullman Hotel, Jakarta. The title of his lecture was ‘Value Chain Connectivity in Indonesia: the Evolution of Unbundlings’.

1. Value Chain Connectivity in Indonesia:
the Evolution of Unbundlings
Fukunari Kimura
Chief Economist, Economic Research Institute for ASEAN and East Asia (ERIA)
Professor, Faculty of Economics, Keio University
The 12th Sadli Lecture, LPEM FEB UI & ANU Indonesia Project
May 2, 2018 @ Jakarta, Indonesia
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2. 1. Introduction
• “Unbundlings” (Baldwin, 2016) for Indonesia
• The Indonesian economy is not only “lumpy”
(due to imperfect mobility of productive
factors; Courant and Deardorff, 1992) but also
uneven in the utilization of unbundlings.
• Upgrading capability for higher levels of
unbundlings would be a key for the future of
the Indonesian economy.
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3. 2. Conceptual framework
• Technological breakthroughs have changed the
international division of labor.
– Pre-globalization [0] > 1st unbundling [1] > 2nd unbundling
[2] > 3rd unbundling [3]
• The 1st unbundling [1]: industry-wise division of labor
• The 2nd unbundling [2]: task-wise division of labor
– Fragmentation and agglomeration
– Service link (communication) costs are the key.
• The 3rd unbundling [3]: person-wise division of labor
– B2C, C2C matching in the digital economy; platforms and
applications
– IT (concentration forces) vs. CT (dispersion forces)
3

4. Figure 1: Evolving unbundlings to overcome distance
Trade costs
Communication costs
Face-to-face costs
What starts moving? What
overcomes distance?
International division of
labor
Years of dominance
Pre-
globalized
world [0]
High
High
High
None
Autarky
- 1820
The 1st
unbundling
[1]
Lower
High
High
Goods
Industry-wise
(Production and
consumption are
fragmented)
1820-1990
The 2nd
unbundling
[2]
Lower
Lower
High
Ideas
Task-wise
(An industry is
fragmented)
1990-2015
The 3rd
unbundling
[3]
Lower
Lower
Lower
People
Person-wise
(A task is
fragmented, b-to-c
c-to-c matching
easier)
2015-
4

5. 3. Indonesia in global unbundlings
• Representative industries, key technologies,
and geography for each level of unbundling
• Check the dominant form of unbundlings for
the whole Indonesia and for each province in
Indonesia.
5

6. Figure 2: Key features of unbundling regimes
Representative industries
Key technologies
Geography
Subsistence
agriculture
Self-
subsistence
Autarky
Plantation agriculture
Mining
Labour-intensive
manufacturing
Mass
production
Comparative
advantage
Machinery
industries
Supply chain
management
Fragmentation
and industrial
agglomeration
Digital
economy
Advanced
information and
communication
technology
Concentration and
dispersion of
innovation and its
applications
Pre-globalized
world (0)
The 1st unbundling
(1)
The 2nd unbundling
(2)
The 3rd unbundling
(3)
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7. 3.1. Trade driven by the 1st unbundling
• Industrialization and exports of manufactured goods
since the 1990s
• 200+ seaports with international trade in Indonesia
– Many are very small.
– Some have a skewed structure in exports and imports.
• Exports: concentration in a few products connected with foreign
markets
– Large trade is in Java and Riau Islands, which conduct both
the 1st and 2nd unbundling.
– In other islands, pre-globalized world and the 1st
unbundling dominate.
• A lot of room for 0 > 1 and 1 > 2 in other islands.
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8. Figure 3: Indonesian NonOil and Oil trade
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9. Table 1: Top Indonesian ports (unit: % in value)
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10. Figure 4: Trade driven by 1st unbundling, by province
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11. 3.2. Trade driven by the 2nd unbundling
• Indonesia is coming into the 2nd unbundling in
machinery industries (up and a bit down) though the
whole economy is still placed in the upstream of GVCs.
• The 2nd unbundling is actively being developed in Java
and Riau Islands: machinery p&c.
– Increases in extensive margins for both exp. and imp. (# of
product-trading partner pairs).
– Still shallow participation by Riau Islands and Surabaya
though.
• Changing, but still a lot of room for deepening the
involvement in the 2nd unbundling.
– The formation of efficient industrial agglomeration is the
key.
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12. Figure 5: Indonesian trade in machinery and
parts and components, 2000–2015
12

13. Figure 6: GVC indicators for ASEAN member states
13

14. Figure 7: Trade driven by the 2nd unbundling,
data of 2015, by province (machinery p&c trade)
(Figures in 2012 are in parentheses.) 14

15. Figure 8(a): Number and value of exported parts
and components per destination: Indonesia
15

16. Figure 8(b): Number and value of exported parts
and components per destination: Jakarta
16

17. Figure 8(c): Number and value of exported parts
and components per destination: Riau Islands
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18. Figure 8(d): Number and value of exported parts
and components per destination: Surabaya
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19. Figure 9(a): Number and value of imported parts and
components per source country/region: Indonesia
19

20. Figure 9(b): Number and value of imported parts and
components per source country/region: Jakarta
20

21. Figure 9(c): Number and value of imported parts and
components per source country/region: Riau Islands
21

22. Figure 9(d): Number and value of imported parts and
components per source country/region: Surabaya
22

23. 3.3. Prospects for the 3rd unbundling
• Reduction in face-to-face costs triggers the 3rd
unbundling.
• Before the fragmentation of a task, B2C, C2C matching
proliferates.
– Social media, matching business, e-commerce, e-
payment/fintech, ...
• Indonesia, a lot of potential: large and young
population, room for overcoming distance.
• The digital economy for deepening the involvement in
GVCs.
– Importance of services: link-up and outsourcing
– Government policies: infrastructure and regulations
– Improvement of distribution networks
23

24. Figure 10: Firm-level technology adoption in
Indonesia and selected ASEAN member states
Raw data from World Economic Forum (2017).
24

25. Figure 11: ICT use in business transactions
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26. 4. Required policy for upgrading
unbundlings
• The “step-by-step” approach (0 > 1 > 2 > 3)
should be prioritized in most of the cases.
• However, alternatives may be introduced.
– The “leap-frogging” approach
– “Feedback” of new piecemeal technologies to old
industries
• For Indonesia
– Jakarta+: Deepen the involvement in [2] (industrial
agglomeration) and step into [3]
– Sumatra, Kalimantan, ...: [1] to [3]?
– Other islands: [0] to ??; feedback?
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27. Figure 12: Industrial dynamism among
unbundling regimes
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28. 5. Concluding remarks
• Three different levels of unbundlings co-exist
in Indonesia.
– Java + Riau Is. vs. other islands
– Expand the capability of unbundlings
– Get feedbacks from new technologies
• Take advantage of dispersion forces by CT.
• Catch up with the advancement of IT in the
world.
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