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Japanese Automobile Conglomerates in Indonesia: Knowledge Transfer within an Industrial Cluster in the Jakarta Metropolitan Area

Foreign direct investment is supposed to stimulate economic growth through the transfer of new technical knowledge and product innovation. This paper deals with the knowledge flow within the Japan ese automotive supply chain catalysed by the keiretsu
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  Working Paper 111         Z        E        F ISSN 1864-6638 Bonn, May 2013 Japanese automobile conglomerates in Indonesia: Knowledge transfer within an industrial cluster in the Jakarta metropolitan area Hans-Dieter Evers and Farah Purwaningrum  ZEF Working Paper Series, ISSN 1864-6638 Department of Political and Cultural Change Center for Development Research, University of Bonn Editors: Joachim von Braun, Manfred Denich, Solvay Gerke, Anna-Katharina Hornidge and Conrad Schetter Authors’ addresses   Hans-Dieter Evers and Farah Purwaningrum Institute of Asian Studies, Universiti Brunei Darussalam Gadong BE 1410, Brunei Darussalam E-mail: hdevers@uni-bonn.de, farah.purwaningrum@ubd.edu.bn  www.zef.de     Japanese Automobile Conglomerates in Indonesia: Knowledge Transfer within an Industrial Cluster in the Jakarta Metropolitan Area Hans-Dieter Evers and Farah Purwaningrum   1  Abstract Foreign direct investment is supposed to stimulate economic growth through the transfer of new technical knowledge and product innovation. This paper deals with the knowledge flow within the Japanese automotive supply chain catalysed by the keiretsu  network in Indonesia. For this purpose, we analyse the character of the keiretsu  and we trace how the knowledge flow is managed via the vertical linkage between manufacturers and suppliers within an industrial cluster. By doing so, we intend to contribute to the growing literature on industrial upgrading of the global production network and the use of knowledge for innovation and development. Based on our qualitative study, we show that the process of industrial upgrading is cumbersome for the automotive supplier companies in Indonesia. This is partly due to the fiscal incentive based policy of the Indonesian government and at the micro level due to the keiretsu  as an institution, whereby knowledge flow is mediated by the restrictive practices of the supplier development programme. Keywords: Japan, Indonesia, keiretsu , automotive supply chain, institution, innovation, knowledge management, government automotive policy, supplier development programme.    2 Introduction Knowledge is often defined as the new production factor of a post-industrial knowledge-based economy (Menkhoff, Evers et al. 2011). This key tenet is evident in Indonesia ’s  science policy, as reflected in the White Book   ( Buku Putih ) Indonesia 2005-2025 on the Research, Development, and Implementation of Science and Technology (RISTEK 2006). The current industrialization strategy followed by Indonesia is sending a positive signal towards the financial market by endorsing the Master Plan for the Acceleration and Expansion of Indonesian Economic Development 2011-2025 (Menko-Perekonomian 2011). In general, the Association of Southeast Asian Nation (ASEAN) countries have followed a policy of developing industrial zones and knowledge clusters (Evers, Gerke et al. 2011). Malaysia’s government policy of Wawasan 2020 is centred on knowledge development within a “ multimedia super corridor ”  (Evers 2003; Evers, Nordin et al. 2010). Brunei Darussalam is currently pursuing an industrial clustering policy by building the necessary infrastructure for a zone village and infrastructure at the Sungai Liang Industrial Park (SPARK) (Ku 2010). Similar programmes are also found in the other ASEAN states. Taking into account the lack of university-industry collaboration (or horizontal knowledge flow) in Indonesia (Thee 1998; Purwaningrum 2012) on the one hand, and the global-local production network on the other hand, we pose the following questions: how does knowledge flow from the vertical/global production network of the supply chain into the local economy? What are the institutions blocking and enabling the flow of knowledge? We intend to investigate this by following a systematic inquiry of policy and the flow of knowledge both at the macro and micro level simultaneously. We limit our study to the automotive industry as an important sector of the manufacturing industry in Indonesia, which is dominated by big Japanese companies. Our study is situated within the wider discussion about knowledge for development and the possibility of industrial upgrading within the automotive supply chain network. This paper concentrates on the issue of keiretsu as an institution and how this affects the chances of industrial upgrading for companies in the supply chain network. In so doing, it gauges two issues: first, overall policy in the automotive sector, and second, the knowledge flow processes within the vertical linkages. The aim of this paper is to shed light on policy at the macro level and on the linkages and the institutions forging the flow of knowledge. We argue that while economic liberalization encourages the flow of capital, tacit knowledge is controlled within the first tier companies and the automotive assembler network. This makes industrial upgrading for suppliers below the first tier strenuous, if not impossible. There are two rationales for this: first, the lack of an organizational set up and the preference towards a fiscal based policy at the macro level; second, the role of keiretsu as a norm and the exclusivity of the supplier development programs. In Japan,  keiretsu  is a form of a “ relational contract ”  (Nagaoka, Takeishi et al. 2008) or “ hands interlocked in a complex network of formal and informal interfirm relationships ”  (Hatch and Yamamura 1996: 69), binding suppliers to the mother company. This can be
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